Author: Domer

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Pre-Modern Prediction Markets

Prediction markets may seem new, but betting on the outcome of important events has a long history in politics and other fields.

Informal prediction markets date back at least a thousand years, involving countless events, including bets on the outcome of military battles, bets on who would be the next king, and bets on the results of the Chinese imperial examinations that determined whether a person entered the civil service.

More formal prediction markets date back at least five hundred years, to early 16th century Italy. At the time, people would use markets to predict who would succeed the next pope and quote the odds in letters. The first formal "legislation" against prediction markets came in 1591, when Pope Gregory XIV said that anyone who bet on the outcome of a papal conclave would be excommunicated.

In the UK, the earliest recorded prediction markets began in the 18th century in London coffee houses. Jonathan’s Coffee House (which later became the London Stock Exchange) traded news on parliamentary scandals and changes of prime ministers in the early 18th century. Trading on these events became commonplace among the elite, and the odds were even published in newspapers of the time.

The first recorded whale was born in this environment, British MP Charles James Fox. Since at least 1771, he has been betting heavily on events in the political sphere, including whether the Tea Act would be repealed. In fact, he may well have bet on who would win the American Revolutionary War. Eventually, he went bankrupt, and his father had to bail him out with tens of millions of dollars (adjusted for inflation). Some may note similarities to a modern, unknown American politician.

Betmaking on prediction markets in the United States dates back to at least the early 19th century. James Buchanan, who would later become president, wrote that he lost three parcels of land in 1816 because of a bad election bet. We also have the first documented American “gambler” from this era: John Van Buren. He was New York’s attorney general at the time, and he logged more than 100 bets totaling $500,000 (adjusted for inflation) on the 1834 midterm elections. His father, Martin Van Buren (himself a documented election gambler), was vice president at the time.

The more formal prediction markets in the United States were centered not in London’s coffee houses but in New York City’s pool halls. The first big rules dispute (or, as modern gambler lingo would say: a corruption of the rules) took place in a pool hall. The 1876 election was a tumultuous brawl. There were more irregularities than a Theranos blood test, and the final results were delayed for months. As a result, “Smoking Old” Morrissey, who ran the largest pool hall in New York City, decided to refund everyone’s bets, but with a slight twist: He kept his commission. He was a famous boxer and rival of Bill the Butcher, so I’m not sure anyone had much of a problem with the arrangement.

As in London, New York’s US election odds were often cited in journals. At the time, public opinion polls were not yet available, so betting odds were often the best indicator of sentiment. In fact, newspapers sometimes published the names of bettors and how much they staked. This was arguably the first prediction market leaderboard.

It wasn’t until 1936 that Gallup polls replaced betting odds as a reliable indicator for journalists. After that, odds reporting dropped dramatically, and any betting markets in New York became taboo during and after World War II, until they were replaced decades later by informal individual bets.

Modern Prediction Markets

Bookmaker betting on elections (the precursor to peer-to-peer prediction markets) began in London in the 1960s with Ladbrokes, who offered (terrible) odds on the Conservative leadership race. The 16/1 odds gave the candidate the win. The tradition of regular election betting with (almost) no surprises continues to this day in the UK, which is home to the world's largest peer-to-peer betting market, Betfair.

Betfair will run prediction markets on the most high-profile elections and political events (including, famously, Brexit). However, the vast majority of its trading volume comes from sporting events. In general, betting on sporting outcomes and politics has become normal in the UK. You can walk into a betting shop in any major city and bet a few pounds on almost any major political event you want to bet on. If you fancy yourself as a great politician, you can also run for office and bet on yourself to win (as more than one candidate has successfully done!).

In the US, things are sometimes good, sometimes bad, but mostly normal.

The Iowa Electronic Market was launched in 1988 as an academic experiment associated with the University of Iowa. The Commodity Futures Trading Commission (CFTC), the government organization that regulates futures trading, did not explicitly allow or prohibit such trading, but sent them a letter indicating that as long as no one held a position of more than $500 in the market, they would not take any action against them. This was the first site to use 0-100 pricing. If you win, you get $1 per share. If you lose, you get $0. IEM started out small and was intentionally kept small, with only a few markets and few users. You would have a hard time betting more than a few dollars on their site (let alone $500). Although it still exists, it is more of a historical footnote than a serious market.

Intrade / Tradesports went live in 2002/2003, partly funded by famous American billionaires Paul Tudor Jones and Stan Druckenmiller. It was a site that offered peer-to-peer binary contracts that traded based on the results of events. Similar to IEM, the contract was worth $10 if you won and $0 if you lost. The site was based in Ireland and had a tacit agreement with the U.S. Commodity Futures Trading Commission (CFTC) since 2005 that the U.S. government would not pursue it if it prevented Americans from trading traditional futures contracts, such as the prices of gold, oil and other heavily monitored and regulated commodities. In the 2004, 2008 and 2012 presidential elections, the site became the go-to site for political odds.

The public was not as savvy with data, statistics and numerical analysis as it is today, so the market for such content was not as large as, say, opinion polls. Despite this, Intrade CEO John Delaney, a tireless advocate of prediction markets, was a frequent guest on the U.S. business television show CNBC, explaining event prices on his site and promoting prediction markets more broadly. He died in 2011 while climbing Mount Everest.

A few weeks after the 2012 election, the US government attacked Intrade for violating a 2005 agreement that prohibited Americans from trading oil/gold/other commodity futures. As a former user living in the US at the time, I can personally attest that all of these markets did not allow Americans to trade anything. However, rather than engage in a years-long and costly legal battle with the US government (which it would have lost even if it had won), Intrade kicked all Americans out of the country and declared bankruptcy a few months later.

In addition to launching the first serious prediction market that allowed US users to participate on a large scale, Intrade is also famous for two famous "whales": the McCain "whale" and the Romney "whale". They each accumulated huge positions in the race against Barack Obama. Unlike the French "whale" who appeared on Polymarket years later and actively bet on Trump's victory in 2024, these two gamblers lost all their money and dumped their winnings on everyone who bet on Obama.

In 2010, a short-lived movie box office futures market called Cantor Exchange (named after parent company Cantor Fitzgerald) was fully approved by the US Commodity Futures Trading Commission (CFTC). I was one of the first people to join. The movie industry hated the idea and immediately launched an intense lobbying campaign against it. The approval lasted less than two months before it was banned by the US Congress. There are exactly two types of futures banned in the US: onion futures and movie box office (so called because in the 1950s, some greedy businessmen bought up nearly all of the US onion supply and cornered the market). Fun fact: Howard Lutnick, the long-time head of Cantor Fitzgerald, is now the US Secretary of the Treasury (this article is written in early 2025).

PredictIt, the US successor to Intrade, uses the exact same template as the Iowa Model: they received a "no action" letter from the US Commodity Futures Trading Commission (CFTC) when they launched in 2014. A US political consulting firm called Aristotle partnered with Victoria University in New Zealand to create the site. They capped each position at $850 (which is the IEM cap, adjusted for inflation). PredictIt became the most frequently cited source of odds for the 2016 and 2020 elections. The CFTC withdrew its "no action" letter to PredictIt in 2022 after it began providing market data that the CFTC deemed too gambling-oriented. This included the number of tweets a politician posts each week. One of the market data was "How many tweets will Andrew Yang post this week?", which led to a phone call threatening Andrew Yang to post more tweets, which ultimately led to a lawsuit from law enforcement. Ultimately, PredictIt struggled to break out of the CFTC's regulatory reach during its startup phase, and it paid the price. Now there are rumors that PredictIt will try to restructure, rebrand, and relaunch as a regulated site if the CFTC approves.

2020 saw the birth of the modern prediction market: Polymarket and Kalshi. Both of these markets were still very small in 2020.

2020 also saw the emergence of a number of other crypto sites that also had fairly crude prediction markets. Several companies carved up the bottom of the presidential election: Augur, Catnip, and FTX, to name a few. On these sites, you bought crypto tokens that sat in your crypto wallet and were worth $1 if your candidate won and $0 if the candidate lost. All of these markets were replaced by Polymarket and have pretty much ceased to exist, except as jokes or memories. Notably, FTX ran afoul of the law for unrelated reasons. Side note: A friend of mine was so heavily in debt (theoretically) from a Trump 2024 election bet that SBF had registered on the books of Alameda County that the money was an item in the bankruptcy filing.

Current Industry and Future

As of 2025, prediction markets are dominated by two giants: Kalshi and Polymarket. Strictly speaking, they have two user bases that do not interact with each other, which often results in slightly different event prices in the two markets.

Kalshi is a website/app with hundreds of markets. After a quick start in Y Combinator, Kalshi received full approval from the U.S. Commodity Futures Trading Commission (CFTC) in 2020 to trade markets based on events, but not elections. In 2022, CFTC commissioners voted to formally reject Kalshi's election contract application, and Kalshi sued the CFTC. In 2024, after a Supreme Court case ended Chevron's deference and severely weakened the power of agencies such as the CFTC, the judge ruled that Kalshi could list election contracts. In 2025, Kalshi further pushed the legal boundaries and allowed betting on sports events from the perspective of event contracts. Currently, they are being sued by multiple states in the United States. Kalshi does not allow non-US citizens to participate, and all bets are denominated in US dollars.

Meanwhile, Polymarket is a cryptocurrency-based website with hundreds of markets. All transactions are conducted on-chain, and all bets are processed by smart contracts, which all go through a third-party verification program called UMA before payment. Polymarket paid a fine to the US Commodity Futures Trading Commission (CFTC) in January 2022 and agreed to ban Americans from using its website. Although they also use cryptocurrencies, bets are denominated in USDC, a stablecoin operated by Circle. Cryptocurrency price fluctuations do not affect users' bets. The website is located on Ethereum L2 called Polygon. To use a rough metaphor, Polymarket is like an application, Polygon is like an operating system, and Ethereum is like a mobile phone manufacturer.

Both companies were founded in New York by ambitious founders of similar age. Both companies have ambitious capital and have many well-known investors and advisors. The competition between the two is comparable to that between Uber and Lyft, or Visa and Mastercard.

With the political chaos in the United States (especially the unprecedented collapse and late exit of one party’s presidential candidate), the media has focused more than ever on betting odds to make sense of the world, so trading volume for each company, and for the prediction market as a whole, has exploded in the run-up to the 2024 election.

One story that has particularly captured public attention is the discovery and conversation I had with the “French Whale.” This mysterious gentleman became the largest prediction market gambler in history in just a few weeks. He bet tens of millions of dollars on Trump winning the 2024 election and significantly pushed the odds in Trump’s favor. Ultimately, his prediction was right.

The future of these markets will likely depend on how each company competes for dominance. However, the most likely outcome is that by 2028, both companies will be giants, while smaller companies try to get a piece of the pie.

Regulatory issues remain a difficult problem in the US, especially given Kalshi’s push for legal boundaries in sports and the DOJ raid on Polymarket’s founders at the end of Biden’s presidency.

As prediction market volumes have surged in recent years, demand for new and innovative markets has never been higher. This is both an opportunity and a challenge: regulatory issues are now the industry’s biggest hurdle. And this will inevitably delay the market’s next huge growth spike as new users become frustrated by the need for complex expertise to navigate the landscape.

In summary, despite historically stifled prediction markets, they will continue to emerge when given the opportunity. When two people disagree on an important issue, the best solution is to back up your words with money. And combining all that speech and money into one massive market unlocks wisdom.

Final Thoughts

The future is unknowable and unpredictable.

Don’t think of prediction markets as a silver bullet for predicting what the future will look like, but rather as a better flashlight that allows us to see into the future. Markets are certainly more effective than expert opinion, and even better than polls, because they contain polls.

As citizens in Western democracies become increasingly polarized and people get their news from increasingly biased sources, prediction markets can and will cut through the partisan nonsense and reveal the truth.

A federal judge blocked Arizona from bringing criminal charges against Kalshi.

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