By now, it’s no secret that the gaming industry is no friend of prediction markets – their legal battles continue to escalate and expand. But another important development for prediction operators is the sector’s relationship with the institutional finance and investing world, as that could have a significant impact on its growth potential.
There is ample debate as to whether sports event contracts, which currently constitute the bulk of prediction market trading, will hold up long-term to mounting legal scrutiny. That sports trading primarily comes from recreational traders who are predominately in the red, per recent research. Institutional investors, by contrast, are more attractive to prediction markets in terms of liquidity and trading volume.
There are many indications that prediction markets are becoming increasingly attractive to institutions despite the potential downsides. One example comes from Charles Schwab CEO Rick Wurster, who said last November he didn’t want clients, especially younger ones, to “think that betting on the Monday Night Football game is equivalent to being invested for the long term in stocks and bonds”.
Yet on Schwab’s Q1 earnings call on 16 April, Wurster reiterated his gambling-investing cynicism but conceded, “at some point, we will likely have prediction markets”. But with the Commodity Futures Trading Commission embarking on prediction market rulemaking, there is some pushback in financial circles.
“I was around for the Dodd-Frank Act in 2010 as a staffer … nobody once mentioned sports gambling, changing the oversight framework,” Amanda Fischer, COO of the financial advocacy group Better Markets, said on an Indian Gaming Association webinar on Wednesday. “If that was the intent of Congress, they would’ve duked it out.”
Deals expand amid rulemaking process
Fischer’s appearance on the IGA’s New Normal series with hosts Victor Rocha and Jason Giles came about a week after the CFTC closed a comment portal for the rulemaking. The proposal garnered more than 1,500 comments – according to Fischer, the next-highest number of comments the agency has received on a proposal this year is nine.
The newer-age, digitally native finance world has cannonballed into the prediction market space, with leading firms like Robinhood, CoinBase, Crypto.com and Gemini all launching their own exchanges. While there are plenty of other big players still on the sidelines, the traditional finance world is edging closer to the controversial exchanges.
In late March, Kalshi was approved for margin trading for institutional clients, a big step toward larger-scale adoption. At that same time, the exchange announced a partnership with ARK Invest, Cathie Wood’s high-profile firm with over $15 billion in assets under management. Numerous other, similar partnerships include the hedge fund Clear Street, trading platform Tradeweb and the financial news network CNBC. Kalshi’s valuation has soared to $22 billion, higher than any existing commercial bookmaker.
Asked last month about institutional adoption on prediction markets, Kalshi co-founder Luana Lopes Lara noted that the platform already accepted block trades in the neighbourhood of “$20-$30 million”. Her claims have not been verified by iGB.
Wood, one of the most prominent investors in the US, established a large position in DraftKings shortly after the pandemic. In 2021, CNBC reported that Ark Invest amassed a $60 million position in the online gambling company. More recently, the investment fund has explored the macro implications of prediction markets.
“As financial infrastructure evolves, prediction markets represent a natural extension of market based information discovery, one with meaningful implications for research, risk management and capital allocation,” Wood wrote to the CFTC’s comment portal on 29 April.
US financial agencies embracing the sector
Outside the private sector, it is clear that financial regulators are also in favour of the technology. The CFTC, which is understaffed relative to previous administrations, has just one sitting commissioner. Chaired by Michael Selig, the commission has sued five states over claims that their enforcement efforts undermine federal jurisdiction as the rulemaking process is ongoing.
Additionally, researchers from the Federal Reserve have highlighted prediction markets as a groundbreaking resource for monetary policy decisions. The Fed is set for a massive overhaul, with Trump nominee and relative unknown Kevin Warsh set to take over as chair in the coming weeks.
But this fast-and-furious rise has not come without pushback. There are 14 prediction market bills currently before Congress, 10 of which came in March alone. The Senate unanimously passed a ban on 30 April on prediction market trading for members and staff, but, as Better Markets’ Fischer said Wednesday, the biggest concern is direct oversight from the CFTC.
“There’s a lot of opposition to this, both from ordinary people and people with sophisticated analysis, so they’re not following that whole process and I think there are a lot of legal infirmities to what they’re proposing,” she said.
Selig has not given a firm timeline for when the CFTC intends to publish a final rule on event contracts.
Sports, crypto play big roles
There are two big factors that could potentially impact prediction markets and their institutional interest: sports and crypto.
Currently, sports contracts make up more than half of prediction trading, with tentpole events like the Super Bowl and March Madness driving the biggest growth spikes. Those contracts are the most contentious from a legal standpoint, and potentially the most at risk. This creates an interesting conundrum – prediction markets see institutional adoption as a way to diversify beyond sports, but institutions are interested in the exchanges because of the growth driven by sports. Should they be banned, there’s little clarity on whether investors would still be as interested as they are now.
“As you know, the CFTC does not currently have a regulatory regime like those run by the state gambling authorities,” Elevate Government Affairs, which represents players’ unions from major US sports leagues, wrote to the comment portal. “The individuals targeting our members, however, do not distinguish between state-regulated wagers and contracts offered on prediction markets. From their point of view, a bet is a bet regardless of where it is placed.”
Similarly, the growth of crypto and prediction markets have become somewhat intertwined, given that several companies offer both and many traders are familiar with both. The crypto market is valued between $2,61 and $2.75 trillion, per CoinGecko, and a significant crypto framework bill has been stuck in the Senate since last September. The CFTC would take on immense new duties as part of the bill, adding to questions surrounding oversight and enforcement capabilities. In any case, prediction markets are in some ways building on the institutional progress paved by crypto interests.
“It took -10 years for institutions to jump into crypto. That number is -5 years for prediction markets,” Kalshi CEO Tarek Mansour said in a February X post.
Predictions a safe haven from volatility?
Crypto prices, especially Bitcoin, have been volatile of late. Bitcoin is currently trading below $80,000, which is up 16% in the last month but down 21% in the last six after peaking to all-time highs above $120,000 last October. Ethereum has seen similar movement – its price of $2,292 is up 9% in the last month but down 30% in the last six, far off its all-time high of $4,953 from last August.
This volatility has led to prediction markets being viewed as an attractive new growth vertical, Fischer argued.
“Crypto companies are looking for other revenue streams, and they see getting into sports betting, and these prediction market platforms, as a lucrative product offering that they can offer,” she told Rocha and Giles.
During her tenure with the Securities and Exchange Commission, Fischer said she saw similar tactics in advancing crypto interests by charging forward with aggressive lobbying in the “hope that the law is retrofitted to their business model”. The constant fluctuation in American politics plays a big factor in the favour of the moment, as has been the case with prediction markets from the Biden to Trump administrations.
For the most part, crypto companies “ended up winning because the administration changed and the lawsuits got dropped,” Fischer lamented.
Jess Marquez
Jess has covered the global gaming industry since 2022. A native of Reno, Nevada, he’d like to note that it’s Ne-va-da, not Ne-VAH-da.
Original article: https://igamingbusiness.com/finance/prediction-markets-institutional-adoption-may-2026/
