Polymarket's Sports Problem

Prediction market platforms Polymarket and Kalshi spend a lot of time and money convincing regulators they're not gambling.

Prediction market platforms such as Polymarket and Kalshi have been facing scrutiny from regulators, with some classifying them as gambling operations. Despite their efforts to highlight their role as investment tools, authorities outside the U.S. have taken steps to restrict access to these platforms.

Taiwan, France, and Singapore have moved to block users from accessing Polymarket at the ISP level, citing concerns that the platform operates as an unlicensed gambling entity.

However, prediction markets are designed to function as instruments for forecasting outcomes based on probabilities, rather than games of chance.

In the U.S., the Commodities Futures Trading Commission (CFT) has jurisdiction over prediction markets, viewing them as a collection of event contracts, similar to weather derivatives used by farmers to hedge against crop loss.

Both Polymarket and Kalshi have engaged in disputes with the CFTC regarding the classification of their platforms. While Kalshi ultimately obtained permission to offer election-based event contracts, Polymarket faced a setback, with U.S. users being blocked from accessing its platform.

These election-based event contracts played a significant role during the 2024 election, serving as financial instruments to prepare for the post-election market.

For instance, considering Bitcoin's "Trump Bump" during the election, traders could anticipate a price correction if Kamala Harris won, prompting crypto traders to hedge their holdings with prediction market positions.

Despite facing challenges and naysayers predicting its demise post-election, data from Polymarket Analytics showed that the platform continued to thrive, boasting $1.6 billion in monthly volume.

A substantial portion of this volume stemmed from sports-themed prediction market contracts, with over $1.1 billion bet on the NFL Super Bowl, $740 million on the Champion's League, and $700 million on the NBA Finals.

Unlike events such as elections, wars, or corporate acquisitions, the outcome of a sporting event carries no broader financial or societal consequences. This aspect of sports-themed prediction markets aligns them more closely with online sports betting, which has its own distinct regulatory framework.

In jurisdictions with licensed online sportsbooks, such as Singapore, the authorities have clear grounds to impose a ban on prediction markets offering sports betting.

Within the U.S., state-level gaming regulators may also turn their attention to these platforms, potentially prompted by the online sports gaming giants that legalized an industry that was once prohibited.

Nevertheless, there is still a place for sports-themed prediction market contracts within the broader ecosystem.

Considering the NFL's broadcasting rights, which are valued at over $100 billion, and the streaming services' attempts to enter the sports market, prediction market contracts pertaining to NFL ratings, for instance, could serve as a valuable tool for equity holders of media companies.

These contracts can help them gauge the return on their investments in broadcasting rights and identify other potential opportunities or applications. Or, as a final note, Polymarket could simply relocate to Canada, where Ontario permits both political and sports betting. Sometimes, the wisest wager is on a change of scenery, and there's not a prediction market for that just yet.