Forbes: Why Are Billionaires Rushing Into the Prediction Market?

Original Article Title: "Why Billionaires Are Piling Into Prediction Markets"
Original Article Author: Alicia Park, Forbes
Original Article Translation: DeepTech TechFlow

The savviest billionaire traders are betting on emerging prediction markets. Kalshi, with its ties to the Trump camp, has taken a lead in this potentially trillion-dollar opportunity.

On a cold winter morning in 2023, discount brokerage billionaire Charles Schwab arrived at the office of the little-known prediction market startup Kalshi in SoHo.

Armed with several seemingly overstuffed folders, the Wall Street legend had spent time delving into the moves of this small enterprise, leaving Kalshi co-founders, 27-year-olds Tarek Mansour and Luana Lopes Lara, astonished.

Two years prior, Schwab and another Wall Street titan, Henry Kravis, had made an angel investment in Mansour's company, participating in a $30 million funding round that valued Kalshi at $1.2 billion.

"The first time I was on the phone with Chuck, within a few minutes, he was like, 'I want to invest,'" said the 29-year-old Mansour. "He said it reminded him of when he founded Charles Schwab, the first time in a long time he's seen a company that could fundamentally change the financial markets."

Today, Kalshi is one of Chuck Schwab's largest investments outside of his eponymous $176 billion brokerage firm. In June of this year, the startup was valued at $2 billion in a funding round, attracting the attention of another Wall Street billionaire, Citadel Securities' veteran CEO, Zhao Peng.

Investments from Schwab, Kravis, and Peng are not isolated cases. Prediction markets are becoming a hot investment trend among the financial world's smartest billionaires.

Interactive Brokers founder Thomas Peterffy, with a net worth of $72 billion, told Forbes that he had attempted to acquire Kalshi after its angel funding round in 2021. While rebuffed, Peterffy didn't give up. His Interactive Brokers launched a subsidiary called ForecastEx a year ago to compete with Kalshi, predicting future events ranging from the New York City mayoral election to the end-of-2025 Bitcoin price.

In April 2024, Jeff Yass's $65 billion quant trading hedge fund Susquehanna International Group partnered with Kalshi, a prediction market, to act as one of its primary market makers, providing liquidity. Recently, Kalshi teamed up with Vlad Tenev's $6.4 billion Robinhood to introduce event contract trading to the rapidly expanding retail investing product.

To stay ahead of competitors in the field, blockchain-based prediction market Polymarket attracted investments from numerous billionaires, including Palantir co-founder Peter Thiel ($25.3 billion), Ethereum co-founder Vitalik Buterin, and Airbnb co-founder Joe Gebbia ($7.7 billion). According to Pitchbook, in August this year, after a $135 million funding round led by Thiel's Founders Fund, Polymarket was valued at $1 billion. Coinbase co-founder Brian Armstrong ($13.7 billion) also announced in July the upcoming launch of the "Everything Exchange," offering prediction market services to its millions of customers.

According to The Information, both Kalshi and Polymarket are currently seeking new funding rounds that could see their valuations soar to $5 billion and $9 billion, respectively.

Betting on elections and sports events is not a new phenomenon: this form has been present in the United States as early as the 19th century, and modern prediction markets—allowing users to bet on the outcome of future events by trading "yes" or "no" contracts—were first proposed at the University of Iowa in 1988.

Early prediction markets, such as Intrade and PredictIt, were publicly launched in the 2010s, but faced restrictions due to regulatory issues and lack of appeal. While Kalshi was not a pioneer, it made history in October last year when a federal court ruling authorized Kalshi to offer presidential election contracts, a move that broke a century-old tradition of such contracts being illegal.

The presidential election changed the game: with approval to offer election bets, Kalshi's user base grew tenfold in under a month, with user bets exceeding $1 billion and reaching 2 million on the eve of the election night. Polymarket users placed bets amounting to $3.6 billion on Trump or Harris. The momentum of the election made prediction markets culturally relevant, unearthing a series of similar opportunities ranging from next year's Oscar nominations to whether the CEO of an Astronomer will divorce after embracing on the giant LED screen at a Coldplay concert.

If you were to ask billionaire traders why they want to enter the prediction market industry, you might get many noble answers:

“Throughout my entire career, the failure of people to think about the future from a probabilistic perspective has always troubled me,” said Peter Phi. His brokerage firm, with assets reaching $100 billion, was initially established in 1977 to allow more people to trade options or bet on stock prices. “To me, the prediction market is a way to teach the public how to think about the future of things from a probabilistic perspective.”

Jeff Yas runs a hedge fund, and being proficient in poker has almost become a job requirement for him. He sent Forbes a message stating, “The prediction market allows parties to more effectively share risks based on parameters.

The hurricane risk faced by Florida homeowners is one such example. Instead of purchasing annual insurance, it is better to buy a ‘definite’ contract when the hurricane approaches, based on the latest meteorological data predicting that the wind speed in the town will exceed the specified value, thus hedging against potential property loss risks.”

When Tevnev named the partnership between Robinhood and Kalshi set to be reached in March 2024, he wrote, “At the most fundamental level, [the prediction market] is the application of capitalism in the pursuit of truth. The market incentives and collective wisdom will sift through all information to determine the answer to a specific question and the outcome of significant events.” One month ago, Armstrong from Coinbase told CNBC that the prediction market may one day become an alternative to The New York Times.

Mansoor, an MIT graduate engineer who has worked in stock options trading at Goldman Sachs and Citadel Securities, bluntly stated,

“If you are a Wall Street trader, the prediction market has always been your holy grail.”

Speaking of an industry with infinitely tradable products, “We want to build the world’s largest commercial market.”

Today, New York City’s Kalshi has 75 employees, almost double from before the November 2024 election, and offers approximately 2,000 active markets at any given time.

From a financial services perspective, it makes money in a traditional way, by charging a commission or fee from every contract traded. The contract price is linked to the perceived event probability in the market, ranging from 1 cent to 99 cents. For example, buying a 10-cent contract predicting Peter Hegses will be the first to leave the Trump cabinet costs 1 cent, equivalent to a 10% commission. If you buy 100 contracts of ‘yes,’ betting that the U.S. government will shut down in 2026, according to the company’s sliding fee formula, Kalshi would earn $1.75, which is a 3.5% commission. Kalshi also charges a 2% fee on all debit card deposits and a fixed $2 fee for withdrawing bonuses from your account.

However, floating fees are not the only reason Kalshi has attracted billionaire backers. Unlike tradable stocks (which can be traded and settled through any number of brokerages), contracts in prediction markets are proprietary, effectively creating a moat that locks users into the platform hosting the market.

Kalshi currently sees monthly trading volumes of around $1 billion and has processed a total trading volume of $6.9 billion since its inception, with $6.4 billion coming in October 2024 alone. The startup not only attracts speculators directly on its website and mobile app but also white-labels the market to brokerages like Robinhood and Webull, thus increasing liquidity and scale. Mansoor stated that the company plans to add over a dozen more brokerages next year.

“We've found that prediction markets are a really strong engagement tool,” said JB Mackenzie, Head of Futures at Robinhood. With 27 million customers, Robinhood aims to be a next-generation one-stop financial services company. “It helps cross-pollinate other business within our company.”

Matt Huang, Founding Partner at the cryptocurrency investment firm Paradigm, led Kalshi's $185 million funding round in June this year. He believes that the low operational costs might help prediction markets efficiently cannibalize other mature markets. “Prediction markets are a superset of all other markets: you can reclassify sports betting, the stock market, and almost any other market as a prediction market,” Huang said. “In some sense, prediction markets could evolve to be as large as, if not larger than, the largest financial markets. I truly believe their potential is limitless.” For Mansoor, the scale of this opportunity is “in the trillions.”

If the prediction market craze gets more fuel, it is likely to come from the Trump camp. Donald Trump Jr., the son of former President Trump, joined Kalshi in January this year as a strategic advisor. Eliezer Mishory, who previously served as Kalshi's Chief Regulatory Officer for four years, was appointed as efficiency czar in the Trump administration. Kalshi board member Brian Quintenz, who once served as a commissioner at the Commodity Futures Trading Commission (CFTC) during the first Trump administration, was earlier this year appointed as the head of the CFTC by Trump.

In his application for the Forbes 2022 “30 Under 30” nomination, Mansoor listed Kalshi angel investor Emil Michael (Former Chief Technology Officer of the Department of Defense nominated by Trump) as his sole professional reference. Additionally, Samantha Schwab, the granddaughter of Charles Schwab, has no professional experience other than working in the Trump administration. According to her LinkedIn page, she worked on Kalshi’s business development team for a year before joining the U.S. Treasury as Deputy Chief of Staff in January this year.

While Kalshi holds a leading position in the prediction market, this competition is far from over.

At the end of August, Donald Trump Jr. invested in Kalshi's competitor Polymarket and joined its advisory board. A few days later, Polymarket received approval from the Commodity Futures Trading Commission (CFTC), listing in the United States, putting it on par with Kalshi in its ability to penetrate Wall Street. The largest US sports betting platforms, Fanduel and Draftkings, are also developing their own prediction markets, and state regulators are still litigating the legality of Kalshi's sports event contracts—its largest market to date. Stay tuned.

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