Prediction markets may look like gambling. But in reality they may become one of the most important tools in modern finance.

A few weeks ago, Bitwise filed for prediction market ETFs. I’ve been obsessed with prediction markets for decades—ever since writing about the Iowa Electronic Markets in college. I believe they have powerful implications for both policy and portfolios.

But one thing I’ve learned since filing is that not everyone agrees. I’ve gotten more pushback on this filing than almost anything else I’ve done in my career. So let’s address the biggest questions head-on.

[Note: Because of SEC restrictions, I can’t write about the filings themselves. But I can talk about prediction markets generally.]

1) Aren’t prediction markets just gambling?

Sometimes, but not always.

A prediction market on the outcome of a sports game is functionally equivalent to sports betting. I would call this gambling.¹

But a prediction market on whether the Federal Reserve will raise or lower interest rates is functionally equivalent to the CME’s fed fund futures market. This is a multi-trillion-dollar market used by many of the largest financial institutions in the world to hedge interest rate risk. I would call this investing.

We don’t need to treat prediction markets as a monolithic thing. We can be sophisticated enough to separate a market about GDP from a market about Taylor Swift concert receipts.

2) What about prediction markets tied to election outcomes?

Election outcomes dramatically influence markets, via tax policy, trade policy, regulation, government spending, and more. The ability to hedge and invest around those outcomes strikes me as an important, investment-oriented use case.

This one in particular hits home for me because crypto has historically been very exposed to election outcomes and regulatory shifts. Having the ability to hedge these risks would have been nice!

But it’s not just crypto; consider a wealth manager whose clients have significant exposure to sectors sensitive to trade policy or fiscal spending, or a corporate treasurer trying to manage exposure to regulatory shifts.

Hedge fund investors have been "macro trading" around elections and regulatory developments for decades. Prediction markets just make it more direct—and more accessible.

3) But prediction markets are a zero-sum game. You can effectively lose all your money!

Yes, and this is important. Prediction markets are different from stocks or bonds. It would not make sense to build a portfolio holding only prediction market contracts.

But plenty of useful financial tools operate on a zero-sum basis. Futures contracts, FX trading, and other massive markets pair long and short positions, and are valuable tools for investors hedging or investing in specific situations. No one would think it’s ridiculous for a hedge fund to buy options on gold or the Nasdaq-100.

4) Aren’t prediction markets bad for society? Unlike investing in stocks or bonds, they don’t direct capital to useful enterprises.

I strongly disagree. Prediction markets have the potential to drastically improve the quality of information that investors—and society—can access surrounding important events. Better information leads to better decisions—and, by extension, better capital allocation.

This isn't a theoretical claim. A recent Federal Reserve paper found that Kalshi—the largest federally regulated prediction market—correctly predicted the federal funds rate before every single FOMC meeting going back to 2022, a perfect record that neither the New York Fed's Survey of Market Expectations nor fed funds futures achieved. Kalshi was also equal to or better than Bloomberg consensus estimates on CPI and other macro indicators. And critically, Kalshi provides real-time updates on those probabilities, which surveys do not. The paper argues that this data is hugely useful for both researchers and policymakers.

One thing I’ve noticed is that even people who dislike prediction markets look at prediction market data. That tells you the data is valuable. It’s why it’s now being fed into Bloomberg terminals, is regularly mentioned on CNBC, and is widely cited by Wall Street analysts.

5) What about insider trading?

Insider trading should not be tolerated in any market. I’m as concerned as anyone about reports of insider trading in prediction markets. These should be—and are being—investigated.

But the existence of bad actors in a market is an argument for better enforcement, not for eliminating the market. Otherwise we wouldn’t have a stock market—or any market, for that matter.

Importantly, prediction market venues like Kalshi are regulated by the CFTC and are required to maintain surveillance programs to detect and prevent manipulative trading. Major institutional liquidity providers—firms like Citadel and Susquehanna—participate in these markets, which adds a layer of sophistication to the price discovery process.

As prediction markets grow, I expect regulatory scrutiny and enforcement to grow with them. That's appropriate, and it's how every financial market matures.

Bonus: Why do we need prediction market ETFs?

For the same reason we needed bitcoin ETFs.

Before the ETF, there were plenty of ways to access bitcoin. You could buy it and hold it in self custody. You could buy it through an exchange. You could buy it in a private fund. But the launch of the ETF made it easily available to all investors, such that bitcoin could sit alongside other assets in portfolios and financial systems—all while enjoying the features of a regulated product.

The same is true with prediction outcomes. As policy and macro events become more and more important to investors, prediction market ETFs will make it easier for them to position their portfolios accordingly.

Conclusion

We’ll be writing much more on prediction markets pending a decision on the ETFs. In the meantime, I’ll be keeping a close eye on prediction market data when I want to know what’s likely to happen in the world. That probably tells you everything you need to know about their value.

Note:

(1) This isn’t a legal perspective—just a common-sense take. Sometimes you know it when you see it.

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