US Prediction Markets: Bubble Threat and Regulatory Chaos

The world of prediction markets in the US stands at a crossroads. Michael Burry, the investor known for his crisis forecasts, suggests with recent investments that he does not believe in their long-term success. While valuations are soaring, the future of these event contracts seems to be on shaky ground. Observers speak of either the bargain of the decade or a massive bubble waiting to burst at any moment. The debate between evangelists and skeptics is heated.

Particularly the platform Kalshi, prominent in the US market, is at the center of the discussion. It claims to be regulated as a “swap” under the Commodity Exchange Act, thus allowing it to operate federally in all 50 states. This contradicts the common view that sports betting regulation falls under the jurisdiction of individual states. Several states have already intervened. Nevada has imposed a court-ordered ban, and Michigan forced Kalshi to geofence and pull its sports event contracts from residents of the state. A 90-year-old judge, Jane Richards Roth, concluded after visiting Kalshi’s website that the offering was virtually indistinguishable from traditional sports betting. She wrote: “I see Kalshi’s actions as a performative sleight meant to obscure the reality that Kalshi’s products are sports gambling.”

Numbers and facts

The conflict over the regulation of prediction markets in the US is intensifying. The federal agency CFTC (Commodity Futures Trading Commission) is at the core of the issue. Its exclusive jurisdiction is questioned by many. Political entanglements are amplifying the uncertainty. Donald Trump Jr. serves as both a paid advisor for Kalshi and an investor in Polymarket. Trump’s personal statement that the CFTC’s exclusive jurisdiction is “critically important” highlights the political dimensions of the issue. He stated: “We cannot have SCUM like Chris Christie, Letitia James, Tim Walz, and JB Pritzker setting the rules!”

Just weeks earlier, the former casino magnate had lamented that “the whole world, unfortunately, has become somewhat of a casino.”

Internal disputes between leading platforms Kalshi and Polymarket further contribute to the unstable situation. Polymarket previously accused Kalshi of corporate espionage, and both companies filed competing trademark applications for “the world’s largest prediction market.” The legal uncertainty could culminate in the Supreme Court, similar to Murphy v. NCAA overturning PASPA in 2018.

Background

Prediction markets are a tool that converts individual opinions into collective probabilities. Richard Warr of NC State University describes them as markets where participants trade contracts whose payoff depends on the outcome of a future event. A contract that pays $1 if Candidate A wins an election and $0 otherwise, trading at 65 cents, indicates a 65 percent chance. This system more closely resembles financial markets than traditional sports betting, as positions can be traded as perceptions change. Friedrich Hayek emphasized in 1945 the ability of markets to aggregate dispersed knowledge through the price system. The idea is that exchanging bets on future events condenses information and provides accurate forecasts, often more accurately than polls or expert estimates.

However, the acceptance of these markets suffers from serious credibility issues. Cases of insider trading, such as around the capture of Venezuelan President Nicolas Maduro, damage their image. An investor on Polymarket profited by $400,000 in less than 24 hours after betting over $30,000 on Maduro’s removal shortly before his capture. Such incidents demonstrate how pricing markets for geopolitical events create incentives for individuals with classified information.

“Death markets” also came under scrutiny. Following the controversy over Kalshi’s “Ali Khamenei out as Supreme Leader?” market, which generated over $54 million in volume, platforms are more cautious about their offerings. Markets potentially resolvable by a person’s death now carry disclaimers stating that in such cases, positions will be settled at the last price recorded before the death occurred. Marketing strategies are also criticized, including the use of 15-year-old influencers and the spread of misinformation to attract younger target groups. All this contributes to reputational damage.

Why it matters for German players

For German players, the US debates about uncertain prediction markets and their regulation are more of indirect significance. In Germany, since the 2021 State Treaty on Gambling (GlüStV 2021), there are clear rules for online gambling. The Joint Gambling Authority of the Federal States (GGL) licenses and supervises online casinos. Players here benefit from very strict player protection, which in the US – at least for these prediction markets – is still in its infancy. The GGL whitelist lists all legal providers. Illegal offers, often from countries like Malta or Curacao, are prohibited in Germany. German regulation stipulates a stake limit of 1 euro per spin on online slot machines.

Additionally, there is a monthly deposit limit of 1,000 euros, which is monitored via the central blocking system LUGAS. This system aims to ensure that players cannot bypass these limits by using multiple providers. Transparency and strict addiction prevention are core objectives of German legislation. In contrast to the opaque practices of some US prediction markets, where insider trading and dubious advertising methods are commonplace, the regulated German market offers a significantly safer environment. Players can trust that game fairness is guaranteed and that there are clear points of contact for problems. Gambling should be a form of entertainment, not a risky financial instrument characterized by unclear rules and conflicts of interest.

What it means for GGL-licensed casinos

The situation of prediction markets in the US underscores the necessity of clear and comprehensive regulation, as pursued by the GGL in Germany. For licensed GGL casinos, this confirms their chosen path. They must comply with strict requirements that prioritize player protection, transparency, and prevention of gambling addiction. While US platforms like Kalshi and Polymarket struggle with their legal status and suspicions of insider trading or unfair marketing, GGL casinos can score with established and verified processes. This builds player trust and protects market integrity.

GGL casinos must adhere to defined limits, which are monitored across providers via LUGAS. Such mechanisms are crucial to protect players from excessive losses and to counteract problematic gambling behavior. The controversies in the US show that unregulated or insufficiently regulated markets are susceptible to abuse. This strengthens the GGL in its approach to ensuring a safe and responsible online gambling environment. It acts as a beacon, demonstrating what modern gambling regulation should look like to consider both economic interests and public protection.

“I see Kalshi’s actions as a performative sleight meant to obscure the reality that Kalshi’s products are sports gambling.” - Jane Richards Roth, Third Circuit Judge