Are Prediction Markets Investing, Gambling, or Something Else?
- Gin
- 7 days ago
- 6 min read
A year ago, I started seeing ads for Kalshi, a prediction market platform, all over social media.
At first I ignored them. Then they started appearing during commercial breaks while I was watching the World Cup.
Apparently, I wasn't clicking "Not Interested" aggressively enough.
The ads claimed prediction markets were a smarter way to make money by predicting current events. Some influencers even described them as investing.
That immediately raised a question:
Are prediction markets really investing? Because they sound a lot like the stupid bets I’d make with friends when I was in college.
As I looked into what exactly they were, I realized it's not as straightforward s slot machines or index funds, which is why I didn’t include prediction markets in last week’s post about the differences between gambling and investing.
WHAT ARE PREDICTION MARKETS?
Prediction markets are platforms that are structurally similar to stock-trading platforms, except you’re not buying ownership in businesses, i.e. stocks. Instead, you’re buying and selling contracts that give the right to receive money if a future event happens.
And here’s where things get really interesting. Because these aren’t just your normal events like the outcome of a soccer match. The events you can make money off of could be literally anything.
You could buy a prediction market contract where you earn money if a hurricane makes landfall. You can speculate on whether the Fed will cut interest rates. Or whether inflation will exceed 3%. Or whether your favorite reality TV contestant wins.
Humanity apparently looked at the stock market and collectively decided, "You know what this needs? More ways to bet on everything."
Every contract has two sides: Yes or No.
If the "Yes" contract costs $0.35, the "No" contract costs $0.65. Together they always add up to $1. If you're right, the contract pays $1. If you're wrong, it expires worthless.
This structure alone convinced me 100% that prediction markets are a form of gambling.
Or at least it did until I dove deeper. Then things got less clear.
WHY PREDICTION MARKETS ARE DIFFERENT FROM TRADITIONAL GAMBLING
As of this writing, prediction markets like Kalshi and its competitor Polymarket are illegal in certain states. There is an ongoing battle between federal and state regulators on whether they fall under gambling or not.
Before deciding where prediction markets belong, it's worth looking at the strongest arguments as to why they're fundamentally different from gambling.
THEY PRODUCE USEFUL INFORMATION
Probably the strongest philosophical argument is that, unlike a roulette wheel, prediction markets actually produce useful information. They crowdsource knowledge to give real-time probability estimates of future events, such as election outcomes and inflation and interest rate changes.
There is an incredibly large and diverse pool of participants all trying to profit off of information they receive from different sources. When new information comes out—such as a political scandal or surprise economic report—they’ll rush to buy and sell contracts accordingly.
That activity gets reflected in the contract prices in real time. For example, a contract for $0.65 that says Candidate A will win the election is effectively saying that the public believes there’s a 65% chance of that happening.
Whether those probabilities are more accurate than polls or expert forecasts is debatable, but businesses, researchers, and even governments sometimes pay attention.
THERE ISN'T A HOUSE SETTING THE ODDS
One of the most common arguments for prediction markets being different from gambling has to do with how they’re structured.
In traditional gambling, it’s you against the house, and the house sets the odds so that it always has a mathematical edge.
With prediction markets, however, participants trade with each other. In most cases, the platform simply matches up buyers and sellers, just like a stock trading platform, taking a small transaction fee for acting as the middleman.
But the differences with gambling don’t stop there.
YOU CAN EXIT BEFORE THE EVENT
When you place a gambling bet, your money is locked in until the roulette wheel stops or the sports match ends. When you buy a prediction contract, however, you can change your mind and sell before the event occurs.
For example, if you bought election contracts for $0.35 each, and breaking news drops, causing the price to jump to $0.75, you could sell your contracts to lock in a profit before the event takes place. On the flip side, if prices drop, you could also sell early to cut losses.
In that sense, prediction contracts behave more like tradable securities, like stocks, than a typical gambling bet. Even the U.S. federal government seems to think so.
THEY'RE REGULATED AS FINANCIAL PRODUCTS
Kalshi is regulated by the U.S. Commodity Futures Trading Commission (CFTC), which views the prediction contracts as financial instruments versus casino wagers.
Why?
It has to do with how businesses use something called hedging to protect themselves from risk.
Imagine you're a banana farmer. A severe drought could wipe out your crop.
Buying a contract that pays if a drought occurs could offset some of those losses, much like insurance.
That's one reason regulators sometimes treat certain prediction contracts as financial instruments rather than casino wagers.
But the legal classification isn’t what I went down the rabbit hole for. What I wanted to know was: Do prediction markets build wealth the way investing does?
PREDICTION MARKETS ARE BETTER DESCRIBED AS SPECULATION
At first glance, prediction markets seem to resemble gambling. Payouts are fixed. I can either win or lose. And contracts eventually expire.
But unlike gambling, there’s no house edge and money isn’t locked in. I can change my mind and sell my contracts before the event occurs.
The structure sounded vaguely familiar, and that's when I realized I was comparing prediction market contracts to the wrong thing.
The better comparison isn't sports betting.
It's stock options. Both involve buying contracts rather than buying businesses.
When I buy a share of stock, I’m buying ownership in a business. If the company succeeds over time, I share in that success.
Buying a stock option is different. I’m not buying a part of the business. I’m buying a contract whose value depends on what the stock price does before the option expires.
Prediction market contracts work much the same way. I’m not buying a productive asset. I’m buying a contract whose value depends on whether a future event occurs.
The biggest difference between the two is that a stock option is tied to a productive business. A prediction contract, on the other hand, is tied to an event.
And that's when it clicked for me.
Investing and gambling aren’t the only two choices.
There's a third category:
Speculation.
To me, speculation means buying or selling contracts based on what you think will happen in the future rather than owning something that creates value over time. Skill and research may improve your odds, but your success still depends on correctly predicting an outcome—not on sharing in the long-term growth of a productive asset.
Stocks are investments because they represent ownership in businesses that create wealth over time.
Stock options and prediction markets don't do that. They are contracts whose value depends on correctly predicting future outcomes.
That's why I think prediction markets fit most naturally under speculation.
SHOULD LONG-TERM INVESTORS CARE?
Speculation can be intellectually engaging and occasionally profitable. Even I’m somewhat tempted to buy a prediction contract or two, but just for entertainment. Because as a long-term investor, I’m not confident it can make me money.
Prediction markets may reward research.
They may provide useful information.
They may even have legitimate financial uses.
But if my goal is financial independence, I'd rather own the businesses creating tomorrow's headlines than try to predict them.
See you at the finish line!
Disclaimer: I’m not a licensed financial professional. This blog shares my personal experiences and opinions around money, investing, and early retirement. It’s for informational and educational purposes only—not financial, legal, or tax advice. Always do your own research or consult with a qualified professional before making any financial decisions.
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