Original Title: 《Why Billionaires Are Piling Into Prediction Markets》

Original Author: Alicia Park

Original Source: Forbes

Original Translation: Deep Tide TechFlow

The shrewdest billionaire traders are betting on emerging prediction markets. Kalshi, leveraging its connections with the Trump camp, is taking the lead in this potentially trillion-dollar opportunity.

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

Holding several seemingly stuffed folders, the Wall Street legend's deep dive into the small company's operations shocked Kalshi's two 27-year-old co-founders, Tarek Mansour and Luana Lopes Lara.

Two years prior, Schwab and another Wall Street titan, Henry Kravis, had angel invested in Mansour's company, participating in a $30 million funding round that valued Kalshi at $120 million.

"I remember after a few minutes of my first call with Chuck, he said, 'I want to invest,'" Mansour, 29, recounted. "He said it reminded him of when he started Charles Schwab, and it was the first time in a long time he saw a company that could fundamentally change financial markets."

Today, Kalshi is one of Chuck Schwab's largest investments outside of his namesake brokerage firm, which has a market cap of $176 billion. 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' senior CEO, Ken Griffin.

The investments from Schwab, Kravis, and Griffin are not isolated cases. Prediction markets are becoming a hot investment spot for the smartest billionaires in finance.

Thomas Peterffy, founder of Interactive Brokers with a net worth of $72 billion, told Forbes that he attempted to acquire Kalshi after its angel round in 2021. Although he was turned down, Peterffy did not 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 Bitcoin prices by the end of 2025.

In April 2024, Jeff Yass's $65 billion quantitative trading hedge fund, Susquehanna International Group, partnered with Kalshi to provide liquidity as one of its primary market makers. Recently, Kalshi collaborated with Vlad Tenev's $6.4 billion Robinhood to add event contract trading to its growing retail investment products.

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

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

Betting on elections and sports events is not new: this form has existed in the U.S. since the 19th century, while modern prediction markets—allowing users to bet on the outcomes of future events by buying and selling "yes" or "no" contracts—were first proposed at the University of Iowa in 1988.

Early prediction markets, such as Intrade and PredictIt, were publicly traded in the 2010s but faced limitations due to regulatory issues and lack of appeal. Although Kalshi is not the first, it made history last October when a federal court ruling authorized Kalshi to offer presidential election contracts, which had been illegal for over a century.

The presidential election changed the game: after receiving regulatory approval for election betting, Kalshi's user base grew tenfold in less than a month, with user bets exceeding $1 billion, reaching 2 million on the eve of election night. Polymarket users placed bets totaling $3.6 billion on Trump or Harris. The momentum of the election has made prediction markets culturally relevant, uncovering a range of betting opportunities, from next year's Oscar nominees to whether Astronomer CEO will divorce after embracing on Coldplay's concert giant electronic screen.

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

"It has always troubled me that people do not think about the future from a probabilistic perspective throughout my career," Peterffy said. His brokerage firm, which has a market cap of $100 billion, was founded in 1977 to enable more people to trade options or bet on stock prices. "In my view, prediction markets are a way to teach the public how to think about future outcomes from a probabilistic perspective."

Jeff Yass runs a hedge fund, and being proficient in poker has almost become a job requirement for him. He sent Forbes a message stating, "Prediction markets allow parties to more effectively share risks based on parameters.

The hurricane risk faced by homeowners in Florida is an example. Instead of purchasing annual insurance, it is better to buy a 'certainty' contract when a hurricane approaches, predicting that the wind speed in the town will exceed a certain threshold based on the latest meteorological data, thus hedging against potential property loss risks."

Tenev wrote on X when naming the partnership between Robinhood and Kalshi, which will be established in March 2024: "At its most fundamental level, [prediction markets] are an application of capitalism in the pursuit of truth. Market incentives and collective wisdom sift through all information to determine the answers to specific questions and the outcomes of significant events." A month ago, Coinbase's Armstrong told CNBC that prediction markets could one day become an alternative to The New York Times.

Mansour, an MIT graduate engineer who previously traded stock options at Goldman Sachs and Citadel Securities, stated plainly:

"If you are a Wall Street trader, prediction markets have long been your holy grail."

When discussing this industry with infinite tradable products, he said, "We want to build the world's largest commercial market."

Today, Kalshi in New York City has 75 employees, nearly double the number before the November 2024 election, and offers around 2,000 active markets at any given time.

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

However, floating fees are not the only reason Kalshi attracts billionaire supporters. Unlike alternative stocks (which can be traded and settled at any number of brokerage firms), contracts in prediction markets are proprietary, effectively creating a moat that locks users into the platform that creates the market.

Kalshi currently has a monthly trading volume of about $1 billion and has processed a total trading volume of $6.9 billion since its inception, with $6.4 billion coming from October 2024. The startup not only attracts speculators directly on its website and mobile app but also white-labels its markets to brokers like Robinhood and Webull, thereby increasing liquidity and scale. Mansour stated that the company will add a dozen more brokers next year.

"We find that prediction markets are a very good interactive tool," said JB Mackenzie, head of futures at Robinhood. Robinhood has 27 million customers and is committed to becoming the next-generation one-stop financial services company. "It helps cross-promote other businesses within our company."

Matt Huang, founding partner of cryptocurrency venture capital firm Paradigm, led Kalshi's $185 million funding round in June this year. He believes that low operating costs could help prediction markets effectively eat into other mature markets. "Prediction markets are a superset of all other markets: you can reclassify sports betting, the stock market, and almost all other markets as prediction markets," Huang said. "In a sense, prediction markets could grow to be as large as, or even larger than, the largest financial markets. I truly believe their potential is limitless." For Mansour, the scale of this opportunity is "hundreds of billions of dollars."

If the prediction market boom can gain more momentum, it is likely to come from the Trump camp. Donald Trump Jr., the president's eldest son, joined Kalshi as a strategic advisor in January this year. Eliezer Mishory, who previously served as Kalshi's chief regulatory officer for four years, was appointed head of the Trump administration's Efficiency Department. Kalshi board member Brian Quintenz served as a commissioner of the U.S. Commodity Futures Trading Commission (CFTC) during Trump's first administration and was appointed by Trump as the head of the CFTC earlier this year.

In his application for Forbes' 2022 "30 Under 30" nomination, Mansour listed Kalshi angel investor Emil Michael (Trump's nominee for Chief Technology Officer at the Department of Defense) as his only professional reference. Additionally, Charles Schwab's granddaughter, Samantha Schwab, has no other professional experience besides 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.

Although Kalshi holds a leading position in the prediction market, the competition is still ongoing.

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 CFTC to launch in the U.S., making its ability to penetrate Wall Street comparable to Kalshi. The largest sports betting platforms in the U.S., Fanduel and Draftkings, are also developing their own prediction markets, while state regulators are still litigating the legality of Kalshi's sports event contracts—its largest market to date. Stay tuned.

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