Midterms to Subject Prediction Markets to Reputational Stress Test
Voters in Alaska, North Carolina, Maine, Michigan and Texas are tipped to decide which party controls the United States Senate in tomorrow’s midterm elections. The implications for economic policies around tariffs, affordability and the Iran war are immense.
The stakes are also big for users of Kalshi and Polymarket, who have staked more than $1.4 billion on event contracts related to the midterms.
Under Contract
Institutional heavyweights have backed the two leading prediction markets as if their odds of future success are on par with the 1927 New York Yankees. Kalshi, which is expected to launch an IPO as early as next year, was valued at $40 billion in its latest fundraising round last month, up from $22 billion in May. Polymarket was valued at $21 billion in August, up from $15 billion in April. Their popularity has exploded in the last 24 months, with traders wagering on everything from whether the US government will confirm the existence of aliens to who will be the next James Bond.
But it’s political event contracts that are under the microscope this week, and not just because of the midterms. Prediction markets whiffed big time last week when they implied the odds of Flávio Bolsonaro beating Luiz Inácio Lula da Silva in Brazil’s presidential election were roughly 80%, a forecast that went sour faster than a gym membership and a New Year’s resolution. It smacked of wide misses in the US earlier this year. Francesca Hong, whose implied odds to win Wisconsin’s Democratic primary for governor were 95%, lost. And Spencer Pratt, given a nearly 80% chance of making the runoff in the Los Angeles mayoral election, fell flat. That means tomorrow, Kalshi and Polymarket face a major stress test:
The two have already cracked down on insider trading this year, though anonymous campaign staffers told NPR in May that they’d pocketed thousands betting on their own candidates. Polymarket is also investigating suspect trades on last week’s Israeli election.
News companies including CBS , CNBC , CNN , Fox News parent Fox Corp. and Wall Street Journal publisher Dow Jones have inked partnerships with Kalshi and Polymarket. As of Friday, traders on Kalshi and Polymarket were pricing in the odds that the Democratic Party wins the Senate at 70% or higher — if that doesn’t play out, the news orgs may face questions about their reliability.
All in the Game: Election contracts are still a largely reputational concern. Kalshi and Polymarket’s biggest moneymaker, by far, is sports. And a bipartisan array of attorneys general in states including New York and Utah have sued them for allegedly operating illegal, unregulated gambling operations. The companies maintain their event contracts are financial derivatives and, thus, exclusively under the federal jurisdiction of the Commodity Futures Trading Commission. Although, last week, it was revealed that America’s most popular sports league, the NFL, seems to disagree. Philadelphia Eagles star Saquon Barkley revealed he was required to divest a stake in Polymarket after the NFL Players Association was informed the league “views prediction markets as gambling entities.”
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