From byelections to regime change: how gambling on any event fuelled the rise of prediction markets
As ballistic missiles and kamikaze drones rained down on the Middle East, one of the world’s most talked-about businesses was inviting wagers on whether nuclear Armageddon might be imminent.
Polymarket is a prediction market, a relatively new breed of betting company that has burst on to the scene, particularly in the US, often seducing customers with little previous interest in gambling.
Alongside its larger rival Kalshi, Polymarket offers the chance to stake money on everything from the result of last week’s Gorton and Denton byelection to whether the US will confirm the existence of aliens before 2027.
Its market on nuclear Armageddon now appears to have been taken down, after widespread distaste circulating online for the prospect of wagering on the deaths of millions of humans. Polymarket did not return a request for comment.
For those who like to put their money where their mouth is, it has long been possible to gamble on affairs of state. The 2024 general election betting scandal in the UK opened many people’s eyes to the myriad ways in which bookmakers and punters can do so.
However, the rapid growth of prediction markets, particularly in the US, is making such wagers more commonplace. So how do they work and are they likely to take off in the UK?
What are prediction markets?
For all the fuss about this “new” phenomenon, British punters are already very familiar with prediction markets. We just call them betting exchanges. Betfair, the dominant UK exchange, launched more than a quarter of a century ago.
Unlike bookmakers, exchanges and prediction markets pit customers against one another. The exchanges provide the platform for users to bet on multiple “markets”, such as the outcome of a football match or whether a prime minister will be deposed by June.
Punters choose a side of that bet, either backing (betting on) or laying (betting against) the outcome. The exchanges take a commission on the payout. Customers can trade in and out of those bets, cashing out or staking more as the odds change before the outcome is known.
So what’s new?
Not much, except for some largely cosmetic, but potentially crucial, tweaks. What the likes of Kalshi and Polymarket have done is rebadge the exchange model to make it more accessible to less betting-savvy customers and, importantly, more palatable to US regulators.
Instead of odds, such as 5-1 or 11-2, probabilities are typically expressed in percentage terms. Many of the bets are also presented as a simple yes/no answer. This makes for a more user-friendly experience in a country where legal sports betting is a relatively new, if fast-growing phenomenon.
Prediction markets also tend to deploy the language of financial trading, showing graphs of how individual markets are moving, or inviting customers to “buy” or “sell” an outcome.
Why is that important?
In the UK, the prediction market model is just as legal as any other betting exchange, as long as you have an operating licence from the Gambling Commission.
But in the US, sports betting is only legal in 38 states, all of which have different and sometimes complex regulatory regimes.
Kalshi and Polymarket have found a loophole, by convincing the Commodities and Futures Trading Commission (CFTC) to regulate them as if they were offering financial trading in binary options, instruments that either pay out in full or not at all. Much like, er, bets.
Several US states have taken legal action against this approach, arguing that prediction markets on sports are just gambling in disguise.
One industry insider suggests that a desire not to be regulated like sports betting companies may be one reason why prediction markets are keen to highlight the novelty markets they offer, rather than making too much noise about their markets on football or basketball.
What novelty markets?
Prediction markets have grabbed attention by offering the chance to bet on current affairs, even when it might appear to be in poor taste; the market on nuclear Armageddon serving as a prime example of when that can backfire. But there are quirkier, seemingly harmless markets too, for example on the date that the Grand Theft Auto VI video game will be released, or who will win the Oscar for best picture.
Many of these markets are about generating publicity rather than revenue, says Jason Trost, the chief executive of the UK betting exchange Smarkets.
“These are brand exercises rather than things people want to trade,” he says. “It’s novelty markets for show, sports for dough. The money is all in sports.”
So are they coming to the UK?
Anyone using a virtual private network (VPN) may already be accessing US prediction markets, even though they do not have a UK gambling licence.
What is more, some UK players are moving towards a US-style model.
Trost has redesigned Smarkets to look more like Kalshi and Polymarket. He believes there is UK appetite for a betting exchange that does not use the “esoteric” language and interface of sites such as Betfair. Fellow UK exchange Matchbook, which is owned by Australian gambling tycoon Zeljko Ranogajec, is weeks away from launching its own US-style site. Both will be targeting customers in Britain.
But the opportunities may be limited in a mature gambling market where rivals include sophisticated sports book operators and an incumbent betting exchange powerhouse in the form of Betfair. The volume of bets on the Gorton and Denton byelection outcome on Polymarket was about $1m (£750,500).
That number counts betting positions that a user may have entered and exited several times. The actual amount of money at stake is a fraction of what would typically be wagered in the UK even on an unglamorous Premier League football game on any given weekend.
Alun Bowden, an industry analyst at Eilers & Krejcik Gaming, questions the business case. “People are going to flock back to betting exchanges to bet billions on byelections and what Brooklyn Beckham is putting in his next Insta post? I’m highly sceptical,” he says.
The bigger prize could be to take on the US prediction sites in their own back yard.
Matchbook is pursuing a CFTC licence before a planned US launch, while London-based Plus 500 launched a prediction market product this month. One industry insider says UK firms’ experience and technological prowess poses a real threat to the likes of Kalshi.
“They think they’ve invented an exchange and they’re running really hard and doing a great job of building their brand. They’re first movers. But we don’t believe the back end [exchange technology] is there. We know how to run these markets.”
What are the pitfalls?
As well as public revulsion at betting on war, prediction markets appear to be highly susceptible to manipulation. While sports events can be rigged, it is difficult to do so and betting operators are very good at spotting patterns that indicate they are being swindled.
However, there have been several high-profile examples of novelty or current affairs markets in the US in which big bets have been placed with the apparent benefit of insider knowledge.
In the US, the Guardian has previously traced details of users who aim to have made money thanks to advance knowledge of events such as the US operation to capture the Venezuelan president Nicolás Maduro. Big bets also appear to have been placed very shortly before the US and Israeli strikes on Iran, including on the removal of Ayatollah Ali Khamenei.
Until recently, neither US regulators nor the prediction markets themselves seemed too bothered about apparent insider trading. However, Kalshi last month suspended and fined two users it said had profited by “willingly” cheating and was investigating 200 apparent violations of its rules. Public and political outcry about bets on the unfolding Iran conflict appear to be intensifying scrutiny of the ethics of betting on war too, particularly where it may give a political insider an incentive to favour lethal action.
In the UK, where prediction markets would be regulated as gambling, regulators will have their eye on the potential risks. Last year’s general election betting scandal resulted in criminal charges against 15 people, including the former Conservative MP Craig Williams, for cheating under the Gambling Act 2005. The case continues.