If you wanted to bet on last weekend’s Super Bowl, you had options. You may have even bet with your friends. If you lived in a legal state, you could have gone to a casino or used a casino app.
Alternatively, starting last year, event contracts could be entered into using designated contract markets regulated by the Commodity Futures Trading Commission (CFTC). It’s the same legal structure used to buy derivatives based on the prices of traditional goods like wheat, coffee, and pork belly, and now applied to trades like whether the Patriots will beat the Seahawks or which song will be played first at halftime.
This legal strategy was developed by Kalsi in January 2025 and is being used by a rapidly increasing number of exchanges. The CFTC previously proposed rules that would shut down markets deemed “gambling,” such as betting on politics or sports. More recently, they gave up on the proposed rule and withdrew it, perhaps because they found comments from economists like me persuasive, perhaps because of new leadership at the CFTC, and perhaps because the exchanges poured resources into influencing the regulation, such as hiring lawyers and former CFTC leaders at very high costs.
For these exchanges, the benefits of offering commodity sports markets are clear. It allows them to tap into a lucrative market that was previously limited to a small number of companies with gaming licenses in states where sports betting is legal. As far as benefiting from sports betting, users see many advantages in trading on these exchanges as opposed to casinos. Prices tend to be lower. Contracts can be sold before the end of the game. Exchanges do not limit successful traders any more than casinos limit successful bettors. And the exchange can operate in 11 states that currently do not allow sports betting through casinos.
The winners in commodity sports are clear, but so are the losers. Losing bettors may be in debt. Casinos are facing new competition. State governments that believe they have banned sports betting and do not like the loopholes in this product. And some state governments feel they are missing out on a much-anticipated cut of sports betting by imposing large taxes on legalized sports betting. These groups have challenged this exchange in court, with mixed success so far.
I myself have mixed feelings about commodity sports. The liberal in me is thrilled that the government doesn’t get in the way of voluntary interactions between consenting adults. As a bettor, you’ll be glad to have an alternative to exclusive casinos with high fees.
But as an economist, I’m concerned.
I love that CFTC regulated exchanges like Kalshi and Polymarket are bringing prediction markets mainstream. The real value of prediction markets is that they aggregate information from all over the world into a single number that represents the most accurate prediction of the future. Betting is a zero-sum game, so those who trade in prediction markets are not real winners. Every dollar one trader gains costs another trader. The real winners are the rest of us, those who have access to more accurate predictions without risking a penny. In a virtuous cycle, more accurate forecasters win and accumulate larger funds that they use to move the market in a more accurate direction, while worse forecasters lose and learn to distance themselves. (As former EconLog author Brian Caplan said, “Betting is a tax on wrong thinking.”)
This is the dream that led economists like Robin Hanson to insist on predicting the market long before the latest wave of CFTC-regulated exchanges emerged. Scott Sumner made a case here for the market about future NGDP to better inform Fed policy. Discussions like this directly influenced prediction market founders like Polymarket’s Shayne Coplan.
“I remember reading Robin Hanson’s literature on prediction markets and thinking, “This is too good of an idea to just put in a white paper. There were a million reasons why it wouldn’t work, a million arguments about why not to do it, and the odds weren’t stacked against us, but we had to try.” – Shayne Coplan, Polymarket Founder
So while I think there is great value in prediction markets that provide more accurate predictions about important questions that help policymakers, businesses, and individuals make more informed plans for our future (e.g., which world leaders will leave office this year or which countries will go into recession?), I believe there is much less value in more accurately predicting how many receptions Jackson Smith-Njiba will receive, in addition to the social costs of sports betting.
Like Robin Hanson, I worry that legal battles against commodity sports and a growing cultural backlash against sports betting are at risk of destroying the most profitable prediction markets. I hope I’m wrong and that the revenue from sports betting will help exchanges support a broader and more valuable market than ever before. Indeed, their founders seem to be benefiting from pushing the envelope (FBI raids aside).
At least for now, participants are free to trade derivative contracts on outcomes completed before their expiry, i.e. contracts to bet on sports through prediction markets.
