Tom Waterhouse of Waterhouse VC suggests that prediction markets are expected to rival sports betting and open up new growth avenues for gambling operators.
Prediction markets first gained widespread attention during the US elections in November 2024, when trading volumes surged. The key issue is whether such platforms can maintain activity outside of hot events, thereby ensuring market liquidity, effectiveness, and accuracy. By February 2025, after conducting in-depth research on the Kalshi platform regulated by the US Commodity Futures Trading Commission (CFTC), we concluded that they indeed can.
Simply put, prediction markets allow users to buy and sell contracts on future events, covering areas such as elections, economic indicators, cultural hotspots, and sports events. For example, users can pay $0.37 to buy a "2025 Russia-Ukraine ceasefire" contract, and if the prediction is successful, they can receive a $1 return. Kalshi operates as a US exchange regulated by the CFTC, while Polymarket targets international users, trading based on blockchain and USDC.
Six months later, this field has significantly accelerated in growth. New capital continues to flow in, and large financial platforms such as Robinhood and Webull have integrated popular prediction markets into their apps, and professional trading companies have begun to provide liquidity, allowing users to make high-stakes bets. The integration of artificial intelligence tools—such as xAI's Grok—further displays real-time market probabilities on social media, optimizing the trading experience.
Massive funding validates market potential
On June 25, Kalshi completed a $185 million Series C funding round led by Paradigm, valuing it at $2 billion and officially entering the unicorn ranks. The funds will be used to expand broker integration, enhance market maker participation, and launch more "permanent markets" to maintain user activity. Polymarket is also rumored to be completing a $200 million funding round led by Founders Fund at a valuation of $1 billion, and in July agreed to acquire the CFTC-regulated exchange QCEX for $112 million, paving the way for entry into the US compliant market.
Although Polymarket often has an advantage in trading volume—especially in global events with broader coverage and more market types, Kalshi gains a higher valuation due to its CFTC-approved qualifications and compliant status in the US, reflecting the premium brought by institutional liquidity and broker channels.
Channel integration brings user expansion
In March 2025, Kalshi landed on Robinhood, providing direct prediction market trading access to its over 25 million users, who can trade stocks on the same platform and speculate on sports or economic events. In the second quarter, Robinhood users traded contracts worth approximately $1 billion through the platform. Webull and Coinbase are also following suit, planning further integration of prediction market products.
This distribution model, relying on existing brokerage networks, gives Kalshi a huge competitive advantage. Compared to gambling platforms like FanDuel, which need to obtain licenses state by state and accumulate users over many years, Kalshi almost overnight reaches tens of millions of potential users. Additionally, Kalshi also offers 4% annual interest on cash and open positions, which traditional gambling merchants cannot afford to pay interest on due to reliance on customer floating funds, making it difficult to compete.
Market makers drive liquidity improvement
The maturity of prediction markets depends on deep liquidity. Since April 2024, when Susquehanna International Group (SIG) set up the first event contract trading department for Kalshi, several market makers have joined to provide all-day liquidity for sports, economic, and political contracts, and Polymarket has also launched incentive programs to attract liquidity providers.
Despite this, prediction markets are still far from reaching the institutional scale of commodity or financial derivative markets. They are currently active in the retail market, but institutional participation is limited.
Regulatory and competitive pressures coexist
Currently, regulatory pressure is mainly focused on Kalshi, especially its sports contracts—which account for over 65% of the platform's trading volume. Critics argue that Kalshi is actually engaged in sports betting business but avoids taxes and licensing requirements, and several state regulatory agencies have initiated investigations and lawsuits. However, federal judges have repeatedly ruled that derivative contracts regulated by the CFTC are not subject to state gambling laws.
It is worth noting that FanDuel and the Chicago Mercantile Exchange (CME) recently announced the establishment of a joint venture, planning to launch regulated "event-based financial contracts" that allow users to bet "yes/no" on economic indicators and commodities, excluding sports events. This move may prompt companies like DraftKings to follow suit.
Artificial intelligence enhances user experience and dissemination
Artificial intelligence is significantly changing the way prediction markets are used and disseminated. Polymarket collaborates with xAI to provide users with real-time market analysis, historical data, and interpretations of key influencing factors. On the X platform (formerly Twitter), users can also obtain real-time probabilities through @grok or @askpolymarket. This type of integration greatly enhances user engagement and trading confidence, and also pushes prediction markets to a broader audience.
Future challenges and opportunities
Despite rapid growth, prediction markets are currently limited to binary "yes/no" contracts. Kalshi's filings indicate that it may introduce prop markets and spread contracts in the future, but it is still difficult to replicate the high-profit products found in traditional sports betting, such as parlay betting or casino content.
The core competitiveness of prediction markets lies in user acquisition. Their simple product structure and integration with brokerage platforms attract a large number of users who have never used gambling apps, while also serving professional groups seeking high liquidity and large bets. If the sports sector continues to be the core, prediction markets will expand the gambling user base while creating channels for traditional operators to connect with new users.
This development further confirms our investment view: market expansion will intensify differentiated competition. Operators need to expand product types, optimize experiences, and reduce friction. We continue to be optimistic about the infrastructure innovations that support this ecosystem. Prediction markets not only have great potential themselves but also provide key opportunities for gambling operators and technology service providers to capture value in emerging needs.
