What are prediction markets and why is the Trump administration on ​board?

What are prediction markets and why is the Trump administration on board?

What are prediction markets and why is – A version of this story appeared in CNN’s What Matters newsletter. To receive it in your inbox, register for free here. The concept of prediction markets is gaining traction, with billions of dollars moving weekly through platforms that let users wager on real-world events—spanning politics, sports, and pop culture. These markets, which are rapidly growing in popularity, function as a unique blend of finance and forecasting, offering opportunities to bet on outcomes like the likelihood of a political figure’s election or the result of a sports match.

The Legal Debate Over Prediction Markets

While many in the U.S. view these markets as a form of gambling, the Trump administration is pushing back, aligning with industry leaders to redefine their legal status. The federal government and companies such as Kalshi argue that prediction markets are not just speculative bets but structured financial instruments. This distinction is critical, as it could determine whether they fall under the jurisdiction of gambling laws or are classified as part of the broader derivatives market.

“Prediction markets give you a chance to bet on almost anything, in the sense that markets will go up, typically around a yes-or-no question,” explained CNN senior reporter Marshall Cohen, who specializes in this space. Examples include predicting whether a specific event will occur by a given date or if a public figure will make a particular statement. The mechanism operates through “event contracts,” where participants commit to a position—yes or no—and invest money based on their belief in the outcome.

A Conflict of Definitions

Despite their growing presence, prediction markets remain embroiled in a legal tug-of-war between state and federal authorities. The Biden administration previously attempted to regulate the sector by classifying it as gambling, citing concerns over the integrity of democratic processes. However, the Trump administration has taken a contrasting approach, supporting the industry’s argument that these markets are financial tools, not games of chance. This shift in stance has raised eyebrows, especially since the Trump family has also invested in the space, aiming to capitalize on its potential.

The crux of the debate centers on the nature of the bets. While some argue that prediction markets mirror traditional commodity trading—such as farmers hedging against crop failures through futures contracts—others, including over 40 states, see them as a form of gambling. These states have filed legal briefs asserting that the industry should be regulated under existing gambling frameworks. Yet, the practical differences are minimal for users. As an Eagles fan, I can attest: the experience of betting on a game via Kalshi or DraftKings is nearly identical, with the only distinction being the legal classification.

The Risk of Manipulation

The potential for manipulation in prediction markets has become a focal point of the controversy. A recent case highlighted this risk when a special operations soldier was accused of leveraging classified information to secure a series of high-stakes bets. Among these was a prediction that Venezuelan President Nicolás Maduro would lose power, which proved correct shortly before he was captured in Caracas by U.S. forces. This incident underscores the broader concerns about how insider knowledge could skew market outcomes and influence public perception.

Cohen emphasized that while the mechanics of prediction markets are straightforward, their implications are profound. “The key is that these markets function as financial instruments,” he said. “If something has a 25% probability, you can purchase a share of ‘yes’ for 25 cents and receive $1 if your bet is accurate. The system is designed to reward correct predictions and penalize incorrect ones.” This model, he noted, is fundamentally different from traditional gambling, where outcomes are often random rather than probabilistic.

The Battle for Regulatory Control

The Trump administration’s support for prediction markets has sparked questions about the motives behind their advocacy. While the legal argument is framed around the industry’s role in risk management, critics argue that the Trump family’s financial stake adds a layer of self-interest. This dynamic has intensified the debate over whether the federal government should maintain oversight or allow states to set their own rules.

Under Biden, the Commodity Futures Trading Commission (CFTC) sought to regulate sports and election-related bets, claiming they did not fit the definition of derivative swaps. This stance contrasted with the Trump administration’s position, which emphasized the public benefit of enabling risk hedging. Cohen pointed out the irony in this divide: “The Biden team wanted to ban election betting, arguing it threatened democracy, but they still allowed sports betting, which is more about individual risk.” The proposed rule, which failed to pass before the 2024 election, highlights the ongoing struggle between federal and state authority in this arena.

Implications for the Future

As the legal battle continues, the future of prediction markets remains uncertain. The Trump administration’s backing suggests a broader strategy to deregulate financial activities, potentially opening the door for more innovation. However, the risk of manipulation and the need for transparency will be central to determining their long-term viability. Cohen noted that while the current regulatory framework is fragmented, the industry’s growth could force a national consensus.

The case of the soldier using classified information serves as a cautionary tale, illustrating how prediction markets might be exploited for political or strategic advantage. Yet, proponents argue that the benefits of these platforms—such as providing real-time data on public sentiment and economic trends—outweigh the risks. “Prediction markets are more than just a betting game,” Cohen said. “They’re a way to aggregate information and forecast outcomes with measurable accuracy.”

With the Trump administration’s influence, the legal status of prediction markets may shift, allowing them to operate more freely. However, the challenge remains in balancing innovation with accountability, ensuring that the markets serve their intended purpose without becoming tools for undue influence. As the debate unfolds, the role of prediction markets in shaping policy and public discourse is likely to grow, setting the stage for a redefinition of how we perceive risk and reward in the digital age.