Gambling or investing? In America, the line is increasingly blurred

Economists and financiers have compared stockmarkets to gambling since 1936, when Keynes warned of “the capital development of a country becom[ing] a by-product of the activities of a casino”. In 1999 Jack Bogle of Vanguard decried the “Wall Street casino” where only croupiers got rich, and in 2023 Warren Buffett wrote that “markets now exhibit far more casino-like behaviour than...when I was young”.

Despite this similarity, governments promote bets on companies while discouraging those on cards, dice or sports. Gambling is a zero-sum endeavour in which the house always wins in the end, whereas investing promotes economic growth and distributes the gains among all (diversified) participants. As a result, the companies and legal regimes involved in gaming are mostly separate from those in financial services. In recent months, however, the line between investing and gambling has arguably been blurred out of existence.

America once stood out both for tight limits on gambling and for mass participation in the stockmarket. But policy has shifted. In 2018 the Supreme Court let states permit sports betting, which 39 of the 50 have done. Last October Kalshi, a prediction market regulated by the Commodity Futures Trading Commission (cftc), won a lawsuit enabling it to offer event contracts, which pay $1 to winners and $0 to losers, on the presidential election (Donald Trump traded at 59% on election day). In July Polymarket, a cryptocurrency-based prediction market off-limits to Americans, bought a cftc-registered exchange to build a competing product.

This year Kalshi began offering nationwide markets on sporting events. On August 19th it announced new contracts on score differentials and player statistics in National Football League games, replicating core sports-betting products. The firm has not registered with state gambling regulators and does not pay state taxes, arguing that it falls exclusively under federal jurisdiction. Seven states have told Kalshi to stop, and Native American tribes have sued it. So far, Kalshi has won injunctions preventing Nevada and New Jersey from enforcing those orders, while losing a similar case in Maryland. In June Kalshi raised $185m at a valuation of $2bn, including an investment from the boss of Citadel Securities, a giant marketmaker.

Having received the CFTC’s blessing, financial firms began dipping into once-forbidden waters. Shortly after Kalshi’s legal victory on election wagers, Interactive Brokers, America’s largest electronic-trading platform, opened similar contracts on its own prediction market, ForecastEx. Robinhood, an upstart online broker whose users led the meme-stock craze of 2021, then offered ForecastEx’s presidential-election contracts to its users, attracting $500m of bets in just over a week. Since then, Robinhood has provided access to many Kalshi markets, offering “investments” in when SpaceX will go public, the winners of the us Open tennis tournament and the recipients of Emmy awards. Sports alone have drawn $1.4bn of trading.

Incumbent titans of both gambling and finance have taken note. On August 19th FanDuel, America’s biggest sports-betting site, announced plans to launch a prediction market with the Chicago Mercantile Exchange (cme), the world’s largest futures exchange. For now, it will offer bland contracts on whether the values of things like stock indices, oil prices and American gdp will exceed specified thresholds.

Such events may be of little interest to FanDuel’s recreational bettors. But if Kalshi prevails in court on sports contracts, the alliance will enable FanDuel—whose corporate parent owns Betfair Exchange, the world’s largest sports-prediction market—to offer de facto sports betting in states that have not legalised it, such as California and Texas. And institutional investors seeking to place binary bets, either on elections or financial events like corporate mergers, might prefer to trade on an established platform such as the cme’s.

Tarek Mansour, Kalshi’s boss, insists that event and wheat contracts are legally identical. “If we are gambling”, he said in April, “you’re basically calling the entire financial market gambling.” Keynes must be nodding along in his grave.■