Prediction Markets Are A $846 Trillion Asset Class

Prediction markets are going to have $846 trillion in volume, but it won't be Polymarket or Kalshi.

You open Polymarket and your eyes run down the markets: who wins the world cup, whether the ceasefire holds, will BTC be up or down in 5 minutes, the next Fed decision. One word forms in your head, “casino”. A betting shop with a crypto skin, where the people who would otherwise be on a sports app go to gamble on the news.

So you close the tab. You file the whole category somewhere between fantasy football and a roulette wheel, and you move on. The move feels like sophistication. It is the same reflex that made an earlier generation miss a revolutionary financial product, and it is wrong for the same reason.

I should know, because I had it too. For a long time I treated prediction markets as nothing more than gambling. What changed my mind was not a token chart or a venture thesis; it was realising that everything I was dismissing had already happened once, to an instrument we now treat as basic financial infrastructure - options.

Why Options Markets Exist In The First Place

To understand where we are going, we have to look at why options markets were built in the first place:

• Osaka, 1730: Rice merchants traded futures under government license to lock in a price before the harvest even hit the ground.

• Chicago, 1860s: Farmers at the Chicago Board of Trade did the same, selling grain forward so a single bad autumn couldn't bankrupt them.

• The 1990s: Energy utilities began buying electricity futures and weather derivatives, ensuring that a mild summer, the kind that flattens power demand and revenue, would trigger a payout to cover the shortfall.

Every one of these is a financial instrument doing the exact same job: hedging to mitigate potential loss. They are derisking positions so that the version of the future that hurts you is also the version that pays you.

History doesn’t repeat, but it most certainly rhymes.

Today, options are seen as sophisticated financial tools, but they spent decades legally classified as literal gambling. Throughout the late nineteenth century, American speculators wagered on price movements in "bucket shops" dens where you could bet on whether a stock would rise or fall without ever owning the underlying asset. By the 1880s, states began aggressively shutting them down as existential threats to public morality.

In 1905, the Supreme Court drew the line that still defines the financial field today: a contract you intend to settle by delivering actual goods is a hedge and was legal; a pure wager on the price is illegal gambling.

Congress later went a step further. The Commodity Exchange Act of 1936 banned trading in commodity options outright, regardless of whether the intent was a hedge or a pure wager.

The Chicago Board of Trade finally opened the first standardised options exchange (The CBOE) by allowing trade on securities instead of commodities, which was legal. It was opened on April 26, 1973, and traded just 911 contracts on its first day out of a converted smoking lounge. That same year, economists published the Black-Scholes model, finally making these elusive contracts mathematically priceable. The CBOE opened the door for the commodity options ban to be withdrawn in 1981.

Over forty years later, US listed options clear more than twelve billion contracts annually. It is staggering to realise that the very instruments sitting underneath roughly $846 trillion of derivatives today were a federal crime just over 40 years ago.

How This Ties To Prediction Markets

This brings us back to the current landscape. Prediction markets are not just a venue for political speculators or sports bettors; they are the future of corporate hedging.

I recently spoke with a Fortune 100 CEO who is in charge of one of the largest insurance companies in the world, managing over $100 billion in investments. He described a massive, systemic risk that his own industry is fundamentally incapable of pricing: exposure tied to the Strait of Hormuz.

Following the recent geopolitical strikes, that exposure has become effectively uninsurable through traditional means.

War-risk premiums on Gulf transits ran to around 60x their pre-crisis level, insurers pulled an estimated $352 billion of cover, and the US government had to stand up a $40 billion reinsurance facility as the backstop of last resort.

On Polymarket there was a live, tradable market on precisely that question, whether Iran would close the Strait of Hormuz, and after the June strikes its implied probability spiked to 52%. A risk the entire reinsurance industry refused to touch had a price you could trade against.

Then take a smaller, stranger case. Last season CA Osasuna, a mid-table Spanish football club, faced relegation, and going down from La Liga cost the club tens of millions in lost broadcast money. So they bought a €1.2 million insurance policy that would pay out around €6 million if it happened.

The broker, Howden, could not price that risk efficiently inside the insurance market, so it laid the risk off onto Kalshi, the regulated prediction market, buying contracts that paid out if Osasuna were relegated. The club survived on goal difference on the final day, the hedge expired worthless, and that is exactly what a working hedge does. You insure the house hoping it never burns.

Or take a venue. When an NBA play-off series ends early, the host arena loses the home games that were never played, and a single Finals home game is worth north of $20 million dollars once you count gate, concessions and parking.

The 2026 Finals ended four games to one, so Madison Square Gardens missed a match, as did the Frost Bank Center, something close to $40 million, simply never happened. A team that had bet on a short series would have been paid at the exact moment its own revenue fell short.

A Manhattan bar ran a miniature version this year, promising free tabs if the Knicks won a Finals game and hedging the cost of the promotion on Kalshi.

An insurer, a football club, an arena, a bar. Different risks. Same move. None of them is gambling; each is paying to shift a risk it cannot carry onto someone willing to take the other side.

And that other side is where the real argument lives, because it is the part the sceptics have backwards. For every hedger, someone has to take the bet. Someone has to sell the fortune 100 company its Hormuz protection, buy Osasuna's relegation, and wager that the series runs long. That someone is, very often, the degen you were sneering at. Keynes described the mechanism in 1930 and called it normal backwardation: the people with real exposure pay a premium to speculators willing to carry the risk for them. The speculator is not noise in the system; the speculator is the counterparty that makes the hedge exist at all.

So the thing everyone points to as proof of a casino, the wall of people betting for fun, is the exact thing that will let a shipping company hedge the Strait of Hormuz. You cannot build deep, cheap hedging without a crowd on the other side chasing the odds. The casino floor is the order book. It is also why these markets need no committee to decide what they are worth: hedgers on one side and speculators on the other meet at a number, and that number is the probability. Two-sided demand is what pulls liquidity in, and liquidity is the only thing prediction markets have ever lacked.

None of which means the job is done. Most of the volume really is betting, not hedging. Sports made up around 90% of Kalshi's activity last year. In 2024 a single French trader pushed a thin election market with tens of millions of dollars and walked off with an estimated eighty-five million in profit. Spain banned both Kalshi and Polymarket outright after the Osasuna affair. Call today's prediction markets immature and you are right.

But immature is not the same as destined for failure. This is the bucket-shop stage, the lightly regulated, half-gambling adolescence every derivatives market has passed through on its way to respectability. The signs that it is growing up are already here. A US federal court ruled in 2024 that these contracts are not gambling. Intercontinental Exchange, the company that owns the New York Stock Exchange, has put more than two billion dollars into Polymarket. Kalshi is a federally regulated exchange valued at $40 billion. The Chicago Board of Trade once spun up the CBOE; the owner of the NYSE is now doing the same thing with prediction markets. The establishment does not buy gold, or even the shovels, it buys the shovel maker.

So go back to the tab you closed. You were not wrong about what you saw, because there were gamblers there. You were wrong to stop looking once you found them. The next time a market gets waved away as gambling, do not ask who is betting. Ask who needs to hedge this, and whether they can do it anywhere else. When the answer is a shipping line, a football club or an arena, and the second answer is no, you are not watching a casino. You are watching a market being born.

Find the risk nobody will price. Watch who turns up to offload it. See who takes the other side. Follow the liquidity, not the moralising.

That is the entire bull case. Everything else is volume.

Stop counting the gamblers. Go find the hedgers.