Exploring New Frontiers in Sports Betting
The recent Super Bowl showcased various ways fans could engage with the game, especially for those looking to place bets. Whether through a friendly wager, at a legal casino, or via an app, options abound for enthusiastic bettors.
Since last year, participants have also been able to enter event contracts using a Designated Contract Market (DCM) regulated by the Commodity Futures Trading Commission (CFTC). This innovative approach replicates the legal framework used for trading derivatives on staple commodities like wheat or coffee, now extending to bets on situations like which team will prevail in a match or what song will be performed first during halftime.
Kalshi pioneered this legal structure in January 2025, and it’s quickly gaining traction among various exchanges. Initially, the CFTC sought to curtail markets it regarded as “gaming,” specifically in the realms of sports and politics. However, they recently retracted this proposal, possibly influenced by robust feedback from economists and evolving CFTC leadership, as well as strategic lobbying from exchanges, including hiring top-tier legal experts and former officials.
For these exchanges, diving into Commodity Sports markets is an evident opportunity to tap into a lucrative sector previously dominated by a select few entities holding gaming licenses in jurisdictions with legal sports betting. Bettors enjoy several advantages when trading in these exchanges compared to traditional casinos, including lower fees, the ability to sell contracts before events conclude, and fewer restrictions on successful traders. Notably, these exchanges can operate in eleven states where sports betting remains illegal in traditional venues.
While there are clear winners in the commodity sports landscape, there are also significant losers: bettors who face the risk of falling into debt; casinos that now confront fresh competition; state governments that believed they had effectively prohibited sports betting; and those that imposed hefty taxes on legalized betting are now seeing potential revenue streams vanish. These stakeholders have brought legal challenges against exchanges, experiencing mixed results thus far.
I find myself torn about Commodity Sports. On one hand, the libertarian within me appreciates the shrinking interference of government in voluntary exchanges among consenting adults. As a bettor, I welcome alternatives to monopolistic casinos with exorbitant fees.
However, as an economist, I harbor concerns.
I fully endorse the role of CFTC-regulated exchanges like Kalshi and Polymarket in popularizing prediction markets. The real essence of these markets lies in their ability to synthesize diverse information from around the globe into a unified, accurate forecast of future events. Unfortunately, those who actively participate in these markets do not necessarily emerge victorious, as betting operates as a zero-sum game—a gain for one trader equals a loss for another. The real beneficiaries are those outside the markets, gaining access to improved forecasts without the risk of losing money. In a positive feedback loop, skilled forecasters accumulate larger bankrolls, which further refine market accuracy, while less skilled participants learn to step back. (As former EconLog author Bryan Caplan noted, “a bet is a tax on false ideas.”)
This vision is what motivated economists like Robin Hanson to advocate for prediction markets long before the current boom in CFTC-sanctioned exchanges emerged. Scott Sumner pushed for markets focused on future nominal GDP to refine Federal Reserve policy. These discussions directly inspired founders of exchanges, such as Polymarket’s Shayne Coplan.
“I remember reading Robin Hanson’s literature on prediction markets and thinking – man, this is too good of an idea to just exist in whitepapers. There were a million reasons why it shouldn’t work, countless arguments of why not to do it, and the odds were against us, but we had to try.” – Polymarket founder Shayne Coplan
Thus, while I recognize the considerable benefits of prediction markets in providing accurate forecasts on critical matters—empowering policymakers, businesses, and individuals to strategize effectively for the future (such as which world leaders may depart from office or which nations may experience recessions)—I see diminished value in predicting something as trivial as Jaxon Smith-Njigba’s reception statistics.
Echoing Robin Hanson’s concerns, I am troubled by the potential fallout from legal disputes surrounding Commodity Sports and the cultural backlash against sports betting, which could threaten the more insightful prediction markets. I hope my fears are misplaced and that revenue generated from sports betting supports a broader array of beneficial markets going forward. Certainly, their founders seem to be reaping the rewards of their bold initiatives (with the notable exception of the FBI raid).
For now, the arena remains open for trading derivatives contracts based on the achievements accomplished by participants prior to expiration—that is, betting on sports through prediction markets.
