👁️ Kalshification

The money is their bones.

For classical neoliberals, money and markets are the only information sources that really matter.

John Wang, Head of Crypto at Kalshi, recently appeared on crypto podcast Unchained. He was mainly talking about perpetual futures, a (mark my words) very, very significant financial markets innovation (neutral connotation) that is entering the U.S. market now, specifically through Kalshi.

But I was more intrigued by Wang’s mention of the introduction of a new Over-the-counter (OTC) prediction markets product by Galaxy Digital, which is being used specifically by at least one cryptocurrency hedge fund (Arca) to protect against the risk that the CLARITY regulatory act would fail, which would harm its investments.

That’s typically wonky stuff, but Wang gave another example that’s more broadly illustrative, claiming that bars have been using prediction market contracts to hedge the business risk of sports outcomes. Wang didn’t specify and there are probably many examples, but there were probably plenty of bars in New York who had very material reasons a few weeks ago to hedge the possibility that the World Champion Goddamn New York Knicks wouldn’t come out on top.

Some have described this as the more fundamental long con of prediction markets: the retail-facing product is there primarily to provide “dumb money” liquidity for actual event hedgers.

The Dictatorship of the Predictariat

Risk, Waiting

This is an example of Kalshi working how futures /risk markets are “supposed” to be used in the real economy. These markets originated in agriculture above all, where the fundamental unpredictability of the weather makes crop yields impossible to predict with complete accuracy.

So modern financial modelling of agriculture essentially requires some way to “hedge,” or protect against, that risk. A beef rancher would buy futures betting that the price of beef would go down, so that if that actually happened, he got a payoff that to one degree or another offset the actual revenue lost from his beef sale.

How to Prediction Hedge

First, just a very short description of how event hedging works, for non-wonks.

In the case of the bar, hedging risk of a Knicks series loss would have (in broad terms) involved a bar owner using Kalshi to bet that the Knicks would lose. That way they’ll make their business revenue if things go their way, and get a little buffer if things don’t.

This is basically analogous to farmers hedging the price of corn six months before harvest by betting it will go down with one hand (the hedge), while hoping it will go up on the other (the business). That’s the practical reason futures markets in general exist.

One major difference is that a corn future has a deliverable product, which is why it is easier to understand and was introduced sooner than prediction market event contracts. There are other reasons, of course, that event contracts are different than deliverable futures, and in fact reasons that prediction markets might not wind up ‘working’ long term.

This is why major futures markets in the U.S. are centered in Chicago rather than New York - Chicago was a waystation for agricultural shipping going back to the late 19th century at least, so the market for risk futures emerged there.

It’s why the Chicago Mercantile Exchange (CME) is the one squaring off against Kalshi to protect its turf/market by suing to stop the introduction of perpetual futures (paywall). Kalshi’s is classifying its perpetuals as swaps rather than futures, which is a pretty arcane distinction to unpack another time. The CFTC (Commodity Futures Trading Commission) will be the regulatory agency making that decision.

For all these practical applications, however, the truth is that Kalshi and Polymarket are almost entirely gambling and entertainment products - and they are wildly extractive towards most users. It’s very, VERY worth noting that Galaxy’s market to hedge CLARITY act risk is over the counter. That is, it’s not a page on Kalshi with a price you can just look up - or at least, institutional trades on the swap are treated differently than retail.

This is a reflection of what some have described as the more fundamental long con of prediction markets: that the retail-facing product is there primarily to provide “dumb money” liquidity for actual event hedgers.

The “dumbness” of this dumb money, though, is a real, long-term (and maybe even short-term) problem. When you have retail betting against institutions, institutions will consistently have the insight and know-how to win (whatever mythology Wall Street Bets is promoting). With prediction markets, that’s becomes about not just operational market insight, but material information that retail might not have.

Over time, those losing retail bets will drain the liquidity pool that institutions need to trade against. This permanent secular downpressure - the built-in tendency of retail prediction traders to lose far more often than at casino games - may explain why Polymarket has turned to ads featuring fake wins to market its product.

(FWIW, this is just the latest in a string of seemingly very poor choices by Polymarket leadership. If you even want to be betting on the rise of prediction markets, you probably want exposure to Kalshi. Polymarket is, long-term, terminal.)

What is TESCREALism? Mapping the Cult of the Techno-Utopia.

Prediction(ism) and Authority

I’ve only nibbled around the edges of the prediction market story, but the idea has been developed over several decades, and is deeply entwined with the larger techno-utopian/techno-authoritarian project I focus on here. At the highest level, prediction markets are an expression of the libertarian or anarcho-capitalist belief that ‘free markets’ can produce total information through discovering the price of risk.

These markets are important to the techno-libertarian project because they are believed to strengthen Adam Smith’s “invisible hand of the market,” a phrase used exactly once in The Wealth of Nations but inflated to a kind of religious doctrine by later laissez-faire economists in the tradition of Friedrich Hayek and Ludwig von Mises.

The history of prediction markets also substantially includes their theoretical usefulness for government command-and-control. The precursor idea of “policy markets,” as conceived by Robin Hanson, was meant to serve as a kind of informational supplement to democratic voting.

But the deeper techno-libertarian/laissez-faire goal, as we now see naked in the form of Peter Thiel, is the total replacement of voting, and any other social decision-making process, with bets and financial markets.

The increasing penetration of Kalshi and other prediction markets into the granular risk management of local pubs is one way to observe this process in action, as financial markets creep further into the nooks and crannies of our lives. Once one bar starts hedging the risk of a Knicks series loss, a lot of bars will.

More perniciously, the intentionally confusing deeper messaging around prediction markets - ‘fun’ retail degeneracy out front, real hedges in the back room - will continue to draw in the masses to provide liquidity and profits.

Whether the information gained through the markets’ existence justifies their permanent extractive pressure on some of the most vulnerable market participants is, I suppose, a question for regulators.