Waterhouse VC: The next era of prediction markets – Strategy

We first spotlighted prediction markets in November 2024, when the US election despatched buying and selling volumes parabolic. The query again then was whether or not these platforms might maintain engagement past headline occasions to maintain markets liquid, significant and correct. By February 2025, our deep-dive into CFTC-regulated Kalshi urged they may.

Fast refresher: Prediction markets let customers purchase and promote contracts on future occasions – from elections and financial knowledge to cultural moments and sport. For instance, you may purchase a contract on a Russia-Ukraine ceasefire in 2025 for $0.37 that pays $1 if appropriate. Kalshi operates as a CFTC-regulated trade within the US, whereas Polymarket serves worldwide customers who commerce with USDC on blockchain rails.

Six months on, the engine has shifted up a gear. Contemporary capital has arrived. Massive monetary platforms Robinhood and Webull now combine standard prediction markets immediately of their apps, {and professional} buying and selling corporations are offering the liquidity that lets customers place six-figure bets. AI integrations akin to xAI’s Grok are actually surfacing market odds throughout social media and enhancing the buying and selling expertise.

Billion greenback validation

On June twenty fifth, Kalshi raised $185 million at a $2 billion valuation in a Collection-C spherical led by Paradigm, catapulting it past unicorn standing. The capital will fund what’s already working: increasing stockbroker integrations, encouraging participation from market makers, and launching extra ‘always-on’ markets that maintain engagement.

“Prediction markets remind me of crypto 15 years in the past: a brand new asset class on a path to trillions.” Matt Huang, Paradigm

Polymarket has matched the momentum, reportedly within the means of closing a $200 million spherical at a $1 billion valuation led by Founders Fund. In July it agreed to amass CFTC-licensed trade QCEX for $112 million. That buy offers a compliant path again into the US, even when it requires segregating US and worldwide liquidity. The place Kalshi spent six years within the regulatory trenches, Polymarket is shopping for current infrastructure, an choice created by Kalshi’s groundwork.

Polymarket typically dominates buying and selling volumes, particularly on international occasions. Its worldwide consumer base and broader market protection, together with wars which Kalshi doesn’t record, arguably make it a stronger gauge of worldwide sentiment. But Kalshi instructions double the valuation. The premium displays Kalshi’s present benefit in america, the place CFTC approval unlocks dealer distribution and direct entry to institutional liquidity.

Distribution benefit

When Kalshi launched on Robinhood in March 2025, over 25 million customers gained prompt entry to prediction markets. They might speculate on sports activities and Fed choices proper alongside their inventory trades, no extra signup required. The outcome: roughly one billion price of occasion contracts had been traded by Robinhood in Q2 (SBC).

Webull adopted with S&P 500, crypto and Fed markets, and CEO Tarek Mansour expects additional dealer integrations this 12 months. Coinbase additionally confirmed prediction markets are on its roadmap. With over 100 million customers globally, they may turn into a significant drive whether or not it companions or builds its personal platform.

This broker-led distribution provides Kalshi a significant benefit over US sportsbooks. By plugging into current brokerage accounts, it may attain tens of hundreds of thousands of funded customers at minimal price. FanDuel spent years constructing 18 million clients by state-by-state licensing, whereas Kalshi can obtain comparable attain virtually immediately.

Kalshi just lately added one other hook: a 4% annual curiosity paid on all money and open positions. Conventional operators wrestle to compete with that, since they depend on holding buyer float with out paying for it.

Market makers

For prediction markets to fulfil their promise, they require deep liquidity. Susquehanna Worldwide Group (SIG), which handles greater than a trillion {dollars} in ETF trades yearly, established Kalshi’s first devoted occasion contracts desk in April 2024. ​​Market makers guarantee prompt execution and better limits, important for attracting skilled cash.

Kalshi’s Market Maker Program has since expanded to a number of corporations offering 24/7 liquidity throughout sports activities, financial, and political occasions. Polymarket runs parallel packages that reward liquidity suppliers.

But each platforms have far to go earlier than reaching institutional scale. Conventional derivatives like Brent Crude Futures seize geopolitical danger by billions in each day turnover. Prediction markets excel at retail engagement, and whereas Polymarket contracts now seem on CNBC, this rising visibility isn’t the identical as sector-wide institutional participation.

Predictable pushback

Polymarket’s worldwide consumer base doesn’t immediately compete with US sportsbooks. That will change as soon as the QCEX acquisition allows home operations, however for now the regulatory stress is targeting Kalshi, and the reason being sports activities. Prediction markets in elections, economics, or cultural occasions drew little consideration. No operator had any curiosity in pricing up whether or not Taylor Swift will get engaged this 12 months.

Sports activities now dominate Kalshi’s core enterprise, averaging over 65% of buying and selling quantity since March. With the Premier League underway and the NFL season beginning, these volumes will possible improve. Bettors are migrating for higher costs, decrease charges, and better limits with out concern of being restricted. Kalshi additionally advantages from working in states the place sportsbooks stay prohibited, together with California and Texas, and CFTC guidelines enable 18-year-olds to take part in comparison with 21+ in most sports activities betting states.

Critics argue that Kalshi is providing what quantities to sports activities betting with no tax or licensing obligations. State gaming regulators have responded with cease-and-desist orders, investigations, and lawsuits concentrating on “sports activities occasion contracts”. Federal judges have largely blocked these enforcement makes an attempt, ruling that CFTC-regulated derivatives supersede state gaming legal guidelines.

After hypothesis over whether or not conventional operators would enter the house, FanDuel this week introduced a three way partnership with derivatives big CME Group to launch regulated event-based monetary contracts. The merchandise will let FanDuel customers place ‘sure or no’ bets on fairness indices, commodities, crypto, and key financial indicators, with no point out of sports activities. The launch is slated for later this 12 months, and a spotlight will now shift to DraftKings to see if it follows go well with.

AI engagement increase

AI is starting to form how prediction markets are used and distributed. Each platforms have partnered with xAI, and Polymarket has been coined “the official prediction market of X”. On Polymarket, customers can click on ‘generate market context’ for immediate AI evaluation. This characteristic offers market historical past, key drivers, and potential catalysts that may transfer costs, making customers extra assured to commerce.

On X, customers can tag @askpolymarket or @grok to obtain stay possibilities and evaluation. Market odds now seem immediately in feeds alongside Fed coverage debates or breaking information, exposing prediction markets to X’s 500+ million customers. These integrations create a strong distribution channel, turning information cycles into buying and selling alternatives. Kalshi’s xAI partnership is predicted to observe an analogous path.

An extended-term praise

For all their momentum, prediction markets stay sure by binary sure/no contracts. Current filings counsel Kalshi plans to introduce prop markets and level spreads, however they can’t replicate high-margin merchandise akin to same-game parlays or accumulators, nor can they match the bonus-driven engagement or on line casino content material that underpins sportsbook economics.

The place prediction markets excel is buyer acquisition. Their easy construction and brokerage integrations create an entry level for hundreds of thousands who would by no means obtain a playing app. In addition they appeal to sharp bettors searching for higher liquidity and greater limits, increasing the addressable market in methods sportsbooks by no means might.

If sports activities stay the core enterprise, prediction markets will seize share in simple betting markets whereas offering value discovery for operators and introducing new customers to wagering. When these customers ultimately search parlays, bonuses and on line casino content material, conventional operators stand able to serve them.

This reinforces our funding thesis: because the market expands, differentiation turns into essential. Operators want broader merchandise, smoother experiences, and fewer friction at each step. We again the infrastructure that allows this. Prediction markets are undeniably competitors, however in addition they widen the funnel, creating alternatives for wagering operators and expertise suppliers ready to seize these new customers as their calls for develop extra refined.

Waterhouse VC is a fund that specialises in international publicly listed and personal companies associated to wagering and gaming sectors. The fund is barely out there to wholesale traders.

Since inception in August 2019, Waterhouse VC has achieved a gross complete return of +3,597% (annualised at 83%), as at 31 July 2025, assuming the reinvestment of all distributions.