Kalshi's Valuation Could Nearly Double to $40 Billion After Reports Suggest It Could Raise Another $750 Million. Here's What's Driving the Prediction Market Boom.

The leading prediction markets company, Kalshi, is reportedly in talks to raise another $750 million at a $40 billion valuation. The Information reported the news, citing anonymous sources.

Three months ago, Kalshi raised $1 billion in funding at a $22 billion valuation, so the company is quickly gaining traction in the private markets.

Kalshi is reportedly in talks with the large venture capital firm Sequoia Capital and the large asset manager Wellington Management.

Prediction markets, which allow people to bet on anything from sports and financial events to more ordinary day-to-day events, have exploded in popularity.

A new report from Predicted, which covers the business of prediction markets, estimates that total notional volume hit $111 billion in the second quarter, up from $80 billion in the first quarter.

Here’s what’s driving the prediction markets boom.

Prediction markets prove their worth

The prediction markets really started to gain steam following the election of President Donald Trump. Polymarket actually made a more accurate call about the 2024 election than traditional polling.

Furthermore, prediction markets have done a good job predicting financial data.

Image source: Getty Images.

Earlier this year, the Federal Reserve published a report showing that prediction markets did just as good a job forecasting the federal funds rate as the Fed’s primary dealer survey.

The paper also showed that prediction markets were more accurate in forecasting headline inflation, as measured by the Consumer Price Index, and performed just as well as traditional forecasting methods for core inflation and unemployment.

Even more so, prediction markets are updated in real time, whereas surveys only offer updates once every few weeks at most.

That’s not to say there haven’t been hiccups. Recently, prediction markets were significantly inaccurate in some closely watched Congressional primaries and gubernatorial elections, although there may not be enough data to work on in smaller races.

The popularity of prediction markets has led to institutional adoption, with firms like Robinhood partnering with Kalshi to offer them to their tens of millions of users.

In fact, revenue from event contracts at Robinhood surpassed crypto revenue for the first time ever in the second quarter, and by a wide margin.

Prediction markets have also opened betting to a wider array of users because people can bet on things they are passionate about, beyond sports or finance. For frequent gamblers, there are simply more events to bet on.

The bulk of revenue from prediction markets still comes from sports.

According to a report from the Pew Research Center in May, sports contracts consist of 80% of total trading volume on Kalshi and 39% on Polymarket. On Polymarket, crypto accounted for 20% of the volume, while politics accounted for another 32%.

Potential investors should be aware of the risks

While Kalshi and Polymarket still operate in the private markets, potential investors, whether now or in the future, should be aware of certain risks.

Naturally, the prediction markets have faced regulatory scrutiny. Recently, there has been a battle between the Commodity Futures Trading Commission (CFTC) and the state of New York.

The state of New York recently sued Kalshi, claiming it can’t offer sports contracts without first obtaining a license from the New York State Gaming Commission. The state wants Kalshi to pay taxes similar to those of other casinos or online gambling companies.

But on Aug. 12, the CFTC ordered Kalshi to continue operating in New York.

We likely haven’t seen the last of this argument, and there are other concerns about prediction markets, such as how they prevent insider trading.

That said, the prediction markets continue to increase in popularity, so they are likely here to stay, and it wouldn’t surprise me if Kalshi and Polymarket were eventually to go public.

Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.