This week we talk about DJT, Polymarket, and Kalshi.

We also discuss sports betting, gambling, and PredictIt.

Recommended Book: Build, Baby, Build by Bryan Caplan

Transcript

Trump Media & Technology Group, which trades under the stock ticker DJT, has seen some wild swings since it became a publicly tradable business entity in late-March of 2024.

The Florida-based holding company for Truth Social, a Twitter-clone that was released in early 2022 following former President Donald Trump’s ousting from Twitter—that ousting the result of his denial of his loss in the 2020 presidential election—is a bit of an odd-bird in the technology and media space, as while it’s ostensibly an umbrella corporation for many possible Trump-themed business entities, Truth Social is the only one that’s gotten off the ground so far, and that platform hasn’t done well in traditional business or even aspirational tech-business terms: a financial disclosure in November of 2023 indicated that the network had tallied a cumulative loss of at least $31.5 million since it was launched, and the holding company’s numbers were even worse: when they filed their regulatory paperwork in March of 2024, they noted that Trump Media & Technology Group had lost $327.6 million, while making a mere $770,000 in revenue.

Those kinds of numbers, the company hemorrhaging money, would be a huge problem if DJT was a typical media business, or business of any kind, really. But for most people who invest in the company’s stock, this entity seems to be less a traditional stock holding, like you might buy shares of NVIDIA or Coca-Cola, hoping to earn dividends or see the value of the stock increase over time based on the performance and assumed future performance of the company in question, but instead it seems to operate as a means of betting on Trump and his political aspirations: many people who have been asked why they’re buying the stock of a clearly fumbling company say that they do it because they like Trump and what he stands for, and some have suggested they assume the stock will do much better if and when he’s back in office.

Other entities, especially those who oppose Trump and his politics, have pointed out that this publicly traded business provides foreign and US entities an easy, and easily deniable means of basically bribing Trump—or getting on his good side, if you want to use less charged language—as they could simply, and legally pick up a large number of shares, raising the price of the stock, which in turn increases the size of Trump’s fortune, which he could then, if he so chooses, cash out of at some point, but in the mean time this allows him to do the more typical rich person thing and just borrow money against the non-money, stock assets he owns.

All of which would be difficult to prove, which is part of why this would, in theory, be an excellent means of funneling money to someone who might hold the reins of power in the near-future, if one were so inclined to do so.

But at the moment that’s all speculation, and with ongoing investigations into other purported bribery schemes on the part of Trump and his campaign, it’s not clear that Trump would need DJT in order to get money into his coffers, as more direct approaches—like simply depositing ten million dollars into his campaign account from Egypt’s state-run bank, seem more straightforward, and just as unlikely to result in any kind of pushback from the US’s oversight panels, based on how they’ve addressed that particular accusation so far, at least.

Of course, some people are simply looking for points of leverage anywhere they can find it, not for political or regulatory manipulation purposes, but to earn money by gambling on assets that change value in dramatic and seemingly predictable ways.

For day traders and other arbitrage-seekers, then, a stock that goes up and down based on the perceived successes and failures of a public figure who’s constantly saying and doing things that can be construed in different ways by different people is an appealing target, even lacking a political motivation for tracking (and perhaps even influencing, to a limited degree) those numbers.

What I’d like to talk about today is another type of political betting, and how a recent court case may make politics in the US a lot more tumultuous, maybe more measurable, and possibly more profitable, for some.

—

In mid-2021, a New York-based online prediction market called Kalshi launched in the US, and this service was meant to serve as a platform through which users could place bets—in the form of trades—on all sorts of things, ranging from when the Fed would next cut interest rates, and by how much, to who would win various global awards, like the Nobel in chemistry.

Bets can only be placed on yes or no questions, which shapes the nature of said questions, and delineates the sorts of questions that can be asked, and in general the platform pays out a dollar for each winning contract—so if you buy one contract saying the Republican party will control the House after November’s election, and they do, you would win a dollar, but if they don’t, you would lose whatever money you spent to buy that contract—and these contracts can be purchased for sums that are based on how likely the event is currently expected to be: so if there’s a low chance, based on all available variables, that the Republicans will take the House, that contract might cost substantially less than a dollar to purchase, whereas if it’s likely they’ll take it, it would cost close to a dollar—so the payout is larger for events considered to be unlikely.

The original idea behind Kalshi, and similar platforms, of which there are many, operating in many different places around the world, was to provide investors with a hedge against events that are otherwise difficult to work into one’s asset portfolio.

It’s relatively simple to have a bunch of bets that will pay out big time if the US economy does well, for instance, and simple enough to buy counter-bets that will pay out decently well if it does badly—many investors buying some of each, so they’re not wiped out, no matter what happens—but there are all sorts of things that can mess with one’s otherwise well-balanced investment strategies, like the emergence of global pandemics and the surprise decision of the UK to leave the European Union.

If you can place bets that will pay out big-time when unlikely things happen, though, that can help re-balance a financial loss that arises from the occurrence of said unlikely events; if you lose a bunch of money from your stock portfolio because the UK voted for Brexit, but you also bought a bunch of contracts on this kind of market that would pay out substantially if Brexit was successful, you’ll reach a kind of equilibrium that isn’t as simple to achieve using other markets, because of how difficult it can be to directly link a stock or bond with that kind of not-directly-financial event.

So Kalshi pitched itself as that kind of alternative asset market, predicated on bets, but while they had a license from the US Commodities Futures Trading Commission, or CFTC, to function as a contract market in the States, acquired the year before they launched, their proposal to start a political prediction market, which would allow folks to bet on which party would control the US congress, was denied by the CFTC in September of 2023, the agency claiming that allowing such bets would create bad incentives in the electoral process, and that offering these sorts of contracts would violate US market regulations for derivatives.

A judge ruled in Kalshi’s favor a year later, in September of 2024, saying that the agency had exceeded its authority in banning this type of contract-issuance by Kalshi, and while the CFTC attempted to stall that component of their market’s implementation, on October 2 of this year, a federal appeals court ruled in Kalshi’s favor, and the platform was thus formally allowed to offer contracts that served as a betting market for US politics on which actual money could be lost and earned.

That last point is important, as throughout this process, and even before Kalshi was launched, other betting markets have been common, including those that have allowed bets on US political happenings.

It’s just that the majority of them, and the ones that have persisted and grown in the US in particular, haven’t allowed folks to bet actual money on these things: they’ve allowed, in some cases, the betting of on-platform tokens, which represent credibility, not money, though a few money-trading entities, like PredictIt, have been on the agency’s radar, but in PredictiIt’s case, it was granted what amounts to a “we won’t take action against you, despite what you’re doing being questionable” letter from the CFTC, which until Kalshi’s case turned out in their favor, meant PredictIt was one of the few, large-scale, reputable real-money political prediction markets available in the US.

Not all such markets have been so lucky, but that luck has been highly correlated with their approach to handling money, the structure of the company, and the degree to which they’ve been willing to play ball with the CFTC and other interested agencies.

All that said, we’ve reached an interesting point in which these markets have conceivably become more serious and useful, because rather than relying on not-real tokens that have no actual value to anyone—so you could create an account on one of these sites, bet all your tokens on a silly position that makes no sense, and suffer no consequences for that bet—we now have platforms that allow folks to put their money where their beliefs are, which in turn should theoretically make these markets more reliable