There’s an apocryphal story linked to Joseph “Yellow Kid” Weil, a well-known con man from the early 20th century. Weil was once stuck in an office during a rainstorm. A compulsive gambler, he asked the other men in the room if they would like to bet on which raindrop would reach the bottom of the windowpane first.
He got a few bettors to ante up. As a result, Yellow Kid Weil could be considered one of the first men to bet on the weather.
Weil’s story as a conman, who swindled as much as $8 million from his targets, has been well-documented. Among his most famous scams was swindling the Italian dictator Benito Mussolini out of $2 million, staging fake prize fights, selling “talking” dogs, and selling oil-rich land that he did not own. His audacity was legendary. He once claimed to have defrauded Andrew Mellon’s brother of $500,000 in a scheme involving a silver mine in Colorado.
The spirit of “Yellow Kid” Weil is alive today. He returns in the form of prediction markets, a mass-betting scheme disguised as a computer-driven, large-participant pool of bets on any future event, human-made or natural.
The big question is: The future of what? It could be bets on which raindrop will reach the bottom of a window, an election in Alaska, when Lady Gaga’s next album will be released, who will score the first penalty shot in a Manchester City soccer game this weekend, or if Trump will be impeached by Christmas.
This could all be considered a joke, except that financial engineering, like everything else in late-stage capitalism, is at the point where it has to monetize everything. This is occurring because of faster computers, algorithms that appear to require applications devoid of any societal purpose, and the need for investment firms to generate new commissions and trading sources.
This is all fueled by a population that has not seen real wage growth adjusted for inflation since 2015. Wage stagnation, accompanied by rising inflation and the constant push of advertising to buy more, has created a hamster-wheel class of workers. These workers are not merely minimum-wage workers but highly paid executives who seem to spend as much as they earn on the old conspicuous-consumption bangles that were bought by the Robber Barons 150 years ago.
So, with the combustible mix of needy bettors, unvetted prediction firms, and greedy investment firms, the prediction markets have sought legitimacy by posing as an “asset class” in need of a futures market to list their trades.
This shroud of legitimacy brings in the Commodity Futures Trading Commission (CFTC). This is an interesting development for several reasons: like any federal agency, the CFTC seeks to regulate more markets, even if they serve no economic purpose. Second, the Trump-Libertarian CFTC is essentially anti-regulation, even though they claim they are “regulators.”
The CFTC would also lend legitimacy to prediction market firms. These betting fronts can claim they are being “regulated,” but that does not alter their basic function as betting parlors.
In the latest development, the Trump-libertarian appointed CFTC chairman Michael Selig said, “The CFTC will no longer sit idly by while overzealous state governments undermine the agency’s exclusive jurisdiction over these markets by seeking to establish statewide prohibitions on these exciting products.”
This is predictable fed talk from a libertarian who would call judicial overreach about supervising air traffic or food safety standards. Selig should also explain what he means by “these exciting new products.”
Selig also said the prediction markets should be considered “commodity derivatives.” This is an interesting argument, since many of the categories listed on Poly Markets’ website don’t use examples of hard commodities. As their website says, users can bet on “Will TikTok be banned in the U.S. this year?” or “Whether the Miami Heat will win the 2025 NBA Finals?”
Selig must have a creative interpretation of how TikTok meets the definition of a “commodity derivative.”
The Technology Behind Prediction Markets
A decentralized prediction market (DPM) used smart contracts and oracles (Peterson et al., 2019) that managed event outcomes through secure blockchain technology. This can be everything from the results of a prize fight to weather conditions in California in a month. DPMs create “smart contracts” where the terms of the bet or contract are directly encoded. When the predefined real-world conditions are met, and the verified external data is used, the self-executing contract notifies bettors of the result. The blockchain and the real-world outcomes are connected by oracles. When the conditions for a payoff to participants are met, the holders of the winning tokens are notified and paid.
Proponents of DPMs cite the same benefits of blockchain for crypto as they do for DPMs: transparency, lower costs, and impartial odds makers.
For anyone familiar with the exchange-traded futures, the prediction market meets Webster’s definition of gambling.
There are no fundamentals to driving prices, no economic hedging need, and nothing tangible driving prices. Stock index futures are based on a basket of underlying stocks. The prices of live cattle futures are based on a pen of cattle in a feedlot in the Midwest. The prices of West Texas Intermediate Crude futures are based on extensive data about supply, demand, refinery capacity, tanker traffic, Arab oil prices, weather conditions, pipeline transport, and storage. None of this information is available for TikTok or the LA Lakers.
To gain additional legitimacy, the CFTC’s Selig argues that all will be fine because the prediction markets will be traded on an exchange. This is window dressing. The fact that prices will be disseminated by an exchange will not make the underlying bet product legitimate.
However, it could reassure bettors that an exchange will supervise and regulate the listed trades. However, the nation’s casinos now serve this same function. Casinos pay out millions daily to chip holders and card game winners, with very few disputes. Aside from Trump’s Taj Mahal Casino, few casinos have ever gone bankrupt.
Why is the CFTC Involved with Prediction Markets?
As a federal agency, the CFTC is always seeking new markets to regulate, given the right circumstances. However, their interest may be tied to the Project 2025 plan to destabilize financial markets through crypto, prediction markets, and private equity. This would also include any other financial-engineering-enabled scheme to monetize assets for the benefit of the large investment firms controlling the action.
Crypto and prediction markets are the latest iteration. But there’s more. The latest development in private equity is to monetize medical malpractice lawsuits by assembling a portfolio of claims and then wait for the best settlement that pays off investors. In 2024, the average malpractice claim was $56 million.
Dr. Caleb Masterson said this new private equity trend will push doctors out of specialty practices. These include emergency room medicine, obstetrics and gynecology, and neurosurgery. He said doctors will also have to pay higher malpractice premiums. Private equity firms, such as Bain and Company, are positioning these malpractice portfolios as a “non-correlating asset” to attract institutional investors.
Private equity firms, like prediction market firms and crypto firms, have yet to demonstrate a positive societal function. Futures markets in the US date to 1848, when the Chicago Board of Trade began trading forward, or “to arrive,” contracts for grain. Margin and delivery procedures were established in 1865. Within 50 years, more futures exchanges were established in Chicago, New Orleans, New York, Minneapolis, and Philadelphia to set prices for practical hard commodities such as grain, cotton, coffee, and sugar.
Transparent pricing helped reduce price risk for producers and manufacturers through hedging, while also improving cash management.
Futures markets have advanced significantly, now including equity indexes that provide many of the same benefits to portfolio managers and investors.
A Bleak Future For Prediction Markets?
Selig’s claim that prediction markets should be treated as swaps is overstated, as swaps are used to manage cash flows. If a bettor takes a position on when TikTok will be sold, where’s the cash flow? What is the risk that is being managed? Who would suffer if TikTok were not sold?
Prediction markets have more in common with cryptocurrencies than with traditional markets. Both are desperately seeking a legitimate purpose beyond price appreciation and the pursuit of fast profits. Crypto is not being used as an everyday medium of exchange. Its main purpose is to weaken the Federal Reserve, avoid taxes, trick unsuspecting people, and support illegal trade.
The big investment firms and the financial media treat crypto as a real investment. They have forgotten basic security analysis. Ben Graham and David Dodd explained these ideas in their classic 1934 textbook, “Security Analysis.” This book established procedures for determining and analyzing a company’s profitability, margins, intrinsic value, earnings, cash flows, PE ratios, fundamental valuations, and premium discount calculations from the stock price. In stark contrast, determining the prices of crypto and prediction markets relies on animal instincts and social media rumors.
The forces driving financial engineering and private equity are out of control. No moral or ethical standards are evident in this investment segment.
Selling malpractice settlements as a non-correlated asset to institutional investors is a new low for private equity firms. Their next investment area will pool trades on infant mortality in India and traffic deaths in California.
With Trump’s CFTC pushing to legitimize the prediction markets, it will essentially bring gambling to the entire nation. Whether in a casino or on an exchange, prediction markets do not serve any societal benefit. The same is true for malpractice-suit portfolios that are part of private equity’s search for new asset classes, and for the social media rumor mills that drive Bitcoin. All this is only a measure of the decadence of the nation’s investment class.
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