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\n Photo-Illustration: Intelligencer; Photo: Getty Images\n <\/p>\n
One of the premises that prediction markets insist we take seriously is that they exist, if not primarily then substantially, to help people hedge risk. It is undeniably true that they can be used this way, and technically speaking, they work like the exchanges used by, say, airlines to hedge jet fuel, farmers to hedge crop prices, or energy utilities to manage climate and weather risk. This premise is also endorsed by the Commodity Futures Trading Commission, which at times makes this case more enthusiastically than the companies it\u2019s supposed to regulate. \u201cPrediction markets have exploded in popularity as broad swaths of market participants seek to hedge portfolio risks and test their abilities to forecast truth,\u201d CFTC commissioner Michael Selig said early this year<\/a>. Prediction markets had indeed exploded in popularity. But anyone who spent any time looking at them or talking to their users could tell you that the people using them to predict how many times MrBeast would say the word \u201cdollar,\u201d or simply who would win a basketball game, were doing something much closer to risk-seeking than hedging. Most of them, contrary to the official position of the United States government, were acting is if they were placing bets.<\/p>\n Maintaining the argument that any \u201cevent contract\u201d can function as a hedge is rhetorically important and has clear regulatory implications. But it\u2019s also crucial to the pitch that companies like Kalshi can be more than betting app alternatives \u2014\u00a0that they represent a potential expansion of a narrow institutional practice to a much wider group of participants. Which is perhaps why the company is drawing attention to this hedge on tonight\u2019s Knicks game<\/a>:<\/p>\n For Game 1 of the NBA Finals, The Jeffrey, a beloved Upper East Side bar, is giving its customers a deal that sounds almost too good to be true: if the New York Knicks win, everyone\u2019s tab is on the house. To protect itself from the potential financial hit, The Jeffrey will place a $5,000 hedge on Kalshi, the world\u2019s largest prediction market, turning a risky promotion into a fully insured one.<\/p>\n<\/blockquote>\n First off, go Knicks. Second: Huh? \u201cThe mechanics are straightforward,\u201d Kalshi reassures us. \u201cIf it happens and every tab gets wiped, the Kalshi payout offsets the loss. If the Knicks lose, the bar collects abnormally high revenue from the promotion, having paid only a small premium for the peace of mind.\u201d The company then suggests this is a model for hotels (which can hedge with sports contracts), clothing stores (which can buy weather contracts), or other small businesses (which can manage tariff risk, for example).<\/p>\n It\u2019s an attempt to provide examples for the company\u2019s stated position that, actually, \u201c[e]very contract has a hedging use case, even the less obvious ones,\u201d but the routine use cases here are theoretical, while the actual example is basically contrived: A bar owner created a pretty serious financial risk for himself in the form of a free drinks promotion, and then, hey, look at that, here\u2019s a way to buy something sort of like insurance to make sure that the promotion doesn\u2019t turn a sure-thing busy night into a financial catastrophe.<\/p>\n This, again, looks less like someone minimizing risks in the manner of a farmer who can\u2019t control the weather than someone seeking new risks which must then be hedged. But it\u2019s worth extrapolating a bit, here, to try to imagine what the sort of widespread hedging-via-prediction-market scenario imagined by these companies, and the CFTC, would actually look like.<\/p>\n Let\u2019s say hedged free drinks promotions turn out to be a good deal for this bar, giving it an edge over other bars where people might want to watch big games. So good, in fact, that other bars start doing it, to the point that \u201cif your team wins, drinks are free\u201d promotions become common practice. At that point, the competitive advantage starts to go away, while prediction markets are effectively taking a cut; eventually, though, not offering hedged promotions like this might actually become a disadvantage, so you keep doing it. Meanwhile, you\u2019re no longer just a guy who owns a bar, which already meant dealing not just with figuring out how to attract customers and sell drinks, but managing a staff, dealing with finances, taxes, and regulations, and competing with other nearby businesses. Now you\u2019re also an amateur trader trying to figure out how much to spend to offset business risk, as well as which new and increasingly exotic risks you should assume in a world where hedging them is easier. (Free drinks if the temperature breaks 95 degrees! 15% off a new car if the Consumer Price Index increases next month!) You have unique and strong intuitions about how your business works, which feels like it puts you in a good position to think about these things. But in the bigger picture of, say, weather futures, you\u2019re not going to be anywhere close to the most sophisticated participant in the markets, which, in a scenario where buying into contracts like this becomes common practice, have likely attracted a great deal of attention from the finance industry. Maybe you relish this, and find the new speculative aspects of the hospitality business more invigorating than the dealing-with-wholesalers part. Or maybe you start to wonder if you\u2019ve become the dumb money in a marketplace that, when it was novel and new, made you feel clever. Airlines have people whose entire job is pricing these sorts of things \u2014 do you need to hire someone now, too? Or contract someone so you don\u2019t screw up the numbers?<\/p>\n This is an extreme and slightly absurd extension of what Kalshi and others are putting down, here, but it\u2019s worth thinking about. As alternatives to sportsbooks, these companies have a lot of room to grow; as platforms where people can, well, not-bet on a much wider range of outcomes, and in the process produce relevant predictions about the world, they also seem to have a pretty high ceiling (they\u2019re already a part of our electoral process<\/a>). But as startups operating in a moment of maximum regulatory freedom and wild financial speculation at the highest levels, they have an opportunity to sell investors on a story that, even if it sounds sort of ridiculous to everyone else, might seem reasonable and even obvious to them, and like an intuitive continuation of the last few decades of changes to the American economy: total financialization, wrapping itself not just around the big game, but also the bar where you go to watch it.<\/p>\n Sign Up for John Herrman column alerts<\/p>\n Get an email alert as soon as a new article publishes.<\/p>\n Vox Media, LLC Terms and Privacy Notice<\/p>\n\n