Want to 233x your money? Why this new form of gambling is a dangerous trap

Last month it came out that a man named Gabriel Perez made more than $143,000 by predicting what Donald Trump would say in his speeches.

The rise of US-based prediction markets, Polymarket and Kalshi among them, allowed Perez to gamble on future events through “binary option” bets on whether something will (or will not) happen.

There was a problem: Perez was Trump’s teleprompter operator. He is no longer in the job, although he does not appear to have been charged at this stage.

Having grown more than 380 per cent globally in less than a year, these prediction markets can pay high returns if you bet on unlikely events. For example, at current prices, you could 233x your money by betting on Australia to win the 2030 FIFA World Cup.

It is illegal for these prediction market providers to operate in Australia; however, it takes as little as a $10 VPN to join them. Even worse, the Australian Communications and Media Authority (ACMA) – the regulator that ordered the ban – admits that using a VPN to circumvent geo-blockers is completely legal.

They aren’t all bad news. According to Australian-American economist Professor Justin Wolfers, “prediction markets produce better forecasts than the alternative, whether that’s polls, pundits, models, or other approaches”.

In the 2024 US presidential election, for example , opinion polls narrowly favoured Kamala Harris, while prediction markets had Donald Trump as the clear favourite. Trump went on to win every swing state. But why does this matter?

Better predictions allow people, businesses and governments to make better decisions about the future. Wolfers argues that having “high-quality forecasts of the likelihood of the Strait of Hormuz opening”, for example, would be of great value to businesses.

These markets are so good at predicting future events, he says, because they excel at aggregating disperse information – instead of asking 10 experts, or polling a few thousand people, markets collect all this information and reflect it automatically in the live price.

When traders think the market has got the probability wrong, they can put their money behind that view, pushing the price up or down. Those willing to bet more have a greater influence on how much prices move from each bet.

The result is that many prediction markets are comprised of a few sophisticated large bettors – armed with expertise and fancy models – who bet against masses of small gamblers who guess outcomes based on little more than “vibes”.

A recent Wall Street Journal analysis found that two-thirds of all profits went to only 0.1 per cent of accounts and more than 70 per cent of users lost money. the Australian Securities and Investments Commission estimates the true number is closer to 75 per cent.

So, while the predictive benefits of these markets are real, they appear to come at the expense of the roughly 75 per cent of users who lose money.

Among other reasons, this is why anti-gambling advocates are worried about the sudden emergence of prediction markets. The recent senate inquiry on gambling is one of the many proof points highlighting the immense financial and emotional cost of gambling addictions.