--:-- [Theme music fades out]
--:-- Ryan Knutson: Welcome to The Journal, our show about money, business, and power. I'm Ryan Knutson.
--:-- Jessica Mendoza: And I'm Jessica Mendoza. It's Monday, September 9th.
--:-- Ryan Knutson: Today, we're exploring the world of political betting. We meet a trader making big money making predictions on the upcoming U.S. elections over a platform called Polymarket.
--:-- Jessica Mendoza: And we examine the fight that's brewing with regulators over the practice.
--:-- Ryan Knutson: But first, a story about how one trader made a tidy sum of money betting on the U.S. presidential election.
--:-- Ryan Knutson: Ryan is a Canadian university student who follows U.S. politics closely. So when former President Donald Trump was nearly assassinated back in July, Ryan heard about it just minutes after the story broke.
--:-- Jessica Mendoza: And I see that people are saying Trump just got shot. So I go to the live stream and I see Secret Service pushing him away. There's confusion everywhere.
--:-- Ryan Knutson: A big event like this is market-shaping news. And Ryan had money on the line. Not necessarily in the stock market, but in a growing market based on betting.
--:-- Jessica Mendoza: Ryan had a number of bets going on the U.S. presidential election. And if Trump had been killed, that would have changed everything.
--:-- Ryan Knutson: But of course, Trump survived. And I go onto Twitter and I see people starting to say, Trump just locked the election. He's the winner. He's resilient.
--:-- Jessica Mendoza: Trump is going to win now.
--:-- Ryan Knutson: Ryan logged onto the site that he uses to make bets on American politics. He goes by the name Phantom Bets Online.
--:-- Jessica Mendoza: He quickly bought more shares on Trump to win the election.
--:-- Ryan Knutson: When the photo of Trump raising his fist began making the rounds, the share price soared.
--:-- Jessica Mendoza: And that was when Ryan sold his position for a tidy sum of $700.
--:-- Ryan Knutson: It's all about riding the wave, riding the narratives that you see.
--:-- Jessica Mendoza: I want to catch a narrative before the public does, right? I buy the rumors, sell the news.
--:-- Ryan Knutson: I just sensed that the price would move, and I was right.
--:-- Jessica Mendoza: Sites like the one Ryan is using are on the rise.
--:-- Ryan Knutson: Their popularity is leading to a wave of betting on political events in the U.S.
--:-- Jessica Mendoza: And it's setting up a clash with U.S. regulators.
--:-- Ryan Knutson: Welcome to The Journal, our show about money, business, and power.
--:-- Jessica Mendoza: I'm Jessica Mendoza.
--:-- Ryan Knutson: And I'm Ryan Knutson.
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--:-- Ryan Knutson: In 2024, betting is bigger than ever, especially online.
--:-- Jessica Mendoza: People are betting on all sorts of things.
--:-- Ryan Knutson: They are betting on weather.
--:-- Jessica Mendoza: They're betting on pop culture events.
--:-- Ryan Knutson: They're betting on the Oscars.
--:-- Jessica Mendoza: They're betting on economic data, like whether the Fed is going to cut interest rates.
--:-- Ryan Knutson: I talked to our colleague Alex Osipovich about the platforms where people can place these bets.
--:-- Jessica Mendoza: They're called prediction markets.
--:-- Ryan Knutson: Prediction markets are places where people come together and they bet money on future events.
--:-- Jessica Mendoza: You know, will Taylor Swift get engaged by the end of the year?
--:-- Ryan Knutson: Will Donald Trump win the election?
--:-- Jessica Mendoza: And in the push and the pull between the people betting one way and betting the other way, you have essentially a price that's established.
--:-- Ryan Knutson: And the idea is to sort of harness the wisdom of the market and try to arrive at a consensus version of the truth, of what the masses of people think is likely to happen.
--:-- Jessica Mendoza: And one prediction market platform that's recently taken off is called Polymarket.
--:-- Ryan Knutson: Polymarket's been around for a few years.
--:-- Jessica Mendoza: It was founded by a young guy in his 20s named Shane Copland in 2020.
--:-- Ryan Knutson: Polymarket, as its name kind of suggests, is meant to be a market for everything.
--:-- Jessica Mendoza: There are all sorts of topics there.
--:-- Ryan Knutson: Essentially, anything that you see in the news, they will try and make a market out of it.
--:-- Jessica Mendoza: But its users have generally gravitated to the political markets.
--:-- Ryan Knutson: And it's the election-related markets right now that are getting the bulk of the trading volume and the bets being placed.
--:-- Jessica Mendoza: Polymarket sets up betting by allowing users to buy shares of yes or no on an event.
--:-- Ryan Knutson: Just like buying shares of a company, if more people buy yes, the price of yes shares goes up.
--:-- Jessica Mendoza: People can buy and sell these shares up until the event happens.
--:-- Ryan Knutson: They use cryptocurrencies to make the trades.
--:-- Jessica Mendoza: The way you're describing it, it does sound like somewhere in the middle of a brokerage site where you would trade stocks or futures and also kind of a sports betting site where you're placing bets on the outcome of events.
--:-- Ryan Knutson: It sort of kind of lives in a middle spot.
--:-- Jessica Mendoza: It is sort of a mashup between brokerage-type markets and plain casino-type gambling.
--:-- Ryan Knutson: Right now on Polymarket, there are bets about who will win tomorrow's presidential debate.
--:-- Jessica Mendoza: Will August be the hottest on record?
--:-- Ryan Knutson: Who will win the popular vote in November?
--:-- Jessica Mendoza: But one of the big questions that really drove people to the marketplace came up in June.
--:-- Ryan Knutson: If you look at its trading volumes, they really took off this summer around the time of the Biden-Trump debate.
--:-- Jessica Mendoza: And the reason for that is because the debate and, you know, Joe Biden's poor performance set off this huge wave of speculation of, is Biden going to drop out?
--:-- Ryan Knutson: And for several weeks after the debate, as different bits of news rolled in, you know, Joe Biden saying he was going to stick around, prominent Democrats calling for him to drop out.
--:-- Jessica Mendoza: All of these things moved poly markets odds on Biden dropping out of the race.
--:-- Ryan Knutson: And some people in the end ended up making a fair amount of money because they bet that Joe Biden was going to drop out when that was not a consensus position.
--:-- Jessica Mendoza: One of those people who won big was Ryan, the Canadian university student.
--:-- Ryan Knutson: I think I got around 110,000 shares of Biden not to be the nominee between 15 and 20 cents.
--:-- Jessica Mendoza: And then as House reps and senators started to call on him to drop out, Nancy Pelosi gave vague answers.
--:-- Ryan Knutson: The odds would go up and down throughout the June to July period.
--:-- Jessica Mendoza: How much did you wind up making?
--:-- Ryan Knutson: That I'm not sure because I have so many trades on the site that everything was so volatile.
--:-- Jessica Mendoza: But you're sure you made money?
--:-- Ryan Knutson: Oh, for sure.
--:-- Jessica Mendoza: It was one of my bigger wins of the year, for sure.
--:-- Ryan Knutson: In total, Ryan's made more than $290,000 on Polymarket since he started trading on the platform a few years ago.
--:-- Jessica Mendoza: The site is attracting a lot of folks like him.
--:-- Ryan Knutson: People curious about gambling or wonky about politics or, because all the bets are done in crypto, crypto enthusiasts.
--:-- Jessica Mendoza: And that's led to investors taking notice.
--:-- Ryan Knutson: In May, Polymarket announced that it had raised around $70 million in new venture capital funding, including from Silicon Valley big names like Peter Thiel.
--:-- Jessica Mendoza: Here's our colleague Alex again.
--:-- Alex Osipovich: I think collectively, the investors behind Polymarket believe that it is sort of an idea whose time has come.
--:-- Ryan Knutson: They like the idea of prediction markets.
--:-- Alex Osipovich: They think prediction markets could have a very bright future if done correctly.
--:-- Jessica Mendoza: There's also this argument, which I find very interesting, that prediction markets create a public good.
--:-- Alex Osipovich: And many of us spend a lot of our time checking opinion polls to see you know whether our preferred candidate is up or down in the polls.
--:-- Ryan Knutson: And prediction markets offer another way to kind of get at that.
--:-- Alex Osipovich: They have this interesting property where they react in real time to events.
--:-- Jessica Mendoza: I mean, right after the Democratic convention, there is a lot of interest of like, well, how much of a bump is this going to give Harris?
--:-- Alex Osipovich: But you have to wait a few days for those polls to be conducted.
--:-- Ryan Knutson: If you're impatient, you can just kind of look at the prediction markets, be like, oh, well, it looks like the prediction markets are up a little bit after all those good speeches at the DNC.
--:-- Jessica Mendoza: And so that gives you that real-time fix that is missing from opinion polls.
--:-- Ryan Knutson: In August, PolyMarket's users made more than $400 million worth of trades, a new monthly record for the company.
--:-- Jessica Mendoza: But all that attention hasn't gone unnoticed, especially from a top U.S. markets regulator.
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--:-- Jessica Mendoza: The rising popularity of elections betting has led to a lot of discussion over the pros and cons of sites like Polymarket.
--:-- Ryan Knutson: There's a lot of debate over whether betting markets on elections are a good thing or a bad thing.
--:-- Jessica Mendoza: On the plus side, they do give you sort of an independent source of forecasts outside of pundits and opinion polls.
--:-- Ryan Knutson: As we've seen in the past few election cycles, opinion polls can be wrong.
--:-- Jessica Mendoza: Advocates of prediction markets say they're kind of more pure in a sense because these are real people putting down real money.
--:-- Ryan Knutson: And when you do that, you tend to assess the situation.
--:-- Jessica Mendoza: You don't want to lose money.
--:-- Ryan Knutson: So the idea is that if you have enough of a diverse user base putting in money and betting on different things that they know stuff about, the more authoritative voices that are better endowed in terms of funds will have more weight and it'll ultimately trickle into a more accurate result.
--:-- Jessica Mendoza: So let's talk about the people who are concerned about marketplaces like Polymarket.
--:-- Ryan Knutson: What are they worried about?
--:-- Alex Osipovich: The main criticism of election betting markets is they could lead to manipulation of elections.
--:-- Jessica Mendoza: You can imagine a scenario where somebody with a vested interest in pushing a certain election result or making money off of the election result will place a big bet on a betting market and then try to meddle in the election.
--:-- Ryan Knutson: I mean, we've seen a lot of allegations of election interference in recent election cycles, but those were generally driven by nation states trying to meddle in U.S. affairs.
--:-- Alex Osipovich: Imagine if on top of that you had the profit motive.
--:-- Jessica Mendoza: Still, election betting is controversial.
--:-- Ryan Knutson: It's traditionally been banned by U.S. regulators because of concerns that it could unfairly influence the outcomes of elections.
--:-- Jessica Mendoza: The Commodity Futures Trading Commission, or the CFTC, is the main federal agency in charge of policing this kind of market.
--:-- Ryan Knutson: Over the years, the CFTC has repeatedly blocked attempts to offer election betting on the trading platforms that it regulates.
--:-- Jessica Mendoza: So Polymarket operates outside of the U.S. to get around those regulations.
--:-- Ryan Knutson: One of the reasons that the CFTC has been so concerned about election betting is that it does not want to be drawn into investigations of election manipulation.
--:-- Jessica Mendoza: The chairman of the CFTC has said that the CFTC should not be an election cop.
--:-- Ryan Knutson: He expressed concern that if there is a case of election manipulation in which somebody tried to profit from a prediction market the CFTC would be forced to investigate that and essentially open up a gigantic can of worms that they don't want to get involved with.
--:-- Jessica Mendoza: Has that kind of election manipulation happened before?
--:-- Alex Osipovich: I would point you to the UK, where there was a scandal in the most recent election in the UK where some politicians were involved in election betting in elections that they're involved with.
--:-- Ryan Knutson: Polymarket says that it takes every effort to be compliant with U.S. regulations.
--:-- Jessica Mendoza: It says it does not have U.S. users.
--:-- Alex Osipovich: I think that in general, they take the view that prediction markets are the future and they're building that future.
--:-- Ryan Knutson: Advocates of prediction markets have argued that the CFTC is wrong and that Americans should be allowed to bet on elections.
--:-- Jessica Mendoza: And there's been some movement.
--:-- Ryan Knutson: Last week, a federal judge issued a ruling that could open the door to election betting in the U.S.
--:-- Jessica Mendoza: There's another hearing on it later this week.
--:-- Ryan Knutson: What is it about this moment that makes polymarket and prediction markets like it such a big draw for people?
--:-- Alex Osipovich: Well, I think polymarket kind of got lucky.
--:-- Ryan Knutson: We are in an unusual election.
--:-- Jessica Mendoza: I mean, every four years, people say, oh, this is the most important election ever.
--:-- Ryan Knutson: But this is really an interesting election.
--:-- Jessica Mendoza: I mean, Trump and Harris represent very different directions for the country.
--:-- Ryan Knutson: And it's been unusual in terms of some of the events that have happened.
--:-- Jessica Mendoza: Joe Biden dropping out.
--:-- Ryan Knutson: When does that sort of thing happen?
--:-- Jessica Mendoza: The drama around the Trump assassination attempts.
--:-- Ryan Knutson: So this has been an unusually volatile election season.
--:-- Jessica Mendoza: And I think that sort of plays to polymarket strengths in terms of providing a way for people to express their views through bets and, you know, providing this real-time window in what's happening with the chances of election at any given time.
--:-- Ryan Knutson: And also give people a chance to make money in the process.
--:-- Jessica Mendoza: Exactly.
--:-- Ryan Knutson: In the meantime, users outside the U.S., like Ryan, are continuing to bet on U.S. elections on polymarket.
--:-- Jessica Mendoza: How would you rate yourself?
--:-- Ryan Knutson: Do you feel like you're good at this?
--:-- Ryan: I'd like to think that after three years of knowing the ins and outs of polymarket I have a pretty good knack for it.
--:-- Jessica Mendoza: I would consider myself center right.
--:-- Ryan Knutson: But on prediction markets you try to take emotions out of your trading and really in anything you want to take emotions out of what you do especially financial decisions.
--:-- Jessica Mendoza: So I try to stay as unbiased as possible.
--:-- Ryan Knutson: And really now I hold a big position on Kamala Harris to win the election, and that's inspired by the data rather than who I want to win.
--:-- Jessica Mendoza: It's not just who wins and loses.
--:-- Ryan Knutson: Ryan, like many polymarket users, is betting on key moments leading up to the presidential election.
--:-- Jessica Mendoza: On Tuesday, Vice President Kamala Harris and former President Donald Trump will square off in a debate, and Ryan has money on it.
--:-- Ryan Knutson: Yes, so with the debate coming up tomorrow, there's a market on will Kamala and Trump shake hands at the debate.
--:-- Jessica Mendoza: And that's a market I'm particularly interested in to see what happened in the previous debate because Biden and Trump didn't shake hands.
--:-- Ryan Knutson: I had a bet on them not to shake hands.
--:-- Jessica Mendoza: Which one?
--:-- Ryan Knutson: Are you purely on polymarket to make money?
--:-- Ryan: I am a university student, a business student, and this is something of a resume builder.
--:-- Jessica Mendoza: And that's something of a story that you can go and tell someone at a big trading firm that they might be interested in someone who has the intuition and has done this for what is a good couple of years at a young age.
--:-- Ryan Knutson: So that is one of the motivating factors for me trading.
--:-- Jessica Mendoza: But of course, the money is great and it is a lucrative opportunity that I don't plan on dropping anytime soon.
--:-- Ryan Knutson: Your podcasts. We're out every weekday afternoon.
--:-- Jessica Mendoza: Thanks for listening.
--:-- Ryan Knutson: See you tomorrow.
