Waterhouse VC: The next era of prediction markets – Strategy

We first spotlighted prediction markets in November 2024, when the US election sent trading volumes parabolic. The question back then was whether these platforms could sustain engagement beyond headline events to keep markets liquid, meaningful and accurate. By February 2025, our deep-dive into CFTC-regulated Kalshi suggested they could.

Quick refresher: Prediction markets let users buy and sell contracts on future events – from elections and economic data to cultural moments and sport. For example, you might buy a contract on a Russia-Ukraine ceasefire in 2025 for $0.37 that pays $1 if correct. Kalshi operates as a CFTC-regulated exchange in the US, while Polymarket serves international users who trade with USDC on blockchain rails.

Six months on, the engine has shifted up a gear. Fresh capital has arrived. Large financial platforms Robinhood and Webull now integrate popular prediction markets directly in their apps, and professional trading firms are providing the liquidity that lets users place six-figure bets. AI integrations such as xAI’s Grok are now surfacing market odds across social media and improving the trading experience.

Billion dollar validation

On June 25th, Kalshi raised $185 million at a $2 billion valuation in a Series-C round led by Paradigm, catapulting it beyond unicorn status. The capital will fund what’s already working: expanding stockbroker integrations, encouraging participation from market makers, and launching more ‘always-on’ markets that sustain engagement.

“Prediction markets remind me of crypto 15 years ago: a new asset class on a path to trillions.” Matt Huang, Paradigm

Polymarket has matched the momentum, reportedly in the process of closing a $200 million round at a $1 billion valuation led by Founders Fund. In July it agreed to acquire CFTC-licensed exchange QCEX for $112 million. That purchase provides a compliant path back into the US, even if it requires segregating US and international liquidity. Where Kalshi spent 6 years in the regulatory trenches, Polymarket is buying existing infrastructure, an option created by Kalshi’s groundwork.

Polymarket often dominates trading volumes, especially on global events. Its international user base and broader market coverage, including wars which Kalshi does not list, arguably make it a stronger gauge of global sentiment. Yet Kalshi commands double the valuation. The premium reflects Kalshi’s current advantage in the United States, where CFTC approval unlocks broker distribution and direct access to institutional liquidity.

Distribution advantage

When Kalshi launched on Robinhood in March 2025, over 25 million users gained instant access to prediction markets. They could speculate on sports and Fed decisions right alongside their stock trades, no additional signup required. The result: approximately one billion worth of event contracts were traded through Robinhood in Q2 (SBC).

Webull followed with S&P 500, crypto, and Fed markets, and CEO Tarek Mansour expects further broker integrations this year. Coinbase also confirmed prediction markets are on its roadmap. With over 100 million users globally, they could become a major force whether it partners or builds its own platform.

This broker-led distribution gives Kalshi a major advantage over US sportsbooks. By plugging into existing brokerage accounts, it can reach tens of millions of funded users at minimal cost. FanDuel spent years building 18 million customers through state-by-state licensing, while Kalshi can achieve comparable reach almost instantly.

Kalshi recently added another hook: a 4% annual interest paid on all cash and open positions. Traditional operators struggle to compete with that, since they rely on holding customer float without paying for it.

Market makers

For prediction markets to fulfil their promise, they require deep liquidity. Susquehanna International Group (SIG), which handles more than a trillion dollars in ETF trades annually, established Kalshi’s first dedicated event contracts desk in April 2024. ​​Market makers ensure instant execution and higher limits, essential for attracting professional money.

Kalshi’s Market Maker Program has since expanded to multiple firms providing 24/7 liquidity across sports, economic, and political events. Polymarket runs parallel programs that reward liquidity providers.

Yet both platforms have far to go before reaching institutional scale. Traditional derivatives like Brent Crude Futures capture geopolitical risk through billions in daily turnover. Prediction markets excel at retail engagement, and while Polymarket contracts now appear on CNBC, this growing visibility isn’t the same as sector-wide institutional participation.

Predictable pushback

Polymarket’s international user base does not directly compete with US sportsbooks. That may change once the QCEX acquisition enables domestic operations, but for now the regulatory pressure is concentrated on Kalshi, and the reason is sports. Prediction markets in elections, economics, or cultural events drew little attention. No operator had any interest in pricing up whether Taylor Swift gets engaged this year.

Sports now dominate Kalshi’s core business, averaging over 65% of trading volume since March. With the Premier League underway and the NFL season starting, these volumes will likely increase. Bettors are migrating for better prices, lower fees, and higher limits without fear of being restricted. Kalshi also benefits from operating in states where sportsbooks remain prohibited, including California and Texas, and CFTC rules allow 18-year-olds to participate compared to 21+ in most sports betting states.

Critics argue that Kalshi is offering what amounts to sports betting with no tax or licensing obligations. State gaming regulators have responded with cease-and-desist orders, investigations, and lawsuits targeting “sports event contracts”. Federal judges have largely blocked these enforcement attempts, ruling that CFTC-regulated derivatives supersede state gaming laws.

After speculation over whether traditional operators would enter the space, FanDuel this week announced a joint venture with derivatives giant CME Group to launch regulated event-based financial contracts. The products will let FanDuel users place ‘yes or no’ bets on equity indices, commodities, crypto, and key economic indicators, with no mention of sports. The launch is slated for later this year, and attention will now shift to DraftKings to see if it follows suit.

AI engagement boost

AI is beginning to shape how prediction markets are used and distributed. Both platforms have partnered with xAI, and Polymarket has been coined “the official prediction market of X”. On Polymarket, users can click ‘generate market context’ for instant AI analysis. This feature provides market history, key drivers, and potential catalysts that might move prices, making users more confident to trade.

On X, users can tag @askpolymarket or @grok to receive live probabilities and analysis. Market odds now appear directly in feeds alongside Fed policy debates or breaking news, exposing prediction markets to X’s 500+ million users. These integrations create a powerful distribution channel, turning news cycles into trading opportunities. Kalshi’s xAI partnership is expected to follow a similar path.

A long-term compliment

For all their momentum, prediction markets remain bound by binary yes/no contracts. Recent filings suggest Kalshi plans to introduce prop markets and point spreads, but they cannot replicate high-margin products such as same-game parlays or accumulators, nor can they match the bonus-driven engagement or casino content that underpins sportsbook economics.

Where prediction markets excel is customer acquisition. Their simple structure and brokerage integrations create an entry point for millions who would never download a gambling app. They also attract sharp bettors seeking better liquidity and bigger limits, expanding the addressable market in ways sportsbooks never could.

If sports remain the core business, prediction markets will capture share in straightforward betting markets while providing price discovery for operators and introducing new users to wagering. When these users eventually seek parlays, bonuses, and casino content, traditional operators stand ready to serve them.

This reinforces our investment thesis: as the market expands, differentiation becomes critical. Operators need broader products, smoother experiences, and less friction at every step. We back the infrastructure that enables this. Prediction markets are undeniably competition, but they also widen the funnel, creating opportunities for wagering operators and technology suppliers prepared to capture these new users as their demands grow more sophisticated.

Waterhouse VC is a fund that specialises in global publicly listed and private businesses related to the wagering and gaming sectors. The fund is only available to wholesale investors.

Since inception in August 2019, Waterhouse VC has achieved a gross total return of +3,597% (annualised at 83%), as at 31 July 2025, assuming the reinvestment of all distributions.