Speculation Nation

You know you have made it as a startup when South Park makes an episode about you.

A recent South Park episode covered prediction markets, name-checking two startups: Kalshi and Polymarket. The show did a pretty good job. The writers managed a near-exact copy of the app interface, down to the details. The whole thing was meta: thirty minutes before the episode aired, Kalshi was asking users to trade on what South Park would mention in the episode, including whether Kalshi itself would get a mention.

Prediction markets are officially mainstream. At the end of last year, I wrote a set of predictions for 2025. One of them was that prediction markets would have a breakout year. Halfway into 2025, we got not one but two unicorn prediction market companies. In late June, reports surfaced that Polymarket was closing a round that would value it at one billion dollars. The next day, Kalshi announced fresh funding that valued the company at two billion.

Last fall was the first true mainstream moment for prediction markets, with Kalshi and Polymarket both featuring prominently in the U.S. presidential election. Each company saw a large spike in users and trading volume, while also proving more accurate in predicting the result than most pundits. By now Kalshi has surpassed even those election highs.

The rise of prediction markets is the latest chapter in a long-running cultural and technological trend: the financialization of everything.

The cultural forces behind everything being financialized

Four years ago I wrote a piece for The Atlantic called What Happens When You Are the Investment. It covered NFT mania, the GameStop craze, and the deification of Elon Musk, among other things. It was a different time in tech. Bored Apes were selling for millions, large crypto funds were launching, and ChatGPT was still a year from release. But the cultural mood then was similar to today. There was a growing distrust of institutions and an aversion to traditional career paths.

When I think about everything being financialized, I think about three discrete events that planted the seeds in a new generation. The Great Recession gave Millennials and Gen Z a broad skepticism of the corporate ladder, as millions of people abruptly lost their jobs, including many parents of Millennials and Gen Z. A decade later, the pandemic delivered another shock to labor markets. And now AI is making the job market wobble even more. Many young people live in fear of AI taking their jobs, or are already struggling to find entry-level positions.

These events collided with enabling technologies, first the internet, then crypto, now AI, to supercharge the capital markets and open up new avenues for wealth creation.

FAFOnomics versus economic mobility

An important backdrop here is just how unequal the capital markets have historically been in America. Only about one in two Americans has any exposure to the stock market, and that exposure is stratified by income. Only 15 percent of families in the bottom 20 percent of earners hold stock, while 92 percent of families in the top 10 percent own stock. The top 10 percent of earners own ten times as much of the stock market as the bottom 60 percent. And white investors own three times as much stock as Black or Hispanic stockholders.

This meant that the recovery from the Great Recession largely flowed to wealthy equity holders, while wages stagnated for salaried and hourly workers. Limited access to the capital markets has long stymied economic opportunity and mobility. It is nearly impossible to build real wealth by renting out your time. You have to own equity.

What is more, there are now fewer public companies to even own a share of. Today there are about half as many U.S. public companies as there were in 1996. Much of modern wealth creation happens in the private markets, behind closed doors. Your average American is not getting access to Stripe or Databricks or SpaceX or Anthropic. Even with companies working to open the private markets to Main Street, the odds are slim that many Americans will accumulate real wealth from owning private shares.

But what if you could generate wealth by trading on something other than stocks? That is what is happening today with prediction markets. Kalshi did not invent the concept of event contracts, but it popularized them and created the first federally regulated exchange in the U.S. where people can trade on the outcome of future events.

Prediction markets have been around for a while. Here is an excerpt from a Digital Native piece I wrote in July 2021:

The startup Kalshi, named for the Arabic word for everything, lets you invest in almost everything. Kalshi uses yes or no contracts to let you trade on event outcomes. If you think the unemployment rate in July will be over 7 percent, you can buy a yes contract. If you do not think this year will be the planet's hottest on record, you can buy a no contract.

When I wrote that, Kalshi was still three and a half years away from its breakthrough. Sometimes startups feel like overnight successes, but they have been grinding it out for years behind the scenes. Trading volume was linear for a long time until it hit escape velocity.

Finally, prediction markets are at their tipping point. And because most people lack access to the capital markets, there is an argument that they offer a vehicle for economic mobility. What if you know nothing about finance, but you are a pop-culture savant? You are pretty sure Bad Bunny will headline the Super Bowl. Should you not be able to monetize that knowledge?

Robinhood's Vlad Tenev put the optimistic case well. At the most fundamental level, he argued, prediction markets are the application of capitalism to the pursuit of truth. Market incentives and the wisdom of crowds sift through the available information to determine answers to well-specified questions.

But there is the other side of the argument: that prediction markets are a way to unleash a risky new asset class on the masses. The legalization of sports betting sparks similar controversy. The economic commentator Kyla Scanlon calls this FAFOnomics, her shorthand for a fool-around-and-find-out approach to the economy.

FAFOnomics does seem to be the approach for a new generation. Dismayed by static wages, high inflation, and a sluggish corporate ladder, millions have turned to riskier strategies with higher upside. An undercurrent of nihilism runs beneath it. There is truth in both arguments. New financial products do offer a way to build wealth, while also carrying real risk. We need good policy, yes, but we also need good startups to underpin new economic models.

What startups power this shift

We have talked a lot about Kalshi and Polymarket. Even at current valuations, I am bullish on prediction markets. The potential upside is large. One profile chronicles a 2023 visit to Kalshi's offices by an 88-year-old man named Charles Schwab. Schwab was fascinated by what the company was building and would go on to become a key investor and advisor. Within a few minutes of his first call, he said it reminded him of when he started his own firm, and that it was the first time in a while he had seen a company that could fundamentally change financial markets. For reference, the company that bears his name is worth around 176 billion dollars today. Clearly there is room in a young category of finance.

But where else does the broader trend, people wanting to own equity upside, show up in Silicon Valley?

We see a younger generation eschewing traditional careers in favor of more unpredictable work with higher potential upside. The risk-and-return calculus has shifted. The first iteration was the creator economy. Remember the stat about a majority of kids wanting to be influencers? YouTube, TikTok, and Instagram supported millions of new jobs, while Shopify and Etsy underpinned new forms of entrepreneurship.

Now we see a newer generation of players. Whop, for instance, makes it easy to sell digital products: bots, communities, access, you name it, and the company is doing hundreds of millions in volume. Then there are AI companies that support new forms of monetizable work. Text-to-app builders now let a financial analyst sell AI tools, a producer ship a children's learning app, a real estate agent spin up a training portal, a medical student build a CPR app and charge a monthly fee. You can imagine a lot of careers supported by these tools. People want financial autonomy and economic upside, whether that is betting on NFL games or launching AI apps.

New technologies open up new ways to earn an income, often with unbounded upside. New cultural shifts make people want to pursue these avenues, often at the expense of old-school work. Together these forces are creating some of the biggest shocks to labor and capital we will see in our lifetimes.

Final thoughts

How does AI fit into all this? I liked a framing from Derek Thompson:

One way to think about AI's effect on workers is to ask: is artificial intelligence a tractor or a spreadsheet? When we invented tractors, the population of horses on farms plummeted, because the tractor automated everything farmers needed from a horse. If you carried that frame forward, you would have predicted that the spreadsheet would decimate the employment of accountants. Instead, the efficiency of spreadsheet work turned the entire white-collar economy into a bunch of spreadsheet jobs, and the number of accounting and bookkeeping jobs has increased steadily in the age of Excel.

This is Jevons paradox: increased efficiency leads to more consumption rather than less. In the 1800s the UK made coal-burning factories more efficient. Did they burn the same amount of coal more cheaply? No, they burned more coal. In the 2000s the cost of producing and publishing video plummeted. Did we make the same number of videos more cheaply? No, we made a trillion videos. So one plausible prediction about AI is not that it replaces workers, but that the collapsing cost of generating ideas turns nearly everyone into a knowledge worker.

Maybe AI does not replace knowledge work. Maybe it lowers the cost of generating ideas, content, and analysis so much that we all end up doing more of it. Maybe that creates more jobs and we all benefit from higher output per person. Maybe. We will see. There is also a world where AI does most of our work while we live in a speculation economy, one in which everything is financialized and tradable, with the capital markets gobbling up more of life and work.

Either way, we are seeing a major shift in how a new generation views work and wealth. I expect we will see more prediction markets, more sports betting, and more businesses launched on top of tech platforms. We will see more risk, definitely, more reward, probably, and, one can hope, some newfound economic mobility.