In brief: Prediction markets such as Polymarket and Kalshi are primarily known as places where ordinary people bet on sports, elections, and other real-world events. However, as Kalshi markets itself to small businesses and big Wall Street players as a financial hedge vehicle, many suspect it's just trying to control its reputation to sidestep sports gambling laws.

The New York Times reports that Kalshi has spent the past several months preparing to transform itself into a platform for hedge trading by hiring trading specialists and collaborating with financial companies. Small businesses have already proven that, in at least some instances, betting on prediction markets can act as insurance for significant financial decisions, and the company aims to turn this strategy into a workable business model.

Kalshi and its main rival, Polymarket, allow users to bet on whether events on just about any topic will happen by purchasing "yes" or "no" prediction contracts. Kalshi sells them for between $0 and $1, with prices shifting by cents as probabilities fluctuate, and pays out $1 for every correct contract.

The two major players initially rose to prominence during pandemic lockdowns and exploded in popularity when Polymarket predicted Donald Trump's 2024 election victory more accurately than most mainstream media polls. Since last year, Kalshi has doubled its valuation, recently reaching $22 billion. Although most Kalshi bettors are individuals who bet on sports, politics, or pop culture, the company aims to diversify into hedging.

Presenting it as an early proof-of-concept, Kalshi recently lauded the case of a New York bar that used its winnings on Game 1 of the NBA Finals to help cover a promotion that put customers' tabs on the house when the Knicks won. In another example, a college athletics insurance firm bet on golf to offset the financial risks of investing in athletes.

Kalshi wants Wall Street to make similar bets on a larger scale. Although some financial firms remain cautious, the company has already forged agreements with financial services in Brazil, the United Kingdom, and the US.

However, the strategy might also help Kalshi fight accusations of illegal sports gambling. Approximately 90% of transactions on Kalshi fall under sports betting, which is illegal in numerous US states. In a Super Bowl ad last year, the company even called itself "the first nationwide legal sports betting platform."

Kalshi and Polymarket have also faced sharp criticism over numerous other controversies. Critics accuse prediction markets of being susceptible to insider trading, influencing elections, and allowing people to bet on armed conflicts and other human suffering.

Criticism has also centered on the rivals' resistance to US regulatory pressure, owing to their connections with the Trump administration. The president's son, Donald Trump Jr., is a marketing advisor for both companies.

Furthermore, the Commodity Futures Trading Commission, which regulates prediction markets, is currently chaired solely by a former corporate lawyer for prediction markets and cryptocurrency firms. Traditionally, the commission consists of a bipartisan committee of several commissioners, but President Trump has left all other seats vacant.

Kalshi and Polymarket have also built connections with major outlets. Wall Street Journal publisher Dow Jones announced a partnership with Polymarket in January, and Kalshi predictions currently appear on CNN and CNBC broadcasts.

Prediction markets have established these deals and their reputations on the perception that the wisdom of the crowd often knows best, especially when putting money on the line. However, a Wall Street Journal analysis (ironically) found that 67% of Polymarket's profits go to just 0.1% of accounts – fewer than 2,000 in total – and 2.9 Kalshi bettors lose money for every user who wins.