Latest / Bull Market Conversations with Fexingo: Rallies, Momentum, and Riding Market Strength / How Bull Markets Are Reshaping the Midterm Prediction Market Playbook
Transcript
- Lucas: So the S&P 500 is sitting at 7,499 this week, which is down a bit from recent highs, but the broader bull market narrative is still intact. And one of the quieter stories within this rally is how prediction markets are becoming a legitimate asset class. Luna: I saw that Kalshi just launched a dedicated election hub ahead of the midterms. That feels like a big step from where we were even two years ago. Lucas: Absolutely. And it's not just Kalshi — PredictIt has been around for years, but the volume in 2026 is completely different. The total notional value traded on election contracts this year is on pace to exceed $5 billion, which is more than the last two midterm cycles combined. Luna: Is that just because there's more money sloshing around in a bull market, or is something structural changing? Lucas: It's both. The bull market creates the environment — cheap capital, retail traders looking for the next edge, and a general risk-on mentality. But the structural shift is that the regulatory landscape has clarified. The Commodity Futures Trading Commission, or CFTC, has been more permissive with these contracts. They're no longer in legal limbo the way they were in 2022. Luna: Right, there was that big fight over whether these were gambling or legitimate hedging instruments. And I think the CFTC ultimately decided they serve a hedging function. Lucas: Exactly. And that distinction matters because it opens the door for institutional money. Hedge funds and asset managers can now use these contracts to hedge political risk in their portfolios. For example, a fund with exposure to healthcare stocks might buy a contract that pays out if Democrats win control of Congress, because that would signal potential drug pricing legislation. Luna: So it's like a political futures market that acts as a macro hedge. That's pretty clever. But I wonder how liquid these contracts really are. Can you actually get out of a position at a fair price? Lucas: That's the key question. The liquidity is still concentrated in the high-profile contracts — who wins the House, who wins the Senate, a few key gubernatorial races. The more obscure primaries or state-level ballot measures can have very thin order books. But market makers have stepped in. Firms like Cumberland DRW and others are providing two-sided quotes on the major contracts, so the bid-ask spreads are narrowing. Luna: That sounds like the maturation of any new asset class. First the retail speculators come in, then the market makers follow, then the institutions start dipping their toes. Lucas: Exactly the pattern. And we're in the phase where the institutions are starting to allocate small percentages — maybe 1 to 2 percent of their portfolio — to these contracts as an alternative beta source. There's even a new ETF filing that tracks a basket of prediction market contracts, though I think that's still a ways off. Luna: Hmm, that would be a wild product. But it makes sense if you think about it. If you can get a return that's uncorrelated with the stock market, that's valuable diversification. Lucas: Exactly. And that's the bull market angle. When the S&P is up twenty percent in a year, people get greedy and look for ways to juice returns. But they also start thinking about hedging against a downturn. Prediction markets offer both — speculative upside if you think you have an edge on an election outcome, and hedging downside if you want to protect against a political shock. Luna: So is the typical user still a retail punter, or are we seeing the profile shift? Lucas: Retail is still the majority by number of accounts, but institutional volume is growing fast. I saw data from Kalshi's last disclosure that about 30 percent of their trading volume now comes from entities that qualify as eligible contract participants — basically, institutions and high-net-worth individuals. That was probably under 10 percent in 2024. Luna: I guess that's also a function of the bull market making people wealthier. More money to allocate to experimental strategies. Lucas: Exactly. And look, if today's conversation helped you think about your portfolio a little differently, honestly, if it was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. It's how we keep this thing ad-free and independent. Luna: Yeah, completely. It's a small gesture that really adds up. And it means we can keep digging into these niche corners of the market. Lucas: So, back to the mechanics. One thing that's interesting is how the pricing works. A contract that pays out $1 if a candidate wins might trade at $0.65, implying a 65 percent probability. But that's not necessarily the same as a statistical probability — it includes a risk premium, a time premium, and a liquidity premium. Luna: Right, so it's like a binary option. And the implied probabilities can be noisy, especially in illiquid markets. Lucas: Exactly. But studies have shown that prediction market aggregates tend to outperform polls. There's a well-known paper by Berg, Nelson, and Rietz that found prediction markets beat polls in 74 percent of cases across U.S. elections. So there's some informational efficiency there. Luna: That's a good stat. And I think that's why the SEC and CFTC have been more accommodating — they see the social value in these markets as information aggregation tools. Lucas: Exactly. It's not just gambling. There's a public good aspect. And in a bull market, when people are more willing to take risks, the liquidity deepens and the price discovery improves. That's a virtuous cycle. Luna: What about the risks? I mean, we saw some manipulation attempts in the 2024 cycle — people trying to artificially move prices with large orders. Lucas: That's a real concern. The exchanges have detection systems, but if a market is thin, a whale can distort the price. However, the more participants you have, the harder it is to manipulate. And the bull market is bringing in more participants. Luna: So the bull market is almost self-reinforcing for these markets. More money, more liquidity, better price discovery, more legitimacy. Lucas: Exactly. And I think the next frontier is event-linked derivatives beyond elections. We're already seeing contracts on Fed rate decisions, on CPI prints, on geopolitical events. The platform PolyMarket had some of that before it got shut down. Now Kalshi is stepping into that void. Luna: So in a bull market, where every asset seems correlated, these contracts offer a genuinely different risk profile. That's a compelling argument for a small allocation. Lucas: It really is. And the key takeaway for our listeners is: if you're sitting on gains in this bull market, consider taking a tiny slice — maybe one percent — and putting it into a prediction market contract that hedges a risk you're exposed to. It's like buying insurance that might actually pay out if the political landscape shifts. Luna: And if you're more speculative, you can try to pick election winners. But the research says most retail traders lose money doing that. Lucas: That's true. The edge usually goes to the institutions with better data and faster execution. But as a hedge, it's a different story. And the bull market gives you the cushion to experiment. Luna: Alright, so we'll keep an eye on how these markets evolve through the midterms. Thanks, Lucas. Lucas: Thanks, Luna. And if you want to support the show, that link again: buy me a coffee dot com slash fexingo. Appreciate it.