Seven billion dollars. That was the monthly trading volume on Polymarket for February, Herman. Just think about that for a second. We are not talking about a niche crypto experiment for tech enthusiasts anymore. We are looking at a massive, high-velocity financial engine that is fundamentally changing how we process geopolitical information. Today's prompt from Daniel is about the state of financial derivatives, specifically how traditional instruments like contracts for difference are converging with these explosive prediction markets. It feels like we have hit a tipping point where the line between a speculative bet and a core piece of financial infrastructure has basically evaporated.
It is a complete paradigm shift, Corn. And I am glad Daniel brought this up because the timing is incredible. Just yesterday, on March twenty-first, we saw this play out in real-time with those rumors about the Israeli Prime Minister. Social media was melting down with these unverified reports of a wartime death, but if you looked at the Polymarket contract for Netanyahu's status, the probability barely budged. It was the only real-time signal that stayed grounded while the rest of the internet was chasing ghosts. Herman Poppleberry here, by the way, and I have been digging into the numbers behind this all morning. When you see a single-day volume record of four hundred twenty-five million dollars, which happened back on February twenty-eighth, you realize this is about more than just people wanting to gamble on the news. It is what some people are calling information finance.
Information finance. It sounds like a fancy way to rebrand high-stakes wagering, but I see the logic. If you have skin in the game, you are incentivized to find the truth faster than the guy who is just tweeting for engagement. But before we get too deep into the weeds of prediction markets, we should probably clear up some terminology that often gets muddled. We are talking about CFDs, or contracts for difference. Now, for our listeners who follow the energy sector, do not confuse these with the energy contracts for difference used for renewable subsidies. Those are a totally different animal. We are talking about the financial derivatives where you are basically exchanging the difference in the value of an asset from the time a contract is opened to when it is closed.
That is an important distinction. The energy version is a subsidy mechanism to guarantee a strike price for wind or solar farms. The financial CFD is a pure derivative. You never own the underlying stock or commodity. You are just betting on the price movement. In the United Kingdom and across much of Europe and Australia, these are huge retail products, though they are largely restricted for retail investors in the United States. What is fascinating is that prediction markets like Polymarket or Kalshi are structurally almost identical to CFDs. You are buying a contract on an outcome. The only difference is that instead of the price of gold or the S and P five hundred, the underlying asset is a real-world event, like whether a specific law passes or if a conflict escalates.
And the growth in the broader derivatives market is just staggering. I was looking at the Bank for International Settlements data for the first half of twenty twenty-five, and the notional outstanding for over-the-counter derivatives grew by nearly sixteen percent year-over-year. The gross market value shot up by almost thirty percent. People are hedging and speculating at a scale we have never seen before. But the retail side of traditional CFDs has always been a bit of a meat grinder, has it not? The statistics from the European Securities and Markets Authority are pretty grim.
They are brutal. Depending on the jurisdiction, between seventy-four and eighty-nine percent of retail CFD traders lose money. That is why you see those mandatory risk warnings on every platform in the Eurozone. Regulators like ESMA have really clamped down, capping leverage at thirty-to-one for major currency pairs and as low as two-to-one for crypto-based derivatives. They are trying to protect people from blowing up their accounts in an afternoon. But here is the irony: while traditional retail derivatives are being squeezed by heavy regulation, prediction markets are suddenly getting the red carpet treatment from the very agencies that used to want them banned.
You are talking about the Commodity Futures Trading Commission. The shift there has been wild to watch. Back in twenty twenty-four, they were trying to ban these event contracts entirely, calling them a threat to the integrity of elections and public perception. But under the current leadership with Brian Quintenz, the vibe has shifted one hundred eighty degrees. They dropped the appeal against Kalshi, they issued a no-action letter for Polymarket in late twenty twenty-five, and suddenly we have a permissive regulatory environment in the United States. It is a complete reversal.
It is a total pivot toward the idea that these markets provide a public good in the form of data. And that is why the big players are moving in. The Intercontinental Exchange, or ICE, which owns the New York Stock Exchange, put two billion dollars into Polymarket last October. That investment valued the company at nine billion dollars. Think about that. One of the most established financial infrastructure companies in the world is now a major stakeholder in a blockchain-based prediction market. They are already rolling out data tools that feed Polymarket sentiment directly to Wall Street trading desks. This is not a hobby for crypto enthusiasts anymore. It is becoming the new ticker tape for geopolitical risk.
It makes sense when you consider how traditional news has become so polarized and unreliable. If I am a hedge fund manager and I need to know the likelihood of a strike on Iranian nuclear facilities, do I trust a cable news pundit or a market where people have put up five hundred million dollars of their own money? The geopolitical contracts on Polymarket for Middle East military action have actually matched the volume we saw during the presidential race. We are talking about half a billion dollars in a single contract. That creates a very powerful incentive for accuracy.
It really does. It is the wisdom of crowds, but with a massive financial filter. What I find technically interesting is how this is being integrated into the broader intelligence community. The U.S. Army actually published an article in their Military Intelligence Professional Bulletin late last year about using prediction markets to assess national security threats. They are looking at this as a legitimate intelligence tool. If the market probability for a specific event spikes, it acts as a lead indicator that might outpace traditional human intelligence or signals intelligence in some scenarios.
But there is a dark side to this, Herman. I mean, we have to talk about the ethics. We are effectively financializing human suffering. When you have a market where you can profit from an increase in civilian casualties or the assassination of a world leader, that feels like a very slippery slope. I know Kalshi recently froze about fifty-four million dollars in bets on the Iranian Supreme Leader being ousted because of their policy against transactions directly tied to death. But where do you draw the line? If you can bet on a strike but not the result of the strike, is that really a meaningful ethical distinction?
It is a massive gray area and it is something these platforms are struggling with. Kalshi has to stay within the lines of being a regulated U.S. entity, so they are much more conservative. Polymarket, being decentralized and blockchain-based, has more of a wild west feel, even as they re-enter the U.S. market through licensed intermediaries. But the argument from the proponents of information finance is that the events are going to happen regardless. The market just allows us to see the reality of the situation more clearly. They would argue that having an accurate probability of a war starting might actually help diplomats prevent it, or at least help businesses prepare for the fallout.
I am not sure I buy the idea that it helps prevent war. If anything, it could create a weird feedback loop. Imagine a scenario where a high probability of conflict on a prediction market actually emboldens a leader to follow through because they see it as inevitable, or because they want to satisfy the market sentiment. Or worse, what if someone with enough capital manipulates the market to create a false signal? If you can move the needle on a prediction market for fifty million dollars and that causes a massive swing in the much larger oil futures market, you could make a fortune on the side.
That is the big systemic risk. Market manipulation is the elephant in the room. Now, the counter-argument is that in a deep enough market, manipulation is incredibly expensive and usually temporary. If someone tries to artificially drive down the odds of an event that is clearly going to happen, they are basically just handing free money to everyone else in the market who will jump in to arbitrage that gap. The more liquidity there is, the harder it is to fake the signal. That is why the ICE investment is so critical. By bringing in institutional liquidity, they are making these markets much harder to manipulate than they were when they were just small retail pools.
Speaking of institutional moves, we should talk about the geographical split. In the United States, you have this weird tension between federal and state laws. Kalshi is winning at the federal level with the CFTC, but they are getting sued in nine different states. New Jersey and Nevada are currently on opposite sides of the fence regarding whether these are legal derivatives or illegal sports wagering. If you are a trader in Las Vegas, you might have a totally different set of rules than a trader in Newark. It is a mess.
It is the classic American regulatory patchwork. And then you look at the European Union, where the MiCA regulation, or Markets in Crypto-Assets, is set to go into full effect this July. That is going to be a huge moment for platforms like Polymarket that run on the Polygon network. They are going to have to comply with a very rigorous framework if they want to keep operating in the E.U. This is why we are seeing this rush toward professionalization. They are moving from being permissionless protocols to being compliant financial institutions.
It feels like the end of the "move fast and break things" era for prediction markets. They are being absorbed into the Borg of global finance. And honestly, it reminds me of what we discussed back in episode fourteen twenty-six about oil derivatives. We talked about the "paper barrel" and how the global economy runs on these invisible financial architectures rather than just the physical commodity. Now, we are seeing the rise of the "paper geopolitical event." The financial representation of the event is becoming as influential as the event itself.
That is a perfect parallel. In that episode, we looked at how the derivatives market for oil is many times larger than the actual physical market. We are heading toward a world where the notional value of bets on a conflict might exceed the economic output of the region in conflict. It creates this strange, detached layer of reality. But I want to go back to the retail side for a second. Even with all this institutional growth, the average person is still getting lured into these high-leverage CFDs. Do you think the rise of prediction markets will eventually cannibalize the traditional retail derivative space?
I think it might. If you are a retail trader who wants volatility and a chance for big gains, why would you play a rigged game like retail CFDs where the house often trades against you and eighty percent of people lose? Prediction markets offer something that feels more tangible. People understand politics and war, or at least they think they do, better than they understand the nuances of the Japanese Yen versus the Swiss Franc. There is a narrative element to prediction markets that is incredibly seductive.
Seductive, but also dangerous. The problem is that while people think they understand geopolitics, they often lack the technical literacy to understand how these markets actually work. They do not see the order books, they do not understand the impact of liquidity, and they do not realize that a ninety percent probability on a screen does not mean an event is a certainty. It just means that is where the money is currently sitting. There is a real need for market literacy here.
And that is the takeaway for me. We are living in a world where these probability signals are going to be everywhere. They will be on the news, they will be in your brokerage app, and they might even be used by your employer to make strategic decisions. But a market signal is just one piece of data. It is not an oracle. You have to look at who is providing the liquidity and what the regulatory constraints are.
And you have to look at the settlement mechanisms. For these blockchain-based markets, the oracle problem is huge. Who decides who won? If a contract is about whether a "major military strike" occurred, how do you define "major"? We have seen disputes on Polymarket where the resolution was contested for days because the wording of the contract was slightly ambiguous. When you are dealing with hundreds of millions of dollars, those ambiguities are not just annoying; they are a systemic risk.
It is the same issue we saw with those complex credit default swaps back in the day. If the contract is not airtight, the whole thing falls apart when the stress hits. But I have to say, seeing the transition from the CFTC trying to shut this down in twenty twenty-four to the U.S. Army using it as a threat assessment tool in twenty twenty-five is one of the fastest institutional adoptions I have ever seen. It shows you how desperate people are for a source of truth that is not filtered through a corporate PR department or a state-run media outlet.
It is a vote of no confidence in traditional information institutions. People are saying, "I do not trust the experts, but I trust the money." And in a conservative worldview, that makes sense. Markets are generally more efficient at aggregating information than committees are. But we have to be careful not to let the market become the only thing we look at. There are still human elements and black swan events that no market can predict because the people in the market have the same blind spots as everyone else.
Like we saw with the early days of the pandemic, or even some of the recent shifts in the Middle East. The markets are often just as surprised as the public. They just react faster. So, for anyone looking at this landscape, the practical takeaway is to use these markets as a hedge or a sentiment gauge, but never as a crystal ball. And if you are in the U.S., keep a very close eye on that conflict between federal preemption and state gaming laws. That is going to determine whether these platforms can actually survive long-term.
The New Jersey versus Nevada rulings are definitely the ones to watch. If the Nevada ruling holds and states can individually ban these markets despite federal approval, it effectively kills the national liquidity pool. You cannot have a functioning prediction market if it is fragmented into fifty different tiny pools. It would be a disaster for the "information finance" thesis.
It would definitely take the wind out of the sails. But with two billion dollars from ICE on the line, I suspect there is going to be some very heavy lobbying to make sure that does not happen. Wall Street does not spend that kind of money unless they are pretty sure the regulatory path is going to be cleared.
They are betting on the betters. It is the ultimate meta-trade. And with MiCA coming up in the E.U., we are going to see a very interesting split in how these platforms evolve. The ones that can handle the compliance load will become the new giants, and the ones that cannot will be pushed back into the shadows of the dark web.
Which is probably where some of the more ethically dubious contracts will end up anyway. It is a brave new world for derivatives, Herman. From "paper barrels" to "paper wars," the financialization of everything is moving at a pace that is honestly a little bit terrifying.
It is fascinating and terrifying in equal measure. But that is why we dig into this stuff. You have to understand the plumbing if you want to know why the water is changing color.
Well said. I think we have covered the spread on this one. Thanks as always to our producer Hilbert Flumingtop for keeping the gears turning behind the scenes.
And a big thanks to Modal for providing the GPU credits that power this show. They make the heavy lifting of our research and production possible.
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See ya.
