The Retired Investor: Betting on Elections Comes of Age

Place your bets, ladies and gentlemen. The odds favor Trump right now, but anything can happen in the topsy-turvey world of online betting. That's right, presidents have now entered the list of what Americans can bet on alongside sports games, horse races, and blackjack.

 

Last month, a federal District Court judge ruled that betting on election outcomes was neither unlawful nor considered gaming. The Commodities Futures Trading Commission had fought against this outcome claiming that this kind of betting could undermine confidence in elections and adversely affect election integrity. The ruling made election markets legal for the first time in 100 years.

 

That set off a rush by various betting companies to begin offering odds on the Harris-Trump presidential contest. The market quickly ballooned to over $2 billion in bets and is still climbing. Kalshi, a startup company that had brought the suit and prevailed against the CFTC in court, enables users to place bets on real-world events. Rivals, PredictIT and Polymarket jumped in with both feet with Polymarket the clear winner thus far.

 

However, since Polymarket is a blockchain company, users are required to place bets with cryptocurrencies. The site also blocks American users. That was not an ideal set-up for many Americans.

 

This week, a U.S. retail broker, Robinhood Markets Inc., entered the fray. It saw an opportunity and began offering election betting for U.S. citizens. The stock popped 3 percent on the news. I expect similar announcements from other brokers in the future.

 

The instant success of this new betting arena can be partially explained by what is happening in the traditional U.S. polling industry. Over the past two elections, the polls have got it wrong. In this year's super tight race, the polls show a dead heat between the two candidates. Many traders started looking elsewhere to get a leg up on their political future and make a few bucks in the process.

 

They increasingly looked to the betting markets. Elon Musk, the Tesla CEO and a big backer of Donald Trump, argued recently that the betting market is "more accurate than polls, as actual money is on the line."  After all, it costs you nothing to answer a series of poll questions any way you like, but betting your hard-earned dollars on one candidate or another is a far more accurate indication of an election outcome, or so the reasoning goes.

 

Former President Trump's lead over Kamala Harris continues to widen at 67 percent versus 33.7 percent on the Polymarket site with elections just around the corner. Odds flipped in Trump's favor on Oct. 4 — a sharp reversal from September. A week later he was leading by more than 10 points.

 

As Trump's lead expanded in the betting markets, equity traders began to buy stocks that would benefit from a Trump win and sell those that wouldn't. As a result, equity indexes have been climbing higher, anticipating not only a Trump win but as his lead widened, a red sweep of Congress. 

 

But before you take a flyer and follow others in assuming Trump is the winner, take note. Prediction markets are not the stock market. They are small, with little volume, and the odds can easily be moved by a couple of big betters.

 

Polymarket has already identified at least a few big bettors. One of which pushed the odds above 60 percent with a $20 million bet on Oct. 18. This bettor appears to control four of the six largest Trump-voting accounts on Polymarket. Another player has spent $7.22 million on betting "yes" on Trump shares with an unrealized profit of $256,000.

 

Do not assume these big-money bettors are in their positions until election day. It is feasible that experienced bettors could take profits before or on election day. Professional gamblers might choose to bank gains on their Trump positions rather than risk losing everything on a Harris win.

 

They may not even be making bets on who they think will win the election. If the odds go haywire (as they have recently} the professionals will take the other side and bet on Harris instead.

 

Kalshi says there are 1.5 times more people betting on Trump than on Harris. There is no question that Trump voters are fiercely loyal. The demographics might also influence the odds. The betting markets are largely a male-dominated arena. Women gamble far less than men and may not be as enamored as their male counterparts with Trump. In addition, some believe Trump bettors may be younger and more comfortable buying and selling crypto. They may also have experience using online betting sites, while others do not.

 

What happens if the prediction markets get it wrong and Harris wins? Wall Street and the Trump bettors will lose money, but the Harris players who bet on the proverbial "longshot" could clean up. In any case, for a certain element of the population betting on presidents is probably just as exciting as seeing their horse come in or winning at the virtual craps table. As such, I suspect election betting is here to stay.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.