Schwab is setting itself apart…

Nuance is rare in financial markets these days, which is why Schwab’s recent comments on prediction markets were so refreshing. In the Q1 2026 earnings call, CEO Rick Wurster drew a line that almost no one else in the industry has been willing to draw: A line between financially relevant event contracts that serve the public interest and pure entertainment gambling.

That distinction matters more than people realize.

When analyst Devin Ryan (Citizens JMP Securities, LLC) asked about prediction markets, Wurster didn’t hedge:

Devin, I think you hit the nail on the head in terms of how we think about it, which is we do differentiate between financial-related events and sports, politics, pop culture. At Schwab, we believe in the power of ownership and the power of compounding over time and owning equities, owning fixed income assets, being an investor over time and having that ownership leads to higher levels of wealth. And our goal as a company is to help our clients live their best financial lives. And so prediction markets that are not aligned to that are not something that we want to pursue.

Decrypt summarized it perfectly:

Rick Wurster sees a big distinction between speculation on Taylor Swift’s love life and the latest inflation numbers.

Paul Grewal doesn’t necessarily see it that way, but we do. The determination of whether something should be allowed or not depends on where it falls on a spectrum. The correct regulatory answer has never been “ban everything” or “allow everything.” The answer is–and always has been–somewhere in between those two elements.

For event markets in particular, we created an image for you: The top panel visualizes how event contracts are supposed to be evaluated. The next step is the placement of any event contract along this spectrum so a regulatory decision can be made. Below, we did this for inflation contracts:

The idea is simple.

• If a contract benefits society, it’s not gambling.

• If it’s pure entertainment, it is.

All event contracts are located somewhere on this spectrum. The inflation contracts can legitimately be used for risk management, so we place them (so does Wurster) on the socially beneficial side of the spectrum.

Wurster continued:

And if you look at the stats on the success of gamblers, they’re not strong and people generally lose money. And so as a company that is in business to help people live the best financial lives, we have kept sports and other things off to the side.

“People generally lose money.”

That’s a correct statement as evidenced in Dune’s “Polymarket Trader Cashflow PnL:

To be clear, that a large percentage of people losing money is not what makes it gambling. A company managing its exposure to inflation via event contracts may very well lose money also, the same way many people “lose money” on their car insurance. Successful management of a material risk is what they get in return, and that’s beneficial.

More broadly though, Wurster’s stance around separating socially beneficial contracts from entertainment vehicles is not only correct, it’s strategically brilliant.

The Option Schwab Is Quietly Buying

Inflation contracts are not the sexiest. Sports and parlays still dominate prediction-market volume. Crypto markets picked up some, but as of April 18, 2026, 90% of the volume (on Kalshi) was still sports + parlays. Remove sports and the industry craters. Remove sports and elections? The industry then becomes nothing more than a niche.

But if you extract the useful contracts–inflation, oil prices, certain corporate events–and embed them inside a Schwab-scale ecosystem, the calculus changes and they stop being toys and start being tools. An investor long Exxon might want a hedge tied directly to oil prices. Today they are using options. Tomorrow, they might prefer a binary event contract.

It’s not going to be Schwab’s best-selling product, but it doesn’t have to be. It will be a product that will maintain the company’s long-standing tradition of helping customers live their best financial lives.

Is this enough for Gen-Z? Wurster seems to believe Schwab is already winning the Gen-Z race, so perhaps it is. Wurster is effectively buying an option for Schwab–giving him a reputation card to hold in his back pocket. His nuanced view on prediction markets is arguably akin to an out-of-the-money option right now.

And if SCOTUS eventually cracks down on the entertainment side of prediction markets? Wurster will get to say, arguably, the four most valuable words in finance:

“We told you so.”

If the regulatory environment shifts, the option becomes deeply in-the-money overnight, Schwab becomes the responsible adult in the room and today’s out-of-the-money option comes to fruition.

If that’s the direction Wurster is headed, he is be planting the seeds for dominating the financial services sector for the next two generations.

And if he refines his messaging on this decade’s other financial darling, crypto, he will be optioning yet another category for substantial future gains.

Crypto: The Other Option Schwab Should Be Buying

Schwab’s new spot-crypto trading platform is another opportunity, but also another messaging risk. The press release starts strong with this quote from Jonathan Craig, Head of Retail Investing at Charles Schwab:

We know our clients want to conduct more of their financial lives at Schwab. With Schwab Crypto, clients who want direct access to the asset class can trade it alongside their other investments, while benefiting from the service, education, and research they expect from us.

So far, so good. Notice the careful wording. It doesn’t say one can invest in crypto. It uses the word “trade.” It’s intentional and it’s disciplined.

But as the press release elongates, the messaging begins to drift into confusion:

• “A holistic crypto investing experience”;

• “Digital asset investments”; and

• “Incorporat[ing] digital assets into their portfolios.”

Does Schwab view crypto as just another form of investing? That appears to be the case. In fact, customers that sign up for the e-mail newsletter are greeted with a similar message before they even click on it:

• Explore crypto investment opportunities and resources…

And if they actually scroll through that e-mail and make it to the bottom of the disclaimer, their goodbye finally appears:

• Due to the high level of risk, investors should view digital currencies as a purely speculative instrument.

What excites a customer is the first thing they see. The thing they should really know is in the fine print.

A good friend and I were discussing this exact same issue over Christmas break. He challenged me on my thesis and my proposed policy idea around labeling. His critique captured it perfectly: “Don’t companies already say what you want them to say–just in the disclaimers?”

That was a very astute observation, which is also the exact issue at hand. My response to him, which will also double as my reply to similar future feedback is:

Put it in the fine print, you protect yourself.
Put it in the headlines, you protect investors.

The way Schwab communicates its crypto trading platform to its customers is the best market example that drives that point home. If they were to simply flip that order, leading with clarity instead of burying it, they’ll win the next 50 years.

The Real Definition of Investing (and Why it Matters)

We have written extensively on why Bitcoin is not investing, so we will not rehash it here. Bottom line: Investing requires cash flows. No cash flows, no investing. That principle, which was uncontroversial a century ago, is now long forgotten. Buffett hanging up his cleats certainly does not help:

Schwab’s own educational content tries to separate investing from gambling, but it stumbles on one phrase (hidden in a post Craig published back in October 2025):

Investing, on the other hand, is the allocation of capital to a business or asset with the expectation that it will generate income or appreciate in value.

Not every purchase is an investment; the price has to be right, too. But the more perilous expansion to investing comes from the last three words: “appreciate in value.” Craig’s post was well-intentioned, but those last three words encapsulate where the entire modern confusion begins and certainly where I disagree.

The starting point of the confusion seems to be the fact that:

i) Stocks can be investments (at the right price); and
ii) You can make money on stocks in two ways (not necessarily exclusive): Dividends and price appreciation.

Here comes the inference that seems natural to many, but what is, at its core, simply a logical fallacy:

Since investable assets can appreciate in value, an appreciation in the value of any asset implies that the asset was an investable asset.

It’s true that a stock can appreciate in value, without giving you a cent in income. You can buy low, sell high, and voila–you made money. But remember, it’s the process that counts, not the outcome–that’s the core of investing:

If appreciation alone makes something an investment, then what about the following conclusions1:

• Gold is an investment;

• Crypto is an investment;

• NFTs are an investment;

• Baseball cards are an investment; and

• Beanie Babies are an investment.

I’m nearly certain that if I were to ask Craig whether he thinks Beanie Babies are an investment, he’d say no. Schwab, after all, has already discredited that idea:

The friends’ enthusiasm for the toys is contagious, and soon the demand for these cute stuffed animals, called Beanie Babies, is growing so quickly that people are treating them as investments.

Exactly. Notice the tone here, which is absolutely crucial: It’s not Beanie Babies are investments; but people are treating them as if they are. Treating something as an investment doesn’t make it one.

My stance on this is clear. The only coherent boundary for investing is the one finance has been using for a century:

Investing requires cash flows.
Speculation does not.

To be clear, I am not saying people shouldn’t buy those things, and by extension, it doesn’t mean Schwab can’t offer them. I simply mean that the boundaries should be clearly drawn. Limiting people’s choices is not the answer, arming them with clarity is:

Could Schwab decide to choose this path and bring its views about crypto speculation to the forefront rather than burying them in a disclaimer? Sure they could, and if they do, this could be a transformative move that separates them from the competition for the next two generations.

The Better Path: The One Schwab Is Already Halfway Down

Schwab’s own press release ends with a mission statement that contains the answer:

At Charles Schwab, we believe in the power of investing to help individuals create a better tomorrow. We have a history of challenging the status quo in our industry, innovating in ways that benefit investors and the advisors and employers who serve them, and championing our clients’ goals with passion and integrity.

I also believe in the power of investing. But to harness that power, we must first properly define it. I find it very difficult to adopt a definition that leads children to believe that they can invest in Beanie Babies.

If Schwab truly wants to challenge the status quo, they should complete this 3-step playbook:

• Step 1: Equities trading → Investing
  (if price < value)

• Step 2: Crypto trading → Speculation
  (offer it, but label it honestly)

• Step 3: Prediction markets → Risk Management
  (offer the essential subset only; label the rest as gambling and do not offer it)

Schwab is already doing Step 1 and Step 3. In actuality, they are also doing Step 2, but they’ve buried it so deep within their disclaimer language it’s hardly transparent. If Schwab were to take that additional step and flipflop the fine print to the headlines, they will become the industry leader around transparency:

Put it in the headlines, you protect investors.
Put it in the fine print, you protect yourself.

The con: Schwab may lose a few customers, sure.
The pro: Schwab becomes the alpha. They become the out-of-the-money option that can be exercised in the future for pure domination.

That type of transparency is what separates the wheat from the chaff. The long-term reputational benefit may very well outweigh the loss of a few customers.

Consider this: I’ve already speculated that we will be facing a financial crisis in the near future and that 2029 may be the year:

If we face that systemic crisis, with prediction markets and crypto leading the way, Schwab will have already taken the first step by distancing itself from event contracts that don’t serve the public interest (because they are non-essential: frivolous or recreational):

Full Court Press

Frivolous, Recreational or Essential? The CFTC's Missed Opportunity

Last week, we continued our coverage of the Kalshi v. CFTC case. We explained how The Court of Appeals for the D.C. Circuit saw through the ambiguity but the CFTC missed its moment…

Read more

a year ago · Lexicon Labs

If they take just one more step and label crypto as speculative? Not in a disclaimer, but in the headlines? If they can do that, Wurster and his executive team, and Schwab as a whole, become the authoritative firm that saw it coming, labeled it correctly and protected their clients.

That is how you dominate financial services for two generations.

Bottom Line: Transparency is the Alpha Move

I have always believed that the SEC should become a label regulator. We once hoped that the SEC would get there by 2027, but under the current administration, that is very unlikely to happen. It is also unclear whether it will happen with the next one. We started this blog with an aim to spark change, to achieve industry consensus that would eventually trickle into regulator action by 2027 (hence our blog name and logo).

It’s already April 2026, and perhaps that goal was too ambitious. So maybe the solution isn’t regulator-led, but corporate-led. And no company is better positioned right now than Schwab.

They already have the scale.
They already have the trust.
They already have a nuanced worldview.

They simply need the commitment to put the truth in the headline instead of the fine print.

One small step for Schwab.
One giant leap for Schwab.

The SEC and the CFTC announced a historic Memorandum of Understanding (“MOU”) (PDF) last month. It may be well-intentioned, but we believe it has the potential to deepen, not resolve, the confusion already spreading throughout the financial community.

Historically, the two regulators operated in clearly defined lanes. The SEC’s core mission is investor protection, so it regulates investable assets such as stocks and bonds. The CFTC’s mission is to “promote the integrity, resilience, and vibrancy of the U.S. derivatives markets through sound regulation.” Derivatives, by design, are not investment products; they exist to help investors manage the risks associated with their actual investments (or, more broadly, commercial interests). While this dual-track regulatory structure is unusual, it has served America well, as it has clearly been the world’s most successful financial market for the past half-century.

And we are far from the only ones raising concerns. Here is Elie Mishory, Chief Regulatory Officer and General Counsel, who left Kalshi to become the SEC point person for DOGE:

So what exactly could go wrong? Two scenarios seem particularly likely:

The Investing Confusion Grows

At this point, it is fair to say that America has lost track of what “investing” actually means. Why? First and foremost, because people are constantly bombarded with messaging that promotes everything from gold1 to crypto2 to prediction markets3 as investing.

Another looming issue: Warren Buffett will not be around forever:

Markets continue pushing society toward speculation under the guise of investing. At the same time, the most articulate—and arguably most successful—investor is preparing to hang up the cleats. Despite his best efforts, public understanding is objectively worse off than it was a century ago.

The confusion certainly is not new, it predates the United States itself:

LexBeyond

The Investing vs. Gambling Trap - Ep. 1

Welcome to our first episode of the LexBeyond podcast. We are really excited to have you here. Our hosts, Lex and Bianca discuss the Investing vs. Gambling trap and its potential ramifications. We’ve included some show notes for you below with a key timestamp. Enjoy…

Listen now

6 months ago · 3 likes · Lexicon Labs and Alper Ozgit

But at minimum, since the 1930s there has been a dedicated agency whose mission was investor protection. It made mistakes along the way, but it tried. With the SEC and the CFTC preparing to “tie the knot,” it is no longer clear who is responsible for that mission. According to Mike Selig, CFTC Chair, his agency has a role to play:

And this is where the confusion accelerates. The CFTC now appears to be adding investor protection to its mandate, even though virtually none of the products under its jurisdiction, prediction market contracts included, are true investments.

The Security or Commodity Myth Intensifies

Shortly after the MOU, the SEC and CFTC issued a joint interpretative release (Fact Sheet, Interpretative Release - SEC Version).

Here is some LinkedIn commentary:

The gist: Crypto is a digital commodity, not a security. Recall how Gary Gensler struggled with this question:

It was an unfortunate exchange. A Congressman, and not just any, but the Chair of the House Financial Services Committee at the time, asked the wrong question (“security or commodity?”). The Chair of the SEC, who had also chaired the CFTC, did not have enough command of the topic to correct the premise.

Is crypto a security? Or is it a commodity? That exclusivity is a myth, a myth debunked by three former CFTC Commissioners:

Full Court Press

The Security “or” Commodity Myth

If you are a parent, you likely encountered your children questioning the relevance of learning algebra or geometry, arguing that they may never use those concepts in real life. In a recent exchange with my own kids, they raised a similar concern, and I acknowledged that they might indeed rarely apply a particular theorem or framework, or solve an actua…

Read more

2 years ago · Lexicon Labs

McHenry asked Gensler:

There is a lack of clarity here, in the marketplace. Can you at least agree to that?

Gensler did not agree.

Gensler is no longer at the SEC.
McHenry has retired.
The Clarity Act is still fighting to exist—and may yet pass.

Meanwhile, the SEC is now characterizing some of its earlier actions as misguided:

This period brought about the current Commission’s resolution of prior cases that were not sufficiently grounded in the federal securities laws.

We agree that the SEC’s arguments were not the strongest. The agency sensed–correctly–that crypto is a minefield. But instead of addressing the core issue (that crypto is not an investment in the first place, which is the single most important disclosure), it tried to force crypto into the Howey framework. Howey does apply to crypto, but it needs refinement first (PDF). The SEC never did that work, so its litigation positions resembled a suit tailored for someone who was never measured.

The previous SEC may not have had the best legal arguments, but it likely had the right intentions. Now, those actions appear to be swept aside under the moniker of “innovation.”

And to be clear, we are not anti-crypto. Much of the media frames the debate as binary: Pro-crypto (and by extension aligned with one political camp) or anti-crypto (and aligned with the other). We reject that framing. It polarizes the conversation and treats policy disagreements like a sports rivalry. We’re pro-crypto when the technology is useful, and also pro-law because the investing public deserves protection. Both can be true simultaneously.

We are not anti-speculation either. This is a free country, and speculation—so long as it does not veer into gambling—is a perfectly legitimate choice, provided the American public understands what speculation means. Paternalism is often mistaken for prohibition. It can also be clarity. Despite its name, the Clarity Act and the work surrounding it achieves the opposite.

Nuance is disappearing from public discourse. Crypto has now been declared “not a security,” and with that, the most important protection drifts further out of reach. Declaring crypto a non-security does nothing to protect investors. How could it, when people purchase crypto believing they are investing, when in reality they are speculating?

There is a better way: The SEC could—and should—become a label regulator. We are not confident that it will choose that path anytime soon.

Prediction markets are hot.

And as usually happens when something really heats up, the misinformation starts flying. The latest example comes from Jason Trost, Founder/CEO of Smarkets, another prediction market:

He may be correct about industry consolidation, but that’s not the issue here. The problem is this claim:

Gambling vs. non-gambling is a false debate. Gambling is a motivation, not a product. A sports bet is a financial contract. The “gambling” aspect comes from horrible pricing and a user’s willingness to pay it.

No. That’s not how U.S. law works.

Gambling vs. non-gambling is not a false debate. The gambling characterization determines whether a product can legally reach the market. In that sense, gambling is a product category–because it has to be. The law cannot hinge on unknowable user motivations. People’s intentions are not observable, measurable or administrable. So the tests must be tied to the product itself.

A quick reminder: The legal process diverges depending on whether you’re dealing with games or futures.

When it comes to games, the skill vs. chance spectrum is what matters:

When it comes to event contracts–and here Jason is correct that a sports bet is a financial contract–the relevant test is the public-interest determination:

Jason also misfires when he says:

You can gamble on stocks.

No, you can’t Jason. No matter how much it might feel like gambling, it’s not gambling. You can speculate, absolutely--but that doesn’t make it gambling. Here is the correct framework for this:

• Price below value + margin of safety → Investing

• Price below value but shrinking margin → Speculative investing

• Price above value → Speculation

• Buying blind with no valuation → Speculation

Gambling on stocks? Never. That is simply not a thing.

LexBeyond

The Investing vs. Gambling Trap - Ep. 1

Welcome to our first episode of the LexBeyond podcast. We are really excited to have you here. Our hosts, Lex and Bianca discuss the Investing vs. Gambling trap and its potential ramifications. We’ve included some show notes for you below with a key timestamp. Enjoy…

Listen now

6 months ago · 3 likes · Lexicon Labs

And here’s why the distinction matters: if we collapse investing and gambling into the same bucket, we collapse the regulatory frameworks that keep markets functioning. Gambling law is built around consumer protection and paternalism; securities law is built around disclosure and capital formation. Mix them up, and you either (1) suffocate legitimate financial products under gambling rules, or (2) let gambling products slip through the cracks by pretending they’re “investments.” The entire system depends on keeping these categories clean. That’s why the law draws boundaries, and why the “investing is gambling” narrative isn’t just wrong, it’s dangerous.

Jason is right about this though:

You can invest in sports.

You absolutely can. But a sports bet is not an investment. You need an entirely different product for that–something most of the world has never seen before.

And we have that.
Stay tuned.

We haven’t done a Misinformation Mondays post in a while, but something so egregious landed on our desk that it demanded a response.

The first Misinformation Mondays Award of 2026 goes to…

Jeff Edelstein.

He recently wrote an opinion piece titled Everything is Gambling and We’d be Better Off Admitting It.

There are so many issues with his article that we couldn’t possibly litigate them all here, but his core thesis, as you can surmise from the title, is this:

Every decision you make in which you can’t know the outcome is, on some level, a bet. You’re putting something on the line, be it money, time, emotional energy, your digestive system, what have you, and hoping it works out. You might have information. You might have skill. You might have a gut feeling. But you don’t have certainty. And the absence of certainty is what makes it a gamble.

And there it is: The grand confusion, again–Conflating uncertainty and gambling.

The proliferation of this reasoning is precisely why it feels like everything is gambling nowadays. When people spread the notion that those ideas should be collapsed, everything becomes a gamble. Buying a house? A gamble. Eating lunch? A gamble. Crossing the street? A gamble. By definition, the future is uncertain because it is difficult to predict. So if uncertainty equates to gambling, then from one point to the next, your entire life would be a gamble.

But that is not analysis–its wordplay.

The practical world doesn’t work that way. People must make decisions under uncertainty. Families buy homes. Investors buy stocks. Collectors collect. Walkers cross the street. Traders trade. Economic activity requires forward-looking decisions, and because of that, societies had to develop actual gambling laws to distinguish between legitimate economic activity and gambling.

And that brings us to the real problem.

Gambling Is a Legal Term–Not a Vibe

Edelstein’s misinformation is twofold:

1. Conflating uncertainty and gambling; and

2. Using “gambling” as a moral judgment.

This confusion is older than the country itself. Alexander Hamilton struggled with it, trying to distinguish “honest Men” from “unprincipled Gamblers.” The ambiguity only grew from there, and the consequences worsened. So much so that our inaugural LexBeyond podcast was dedicated to this very topic.

LexBeyond

The Investing vs. Gambling Trap - Ep. 1

Welcome to our first episode of the LexBeyond podcast. We are really excited to have you here. Our hosts, Lex and Bianca discuss the Investing vs. Gambling trap and its potential ramifications. We’ve included some show notes for you below with a key timestamp. Enjoy…

Listen now

5 months ago · 3 likes · Lexicon Labs

So what is gambling then? The truth sits somewhere between “everything is gambling” (Edelstein’s position) and “nothing is gambling” (an unserious statement).

The topic is complex, but the basics can be delivered in three pictures. Internalize these and you’re in the top 1% of the curve.

The Stock Market is Never Gambling

Regardless of how it feels, no matter how many losing trades are made, it isn’t gambling. For every Warren Buffett disciple who actually takes time to value businesses, there are a hundred others simply buying stocks with zero understanding of cash flows. A lack of serious analysis and valuation. Just vibes.

Is that reckless? Yes.
Is it gambling? No.

There’s already a word for reckless trading: Speculation.

Think of this like Al Pacino’s line in Scent of a Woman: “But not a snitch.” He wasn’t endorsing everything Charlie did, he was identifying the one thing that mattered the most.

Same concept here. The stock market isn’t the Church, and traders aren’t nuns and priests. But put potential fraud aside, and at the end of the day, there are only two things you can do in the stock market:

• Investing; or

• Speculation.

The transition zone between them? That is known as speculative investing:

The concept is not complicated:

• Price below value + margin of safety → Investing

• Price below value but shrinking margin → Speculative investing

• Price above value → Speculation

• Buying blind with no valuation → Speculation

Two quick reminders:

• There’s no such thing as “value investing.” That’s a myth. (podcast)

• Crypto (including Bitcoin)? Never investing, pure speculation.

Games - The Skill vs. Chance Spectrum

Assuming the prize and consideration legs are satisfied–you pay something of value and receive something of value–how do we know whether a game is gambling?

Simple: Skill vs. chance.

Chess is pure skill.
Roulette is pure chance.

Poker sits near the middle.

The difficulty is not in the framework–it’s the measurement. It would be difficult for society to agree on, say, poker is 55% skill and 45% chance because one can’t even agree on whether the Earth is round. And on the off-chance that there was consensus on it, some states would classify it as a game of skill and others as a game of chance because the skill threshold you see above is set differently by each state.

But don’t confuse measurement difficulty with framework ambiguity. Variations of the framework have been in place since England began legislating gambling in the 14th century. America inherited the English common law foundation, including statutes like the Statute of Anne. From there, it continued to evolve and the level of skill is undisputedly the threshold question now.

Futures–The Hard One

This is the most complex category, but the image helps internalize it.

Futures also sit on a spectrum. In fact, you could redraw the game spectrum from above and simply replace “skill” with “economic purpose, ” and “chance” with “entertainment.” Same idea, different visuals.

So why is this one harder?

Because the real fight isn’t how to determine when a futures product becomes gambling–it’s whether we’re supposed to determine that in the first place. We’ll detail this in tomorrow’s post over on our sister blog, Full Court Press. In fact, it’s so important that we will be exploring the topic in detail in our upcoming book: Predictable.

But allow us to give you a quick history:

• Pre-1974: The informal test was hedging utility. Futures existed for risk management.

• 1974: Congress codified the economic purpose test. Products needed economic purpose to be approved.

• 2000: Congress inexplicably repealed the test and dismantled the approval process. Exchanges could self-certify.

• CFTC’s response: Ignored the repeal and continued using the economic purpose test as their North Star.

• 2010: Congress added the word “gaming” to the statute (but not “gambling”), left it undefined, and cleaned up parts of the mess.

• CFTC’s response: Doubled down (with even more law and legislative history on their side), utilizing economic purpose as their guiding principle.

• 2024: The CFTC shattered the glass. As Selig made clear on Odd Lots, the agency no longer sees itself as a merit regulator.

So, are prediction markets gambling?

Through the economic purpose lens: Most of them, yes.
Through Kalshi’s own lens: also yes.

But here’s the tension:

• “Gambling” appears nowhere in the Commodity Exchange Act.

• For 175 years, America tried to keep gambling separate from futures trading (the CFTC’s view also, not just ours).

• Congress never defined gambling (with respect to futures trading)–even after the biggest economic crisis in modern history.

• The CFTC is clinging to that ambiguity like it’s the last lifeboat on the Titanic (they became the promoter and are no longer a bona fide regulator).

And the smoking gun?
The statute does contain the word “gaming.”

If gaming = gambling (our view of what Congress meant), the economic purpose glass still holds.

If gaming includes sports games (Kalshi’s earlier view), the CFTC is still a merit regulator–at least for sports gambling.

If neither? Then for the first time in 175 years, the boundary between futures and gambling disappears and may never return.

You decide, America.

The stakes are real. The definitions matter. And the confusion Edelstein promotes–collapsing uncertainty into gambling–is exactly how we lose the ability to regulate anything with coherence.

Yesterday, we released a podcast walking you through the colorful history of bucket shops– the 19th and early-20th-century upstarts that became a formidable competitor to organized exchanges. The exchanges went on the offensive and litigation became their primary weapon. It wasn’t cheap, and it wasn’t quick (PDF):

[P]rotracted litigation … had cost the [Board of Trade] about $120,000 and had spanned 25 years, 248 injunctions, 27 jurisdictions, 20 cities, and 11 states.

So, yes, it took a while. But then SCOTUS killed it.

Almost.

While the Supreme Court’s Board of Trade decision in 1905 (PDF) marked the beginning of the end for bucket shops, the shops themselves tried desperately to hang on. They were down, but not out.

Then came 1907.

The 1907 Panic

We’ll dive deeper into the 1907 Panic in our next LexBeyond podcast (Ep. 15), but here’s the short version. Banks and trusts were at the center of the crisis. J.P. Morgan famously locked the bankers in a room, pledged a significant amount of his own capital, and forced a coordinated rescue. It worked–and cemented his status as a national figure. This panic also set the stage for the creation of the Federal Reserve.

While it’s rightfully remembered as a banking panic, there’s evidence that excess speculation at bucket shops magnified the crisis. From Sapien’s Financial Weapons of Mass Destruction: From Bucket Shops to Credit Default Swaps (PDF):

While CDSs may only be about a decade old, they are linked to a fundamentally similar, equally risky arcane financial instrument, which helped bring down the market in the Panic of 1907, known as the bucket shop.

The more one studies the rhetoric at the turn of the 20th century, the more today’s playbook starts to appear recycled.

Parallel #1 - Democratization of Access

At first, the exchanges weren’t particularly worried about bucket shops:

At first, as the Board of Trade’s official historian Charles H. Taylor noted in 1917, “they were not viewed with particular alarm” but regarded as “a sort of democratized Board of Trade, where the common people could speculate.”

Let’s rewind that.

A sort of democratized Board of Trade…

On one side: The financial establishment–old money, organized, regulated (at least somewhat).

On the other: The newcomer– new money, shut out of traditional channels, promising opportunity for everyone.

Sound familiar?

It should. It’s also virtually the same message we heard in Armstrong’s Davos wrap-up:

Tokenization will democratize access to high quality investments, as there are about 4B adults who don’t have access to these markets today (the “unbrokered”).

The great equalizer. Access for the common people. Democratization.

The playbook doesn’t change. Only the characters do.

Parallel #2 - A Call for Inclusivity

Hochfelder again:

Bucket shop proprietors exploited the public’s uncertainty about the difference between speculation and gambling to present themselves as respectable brokers who catered to the small investor. In its 1899 Guide to Investors, Haight and Freese claimed that its facilities were “designed for the benefit of THE MILLION” who lacked the capital and experience to invest with high-priced brokers.

Bringing “the unbrokered” in. Inclusive and empowering on paper. But as Lex and Bianca aptly put it, this was predatory inclusion long before the term existed.

The disruptor’s perspective: The old guard just doesn’t get it. There are millions of people who want this:

Millions. And they want to break free.

Parallel #3 - A Desire For Freedom

In 1906, Merrill A. Teague wrote a four-part exposé on bucket shops. The Alabama Baptist reprinted some of Teague’s excerpts (PDF):

Teague’s stance was clear, but he still gave the other side a voice and incorporated it into his reporting. Enter C. C. Christie, the so-called Bucket Shop King (PDF):

The Chicago exchange was “the biggest bucket shop on earth.” He accused the major exchanges of being grasping monopolists seeking “to crush the independents. It is a case of Greed versus Freedom.”

Freedom. Independence. The misunderstood “investor.”

It’s a familiar refrain. The bucket shops understood it in 1899. Organized exchanges didn’t. And if you ask the “Prince of Prediction,” 125 years later, they still don’t.

Guys like you who are a lot older… may not understand the demand of modern day investors.

Besides earning Coplan a middle finger, that quote revealed the bucket shop psychology. It doesn’t matter whether we are in the 1800s, 1900s or 2000s. The “modern investor” is always misunderstood, always oppressed, always in need of liberation.

And of course, Coinbase just wants freedom for America, too:

Final Thoughts

The echoes between bucket shops and today’s prediction and crypto markets aren’t academic curiosities, they’re warnings. Every generation rediscovers the same tension between access, prudence, innovation and exploitation, freedom and guardrails. Language evolves, technology improves, but the underlying pitch never changes:

This time is different and this time it’ll really be for everyone.

History is less forgiving. It reminds us that democratization without prudence will not expand your opportunities–it will expand your risk. When the cycle turns, it’s always the “common people” who pay the highest price.

As we march deeper into the world of prediction markets, tokenized assets and frictionless speculation, the question isn’t whether these tools will democratize finance. They might. The real question–the one that bucket shops answered the hard way–is whether democratization without prudence leads to empowerment or to the next preventable crisis.

History has cast its vote multiple times. The only question remaining is whether we act before the cycle repeats.

The Davos Fracture revealed the competing visions for the future of American finance.

Speculation By Design exposed the regulatory gaps around crypto and prediction markets.

We ended that piece with a provocative question:

Are we there yet?

Are we driving toward a financial future that democratizes and protects?
We’re not. If anything, we’re drifting in the opposite direction.

Today’s piece explains why, and with it, we close this unofficial three-part series of this week.

A New Era of Coordination

The SEC has had Project Crypto for several months. Now that Selig is fully in charge, the CFTC has unveiled its own initiative: Future-Proof.

And last week, the new heads of both agencies stood side-by-side to tell America how they intend to cooperate toward a shared vision.

Spoken on a high level, in theory, that sounds all well and good.

In practice, the SEC and CFTC’s grand coordination effort mistakes permission for prudence. It functions as regulatory cover–an implicit green light for American financial nihilism at a time when the public needs more protection than ever. The underlying theory appears to be based upon: America wants to trade everything, so let’s give them everything, prudence be damned.

Beneath the forward-looking language lurks all the hallmarks of a reckless expansion, and ultimately a major crisis. We are convinced the road ahead leads to disaster.

To understand why, we need to look through a historical lens. A former SEC Commissioner’s reflections from 1982 offer a surprisingly sharp parallel to present day regulatory affairs.

Growing Pains

Historically, the SEC and CFTC have not been close collaborators.

The SEC is the older sibling –born from the wreckage of 1929 and formalized through the Securities Exchange Act of 1934.

The CFTC arrived four decades later in 1974, created by the enactment of the Commodity Futures Trading Commission Act of 1974. It wasn’t a response to a single crisis per se, but to a rather messy patchwork of state regulations, decentralized futures trading and confusion over what constituted a commodity. Congress centralized oversight and gave the new agency broad authority. After the 2008 recession, it was granted even more power.

The U.S. ended up with a globally-unusual, two-tiered structure. Canada’s Ontario Securities Commission (OSC), for example, oversees securities and derivatives under one roof. The path the U.S. chose has sparked turf wars from the very start.

To understand how these early tensions were viewed in real time, it’s worth revisiting the contemporaneous reflections (PDF) of former SEC Commissioner Bevis Longstreth, writing in 1982.

The regulatory siblings were arguing. Counterintuitively, that may have been healthy.

Inter-agency Competition

Longstreth took the long view with startling foresight:

Looking, then, to the future, the most significant aspect of the accord is that it opens the way for competition among financial instruments across jurisdictional lines.

He could have said this in 2022 and would have been just as apropos.

He continued:

With many products in the pipeline, one can safely assume that… the growth in financial futures and options will continue apace.

A safe assumption, indeed.
Ladies and gentleman: We give you crypto futures and binary options on sports events.

He noted that the profile of the market was shifting:

Ten years ago, traders in the futures markets consisted almost entirely of commercial groups engaged in business-related hedging and a small number of professional speculators. Today, increasing numbers of non-professional hedgers and speculators are being attracted…

At least there were some hedgers back then. Today’s event contract markets are dominated by pure speculation.

Longstreth also predicted competition between products overseen by the two agencies. That prediction came true–though not in the way he imagined. The CFTC barely “approves” anything anymore; the CFMA of 2000 and its self-certification process hollowed out that function.

But the deeper question remains: Is inter-agency competition good or bad?

Longstreth offered two scenarios.

Scenario 1: Productive Tension

With lines of communication open, the agencies may benefit… One would hope that… the agencies would tend to adjust their regulatory schemes to adopt the most effective and least costly means of protecting the public and otherwise serving the public interest.

This is the optimistic view: Competition as a laboratory for better regulation.

Scenario 2: A Race to the Bottom

Longstreth quoted former Fed Chair Arthur Burns:

"[T]he present system is conducive to subtle competition among regulatory authorities… to relax constraints… to delay corrective measures…”

Longstreth also quoted former Senator William Proxmire, who introduced legislation to…

…remov[e] the incentive…“to regulate all institutions at the lowest common denominator level…”

Lowest common denominator.
Sounds eerily similar to the minimum effective dose of regulation approach the CFTC is adopting.
You know, the framework Coinbase praises:

Predicting the Future

Longstreth ultimately chose optimism:

Regulatory differences will be eroded… but not at the expense of the investing public. (emphasis added)

His reasoning:

First, significant competitive advantages derived from regulatory differences cannot last. They will prove intolerable. Second, my experience with these agencies suggests that each, motivated by the public interest and a congruent instinct for survival, will stand by its public trust, despite the temptation to resolve the differences through a “competition in laxity.” (emphasis added)

Motivated by public interest? Doubtful.

Instinct for survival? Perhaps, but survival of what, exactly? The agencies or individuals preparing for the revolving-door landing pads?

As for the investing public not being harmed? The harm is already widespread. And the dangerous echo chamber (podcast) calling everything an “investment” only accelerates it.

Longstreth’s optimism feels increasingly misplaced.

The Video That Won’t Age Well

It’s true that the last administration ignored some rules and laws on the books.

The Biden-Era SEC took a tough stance on crypto–but lost the war because it misunderstood what investing means or how that definition flows through the statutes.

The Biden-Era CFTC took a tough stance on prediction markets as well– but lost because it misunderstood what gaming means.

The goodwill may have been there. The linguistic clarity was not. The American public, the real stakeholder, paid the price and will likely continue to do so through this administration, and potentially the next.

Under the banner of modernization, the current administration is doing worse. They’re not even pretending. Crypto, fine. Prediction markets? Fine. Everything is just fine and dandy.

The laws were misunderstood before. They’re being ignored now.

Ex-commissioner Pham’s advice:

[S]peed is of the essence... [Y]ou craft good, thoughtful rules, and then those will stand up in court when they get challenged.

Translation: The industry is moving fast and breaking things, so as regulators, we need to move fast too. What they’re doing is questionable at best, so expect legal challenges. Courts no longer defer to agencies, so the best insurance policy is Congress.

Make no mistake: This is not about “future-proofing” America.
It’s about “future-proofing” the industry–and the regulators who are supposed to protect the public.

Closing Thoughts

This isn’t complicated.

The SEC should function as a label regulator, making clear that crypto is not an investment product.

The CFTC should return to its roots, drawing a bright line between gambling and futures.

Instead, the SEC ceded ground to the CFTC on crypto–on a pair of false premises:

1. that crypto is an investment; and

2. that if something is a commodity, it cannot also be a security.

Past enforcement actions were mischaracterized as “regulation by enforcement,” and the Biden-era posture was dismissed as political theater. Both narratives were wrong.

Meanwhile, the CFTC–after sitting on the sidelines not for a year but for seven–has reemerged not as a cautious steward, but as an active proponent of sports gambling. The proposed 2024 rulemaking on event contacts and the staff advisory are now officially gone:

Worse, the guardrails for Americans are nowhere to be found. What could go wrong?

The result is exactly what Longstreth warned about: Competition in laxity.

And this time, it’s not subtle.

It’s open, coordinated and justified under the banner of modernization.

The cost will not be borne by the agencies.
It will not be borne by the platforms.
It will be borne by the “investing” public–the very group the SEC and CFTC were created and tasked by Congress to protect.

On this present course, it seems history is doomed to repeat itself.

We are confident we have the solutions.

But before we get there, a quick detour–one that sets the stage perfectly.

Stay Tuned recently released an excellent podcast episode: The 1929 Stock Market Crash: Can It Happen Again? featuring Andrew Ross Sorkin. In it, Bharara, former U.S. Attorney for SDNY, wrestles with the same tension we highlighted yesterday.

He reflects:

[O]rdinary Americans should be able to participate in the market, and should be able to participate in interesting, new, lawful mechanisms to make money and to lose money. That’s on the one side, democratization.

On the other hand is a somewhat, say, paternalistic desire, I guess I was formerly on the paternalistic side, to protect people from being ripped off, and from scams, from crashes.

Exactly. Two words matter most here: lawful and protect.

And yes–crypto entered the chat immediately.

Bharara observes:

There’s a lot of talk about who should or should not be able to invest in crypto.

Stop the tape.
That single sentence represents the entire ballgame. It’s the source of confusion, the mislabeling and the regulatory paralysis. This is precisely why protection is needed from the get-go, and that’s where the existing laws are supposed to come through.

We continue to return to the same unavoidable conclusion:

One cannot invest in crypto. One can only speculate on it.

Failing to adhere to this disclosure is denying the public the protection it needs and that the law already promises.

Bharara frames the dilemma correctly: Democratization vs. protection, but seems unsure about the path forward. In our view, the solution is straightforward once you recognize that democratization and protection are not opposing forces.

We can have our cake and eat it too.

• Democratize crypto trading. Don’t ban it. Let people buy it if they want to.

• Protect crypto traders. Tell them the truth: They cannot invest in crypto.

The SEC needs to become a label regulator, ASAP.

How much speculation is too much?

This is where the conversation reaches a choking point. ARS puts it very plainly:

[Y]ou want the speculators, but you don’t want it to get too crazy. And how do you sort of keep that?

Bharara follows:

How many speculators do you want?

And that leads directly to two questions that always travel together:

• Who has jurisdiction?

• Should the regulator allow or prohibit the trading?

The answer: It depends entirely on the asset.

A picture is a thousand words, so here’s the picture–followed by our commentary:

Stocks

We use stocks as the lead example, but this category includes all long-lived, cash-flow-generating assets.

• Cash flow → ability to be valued

• Buying cheap (margin of safety) → investing

• Buying expensive (ignoring valuation) → speculation

• Buying in the middle → speculative investing

All three behaviors are lawful. The key is not to confuse them–and if you want to invest, you must do the work.

Regulatory solution: The SEC as disclosure regulator. Already exists.
History: Securities laws (1933-34) created this framework after the Great Depression.
Regulatory obstacle: What do you do when stocks get expensive?
Answer: Nothing.

Speculation to one person may be investing to another. The information is already disclosed so people can arrive at their own conclusions. The government simply cannot regulate euphoria.

Crypto

Crypto is simply the most visible example of a broader category: Non-cash-flow generating assets (commodities, art, collectibles, etc.)

• Cash flow → none.

• Value → yes (supply/demand)

• Valuation → impossible

• Investing → impossible

• Speculation → universal

And this is all fine–as long as the labeling is correct.

Regulatory solution:
The SEC must regulate spot crypto through labeling. It hasn’t happened yet.1 It will either happen proactively or reactively after the next crisis (2029 would be quite the irony).

Legal reality:
Investment contracts already cover crypto. Anyone claiming otherwise is ignoring the law’s protective purpose.

“You can invest in crypto” is a harmful phrase–it’s a material misrepresentation and far too many academics, lawmakers and scholars are using it. That’s the exact opposite of what FDR had in mind.

Regulators’ role:
Spot → SEC
Futures → CFTC

But not all crypto futures belong on the market.

“Will Bitcoin hit 75,000 by 5pm tomorrow?” is not a genuine futures contract. This is mindless speculation, a bet on a random event with some chance of losing everything at expiration. Speaking of event contracts…

Event Contracts

The 800-pound gorilla in the room. Not innovative. Quite old in fact, with a deep history (podcast).

Event contracts do have cash flow–but only once, at expiration, and is contingent on whether it resolves in your favor or not. That all-or-nothing payoff potential violates the second cardinal rule in investing: Margin of safety.

Therefore:

One cannot invest in binary event contracts, one can only speculate on them.

Ignore the dangerous echo chamber (podcast) calling them “investments.” It only muddies the waters.

How much speculation is too much?
Futures markets require speculators, but contrary to prediction market optimism, that doesn’t mean that anything goes. The determination is subjective, but the responsibility is clear: the CFTC must do their job, by acting and drawing that line.

Sports is a commodity.
Arguments to the contrary are motivated by a desire for state-regulated sports betting, not by the law.

But that doesn’t make sports event contracts permissible. Even when the economic purpose provision was repealed, it continued to be CFTC’s North Star. Then Congress tightened the screws with the Special Rule in Dodd-Frank. Gambling and futures markets have been separated for 175 years–and started mixing in earnest just over 375 days ago.

The Courts will decide.
The correct defendant is the CFTC.
The correct legal framework is APA (our amicus PDF).
And yes, we are very likely headed to the Supreme Court.

Our predictions: The odds do not favor prediction markets.

Final Verdict

This isn’t complicated.

• Speculation isn’t the problem—misclassifying assets is.

• Different assets require different rules.

The law already knows the difference.

Are We There Yet?

Every parent is familiar with this question. (Thanks Bart & Lisa Simpson!)
Now America gets to ask it too.
The picture painted above represents the balance we believe is right–the balance between democratization and protection. We don’t need new laws to achieve this. The laws we need are already on the books (podcast), they’re simply being misapplied.

We just need to follow them.

So… Are we there yet?
We’re not.
If anything, we’re drifting in the opposite direction.

We’ll explain why in our next post.

When Nelson Mandela addressed Davos in 1992, the meeting had a clear purpose. South Africa was transforming faster than its institutions could adapt, and global markets needed a way to price a future that had not taken shape yet. Davos functioned as a translation layer: Political legitimacy on one side, capital on the other. Mandela didn’t offer policy detail; he offered something more valuable in that moment—legibility.

It was a triumph. Not just for Mandela and South Africa, not even just for Davos. It was a victory for humanity. Since 1971, the forum has convened world leaders, and some of its most meaningful social contributions came from informal coordination: The early scaffolding of the G20, the launch of GAVI, and countless quiet agreements that nudged the world toward stability.

Disagreements were normal. They were even productive. However, they were almost always civil in nature. The underlying assumption was that progress required a shared table, shared norms and at least a shared respect for progress.

That era appears to have evaporated.

You are full of shit.

Apparently, this is how Jamie Dimon feels about Brian Armstrong as he uttered those very words to his face. At Davos. While Armstrong was having coffee with Tony Blair, the former UK Prime Minister.

This… is… not… normal.

The 2026 theme was A Spirit of Dialogue. The Dimon-Armstrong exchange didn’t exactly embody that spirit.

The Flashpoint: Stablecoin Yield

The immediate trigger is narrow but consequential: Stablecoin yield. It’s the latest front in the TradFi vs. Crypto war. Crypto platforms argue that users should be able to earn yield, yield that will almost certainly trump what banks are offering their own customers. Brian Moynihan, CEO of Bank of America, warned that almost $6.6 trillion in deposits could flee the banking system.

But stablecoin yield is a symptom. The root cause is deeper: TradFi and Crypto no longer share a vision for the future of American finance. As the Wall Street Journal aptly paraphrased the landscape: This is a fight over the architecture of the financial system itself.

TradFi’s worldview is built on guardrails, boundaries shaped by decades of fraud, crisis and reform. Securities laws emerged because dishonesty was rampant in the 1920s, when half of the newly issued securities were worthless (PDF). The CFTC was created in 1974 to centralize futures oversight. After a deregulatory detour in 2000, Congress tightened the screws again with Dodd-Frank ten years later.

None of this means that banks or other traditional finance players are inherently moral actors; far from it at times. The history of American finance is littered with scandals, misconduct and outright fraud–often perpetrated by the very institutions now warning about crypto’s excesses. The point isn’t that TradFi actors are moral paragons; it’s that the United States built an architecture capable of detecting, punishing and containing the bad behavior. Boundaries were tested, sometimes ignored, occasionally shattered, but they mostly held.

The symmetry cuts both ways. One narrative was that Bitcoin is primarily a money laundering tool, nothing more. Then, Joe Kernen (CNBC) offered an alternative narrative: that Bitcoin is used far less for money laundering than the U.S. dollar. When we stress-tested these competing narratives, we rejected both and found something more mundane: The levels were roughly comparable. In other words, neither side gets to claim moral high ground by default.

When it comes to trading, however, which is the most direct window to the consumer, crypto and prediction markets reject the boundaries America worked hard to build and maintain. Their worldview is simple: If something can be traded, it should be traded. Anything goes.

Josh Sterling, former CFTC official (who was also on the shortlist to run the CFTC), now counsel to Kalshi, captured this ethos perfectly:

I think everybody’s a professional trader that is in these markets. And I think a lot of these people trade a lot of things. And I’ll tell you why that’s true, because if you look at this industry — the industry of trading, I’ll call it — every company out there that I represent, even the ones that I don’t, are trying to build the everything app on their phone because that’s how people aged 25-to-35 view their portfolio.

They want to trade stocks, zero data expiry options, crypto, FX, events, horses. You name it, they want to trade it because they view that as their financial portfolio. So this isn’t your mom or your dad calling E.F. Hutton to trade stocks at $20 or whatever. This is people trading anything and everything that they can.

Michael Selig, now in charge of the CFTC, wasted no time undoing some of the work the CFTC had already proposed as guardrails (more on this in our next post).

One app. One “portfolio.” Stocks, crypto, events, sports gambling–all collapsed into the same interface.

In other words, investing, speculation and gambling collapse into one giant headache.

And here we go again. Scratch the surface of the Davos quarrel and you return to the same four words–the lexicon of our thesis:

Almost every major disagreement in law and finance is rooted in these four words: Investing, Speculation, Gambling and Gaming.

The Real Question Beneath the Noise

Strip everything else away and one question remains:

If people want to speculate recklessly and gamble mindlessly, should the government facilitate that? Doesn’t the government, after all, represent these very people?

Kyla Scanlon argued (paywall) recently that the “Lambo now” narrative is misplaced. People are not necessarily speculating because they are greedy; they’re speculating because they’re hopeless. They believe the American Dream has failed them (Some of the banks did play their part in Americans coming to this conclusion). Or as Lex and Bianca, our LexBeyond hosts aptly pointed out in our latest podcast:

The S&P 500 promises you might be comfortable when you are 65, crypto promises you might be free next Tuesday.

Sure. But do people truly understand the risks they’re taking? Again Lex and Bianca:

It’s one thing for people to take risks, it’s another thing entirely for them not to know they are taking them.

That’s the core of the frustration from Dimon and other stewards of TradFi. Expanding the menu is one thing. Expanding the menu with items that are unsafe for consumption and failing to disclose that, is something else entirely.

The Real Debate

Democratization vs. paternalization. That’s the exact question Preet Bharara, and Andrew Ross Sorkin grappled with in a recent podcast.

We’ll be back tomorrow with our takes on that podcast, stay tuned!

Key Takeaways

• The phrase “value investing” unintentionally creates the illusion that multiple types of investing exist.

• This linguistic flaw leads the public to treat non‑cash‑flow assets—including crypto—as legitimate investments.

• Regulators inherit the same flawed categories, producing inconsistent treatment of crypto assets.

• Crypto can be speculation and still be an investment contract—the two concepts are not mutually exclusive.

• The result is a public that receives neither clarity nor protection, all because a single word—value—fractured the definition of investing.

• The crypto boom is not a financial mystery; it is a linguistic inevitability created by decades of mislabeling.

As many others do over the holidays, we took a short respite to be with friends and family and we hope that you had some time to do the same. Now that we are fully recharged and back to work, let’s pick up where we left off. 2026 will be instrumental, we know it.

Our last post before the break was The Value Investing Myth, a seven-step conceptual framework designed to be evergreen. But theory comes alive through application, so without further ado, here is the crypto edition. Using the exact same framework, we will illuminate the hidden road that begins with value investing and ends with crypto exuberance.

If you want to understand how myths take hold, read on.

Step 1 - “Value investing” becomes a type of investing
A definitional fallacy.

On December 18, 2025, Seth Klarman (the billionaire hedge fund manager who runs Baupost) published a piece on Warren Buffett in The Atlantic (paywall). Andrew Ross Sorkin praised it:

It’s certainly a worthwhile piece. Last year, we ran the numbers to truly appreciate what Buffett has done - this simple comparison says it all:

• $100 invested in Berkshire Hathaway in 1964 → $5.5 million

• $100 in the S&P 500 → a Toyota Corolla

• $100 in gold → a 12-year-old Mazda1

The math is undeniable: Comfortable retirement vs. brand new car vs. used car. Buffett is the Tom Brady of investing. Naturally, the world is searching for the heir apparent, often in the wrong places:

As the saying goes: “This cover didn’t age well.”

Business magazines are no longer trusted for separating true kings from flings; we call it the Forbes effect.

The problem isn’t a particular crypto entrepreneur gone astray. The deeper issue is people trying to apply Buffet’s framework to crypto. Here’s a real example from Reddit:

I am going to attempt to parallel it to mid to long term crypto investment. (emphasis added).

Reddit is the top source for LLMs, almost twice as much usage as Google and nearly 7x as LinkedIn. If you put “value investing” into your chatbox, it will find these sources, regurgitate the falsehoods and repackage it, trying to convince you that applying Buffett’s concepts to crypto is rational.

Klarman doesn’t believe crypto is an investment. What he doesn’t realize is that a critical flaw in his own terminology is precisely what fuels crypto exuberance.

Step 2 - The public infers new categories of investing
A rational—and predictable—consequence.

When ARS praised Klarman’s piece, we had to weigh in:

The issue is subtle, but simple.
When you use qualifiers, the human brain infers the existence of alternatives.

• “Tall kids” → implies short kids.

• “Hot girls” → implies not-so-hot girls; and

• “Fast horses” → implies slow horses.

All of these inferences are perfectly rational. Adjectives create subsets.

“Value investing,” is a little trickier because, while technically not an adjective, the word “value” functions as one. It partitions the investing universe.

• “Value Investing” → implies other types of investing.

If you are into geometry, here is another way to think about this issue. We also created a quick video to illustrate it:

Step 3 - New instruments are interpreted as investing
Conceptual categories applied to practice.

Once you create a category called “value investing,” it’s only logical to then fill the space that is created.

First, it was growth investing.
Then it was momentum investing.
Then gold, art and collectibles.

And finally, the new shiny toy–crypto.

Klarman looks at the entire landscape and objects:

…these items generate no present or future cash flows… they should be regarded as speculations, not investments.

But the public is reacting rationally to the categories he’s objecting to.

If the titans of finance–David Einhorn to Seth Klarman, from Howard Marks to Joel Greenblatt embrace this concept of “value investing,” then logically they must subscribe to the belief that there are alternative types of investing. That linguistic slip created the empty space that crypto later filled. It wasn’t the first tool that did so, but it was the most aggressive invader.

Here’s the real problem: Even when regulators tried to be skeptical, they still adopted the same flawed terminology. In 2023, the SEC urged “caution about crypto investing,” but by using the word investing at all, they reinforced the very misconception they were trying to warn against. The caution wasn’t the issue. The misdefinition was. By accepting the premise that crypto belongs in the investing universe, the SEC unintentionally validated the myth. The result is the public being floated an “acceptable” fallacy. Our stance around labeling is still sorely needed: Crypto is not an investment.

Step 4 - …but some of these instruments are not investment contracts
Regulatory posture.

Finance question:
Is crypto investing?

Legal question:

Is crypto an investment contract?
The legal question determines whether protection applies.

Under Chair Gensler:

• Bitcoin → not a security;

• Ether → ambiguous; and

• Everything else → “maybe”

Under Chair Atkins:

• Bitcoin’s privilege extended to memecoins; and

• Then to the entire industry.

The SEC’s stance evolved the same way Samantha Jones (Sex and the City) described Jerry Smith’s career progression.

The “not-a-security” ladder now looks like this:

1. Bitcoin

2. Memecoins

3. The industry

Step 5 - The opposite is true: Non-cash-flow-generating assets are not investing
Our position.

A simple four-step chain of reasoning:

1. No cash flows → No intrinsic value

2. BITCOIN has no cash flows → BITCOIN has no intrinsic value

3. No intrinsic value → Not investing

4. BITCOIN has no intrinsic value → BITCOIN is not investing

If you revisit the 1920s and 1930s, you wouldn’t be able to convince anyone that one could invest in Bitcoin. Even stocks were in the doghouse back then.

So what changed?

“Value investing” took hold.

It ended up overriding the factory settings of investing, reducing it to a style and muddied the waters.
By branding themselves so heavily as “value investors,” they inadvertently implied the existence of other, equally valid types of investing–growth, momentum and eventually crypto.

Step 6 - …but some may still be investment contracts
Also our position.

Can something that is not an investment, still be an investment contract? (i.e. some crypto)
Yes.

• The term “investment contract” exists to protect the public–especially when buyers don’t understand what they’re buying.

• Does the Howey test matter?
  Absolutely. Investment contracts flow through it.

• Is there an alternative reading of Howey that preserves case law and still classifies most tokens as securities?
  Yes. More on this soon. Stay tuned to our Full Court Press newsletter on Substack.

Step 7 - The public receives neither clarity nor protection
The inevitable result.

Klarman has done well for himself. He calls investing “value investing.” Why should we care?

His fallacy doesn’t necessarily hurt him. He doesn’t operate in the same space he helped create. Since cash flows are meant to accrue to the investor sooner or later, without the need for a buyer, the patient investor who doesn’t have any capital constraints will not suffer as much from the fallacy.
But almost everyone else operates in that space. Some may end up making money. Others won’t. Either way, they are not investing and worse, they are not aware of that.

If this generation openly said: “We’re screwed, the American dream is dead, so we’re going to speculate,” that would be one thing. Financial nihilism can still be a rational choice.

But financial nihilism disguised as safety?
That’s simply unacceptable.

Linguistic flaws, born from “value investing,” pushed us past the line where individual freedom ends and public harm begins. This is so because clarity must precede liberty.

“Value investors” created their own philosophical prison by marketing themselves too effectively. In the long term that may not matter. In the short term, even they feel the impact because the fallacy is hurting them from a business perspective. But the real losers are the ones that end up speculating endlessly thinking they can be the next Warren Buffett or that their moonshot is coming and their lambo is around the corner.

Klarman got almost everything right, but fell one step short. Unfortunately, that missed step has transformed finance for the worse. Ironically, the word “value” has destroyed so much value.

Do You Want More?

We’ve produced extensive material on the value investing myth. We explored the dark alleys and tested in the lab and have found the one path that will lead us back to sunlight. This post is a good place to start.

Prefer audio?
Start with LexBeyond Ep. 6: The Value Investing Myth.
Episodes 7 and 8 continue that series.

Next up on LexBeyond: Seth Klarman–the brilliant thinker who couldn’t bring himself to take the final step and conclude that value investing is a myth.

Introduction

Investing is one of the few disciplines where clarity of language matters as much as clarity of analysis. Yet, many of the biggest disputes in law and finance trace back to four deceptively simple words:

Investing, Speculation, Gambling, and Gaming.

At the top of this hierarchy sits a subtle but consequential definitional fallacy: the notion that “value investing” is a distinct category. This single linguistic error has shaped how generations of investors think about markets—and its consequences reach far beyond the textbooks.

How Conceptual Errors Propagate: Seven Steps

Conceptual errors rarely remain confined. They ripple outward, influencing perception, regulation and practice. Here’s the seven-step pattern:

1. “Value investing” becomes a type of investing

A definitional fallacy.

Imagine a simple geometry question: What does everyone think of equal-sided squares?
The phrase ‘equal-sided’ is redundant. A square already has equal sides.

“Value investing” works the exact same way.
The word value adds nothing to the definition of investing. Treating it as a distinct style is a categorical error.

2. The public infers new categories of investing

A rational—and predictable—consequence.

Once one group brands itself as “value investors,” it implies the existence of other types of investing. The public, following this cue, infers additional categories. The inference is entirely rational—and predictable.

3. New instruments are interpreted as investing

Conceptual categories applied to practice.

When multiple investing categories appear, new instruments get slotted into the framework. Regulators and even legislators take note. The conceptual map becomes the regulatory map–even when the instruments don’t meet the original criteria.

4. …but some of these instruments are not investment contracts

Regulatory posture.

Categorizing non-cash-flow-generating assets as “investing” is one thing.
But legally, are they investment contracts?

If yes → public protections apply.
If no → they don’t.

Recent regulatory and legislative trends lean toward no.

5. The opposite is true: Non-cash-flow-generating assets are not investing

Our position.

Investing requires intrinsic value.
Without it, the activity is not investing.

Once “value investing” became a style, the public’s understanding of investing blurred. Growth, momentum, meme and more broadly, speculation of all stripes began to masquerade as investing, even when they lacked fundamental justification.

6. …but some may still be investment contracts

Also our position.

A product can fail to qualify as investing yet still qualify as an investment contract under the law. The term exists to protect the public, whether the public needs full and fair disclosure of material information (20th-century finance) or full and fair disclosure that would ensure that the public understands what they’re purchasing (21st-century finance).

Statutory language and legislative intent matter.
Precision in definition ensures protections are applied correctly, not assumed.

7. The public receives neither clarity nor protection

The inevitable result.

It all began with “value investing.”
By branding themselves too effectively, they created a philosophical prison: One that diminished their own value proposition and misled the broader market.

New “investing categories” emerged.
Speculation was mislabeled as investing.
Regulators responded to the wrong problem.

Failing to ensure that the public knows what they are buying contradicts both the text and the spirit of the law.

Conclusion

Most major disagreements in law and finance stem from definitional slippage. Clarifying language restores the foundation for sound reasoning, better regulation, and more informed investing.

Investing, properly understood, is inherently about value.
Treating “value investing” as a distinct style is a conceptual trap.
Recognizing this is the first step toward restoring clarity—for markets, regulators and investors alike.

To paraphrase Neil Armstrong:

One misstep for “value investors,” one giant descent for investing.

A Note on Access

Ideas that clarify thinking, sharpen judgment and correct misconceptions should be accessible to everyone. This argument—showing how the term “value investing” has been misused—is most valuable when read, shared, and reflected upon, not locked behind a paywall.

So, we decided to remove all the paywalls.
You now have free access to F27, forever.

• America’s trajectory: Despite market highs and regulator optimism, public sentiment remains fragile and pessimistic.

• Lessons from 1929: Congress reacted late but ultimately gave the public the tools to distinguish investing from speculation.

• Crypto regulation: The SEC cannot act as a merit regulator for cash-flow-generating assets, but it can, and should serve as a label regulator for non-cash-flow-generating assets.

• Prediction markets: The gambling vs. gaming confusion sustained them; the investing vs. gambling narrative is the next hurdle. The responsible way out hinges on linguistic precision.

• The next century may be tougher: Crypto + prediction markets = potential crisis. A 2029 crisis would be a 100-year irony but recovery may be more difficult this time.

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Our nation is approaching its 250th anniversary. It has been a remarkable ride, but the question looms: Will U.S. dominance continue or fall by the wayside?

The mood is uneasy. Kyla Scanlon recently published Everyone is Gambling and No One is Happy, arguing that the “vibecession,” a phrase she coined in 2022, still persists. Economic pain is real, driven by cognitive overload and eroding trust. Even Kalshi made its way into her essay:

Kalshi’s co-CEO, Tarek Mansour, recently stated that the “the long term-vision is to financialize everything and create a tradable asset out of any difference in opinion.”

Financialize everything???? Every disagreement, every uncertainty, every future outcome - all of it becomes a betting line?? This is Marx’s commodity fetishism taken to its logical endpoint. It is difficult to have solidarity when every interaction is a transaction and every opinion is a tradable asset.

Scanlon is clearly not a Kalshi fan. We commented to remind her of the root cause that doubles as our thesis:

Almost every major disagreement in law and finance is rooted in these four words: Investing, Speculation, Gambling and Gaming.

The middle class feels the squeeze and the pessimism is real. Yet SEC Chair Paul Atkins struck a very different tone just a couple of weeks ago.

SEC Chair Paul Atkins Rings the Bell at the NYSE

He also delivered a speech titled Revitalizing America’s Markets at 250 (video of full speech, written remarks). In his speech, Atkins tied America’s success directly to investing:

Before the United States was a nation, it was an investment.

He reminded us why the securities laws were enacted:

Shortly before the Securities Act became law, President Franklin Roosevelt explained his vision for this seminal statute in a message to Congress. He rejected the idea that the federal government should be a merit regulator, which is the notion that the government approves an offering of securities as sound for public investment because it expects their value to increase. Instead, President Roosevelt sought to protect investors through a disclosure-based regulatory regime—the idea that companies offering securities to the public should provide all the important information about those securities.

That framework remains true. But how does it translate to the 21st century? Here we diverge sharply from the SEC. Their mission is to protect investors, but they are not taking a position on what “investing” means. That silence begs the question: How can you protect a group of people if you don’t define who is in the group in the first place?

If our thesis is correct, the next 250 years may not resemble the first. Most Americans are being set up to lose.

Lessons from 1929

Andrew Ross Sorkin’s new book 1929: Inside the Greatest Crash in Wall Street History--and How It Shattered a Nation revisits the era. His Too Big Too Fail was excellent, and this promises to be another landmark:

Sorkin is now on Substack, too! And his welcome message was heavily commented on, including this commenter who captured the urgency:

This commenter is absolutely on the right track, but allow us to reframe.

Crypto + Prediction Markets = The Next Crisis

This two-headed creature shares one body. When historians look back on 1929 and the next crisis in tandem, they will identify the exact same root cause for both: Lack of sunlight.

1929: Lack of Disclosures → Investing and Speculation Blur → The Great Depression

• ~Half of the newly issued securities were worthless.

• Investing requires cash flows; without transparency on cash flows and associated risks, valuation becomes tricky and speculation masquerades as investing.

• Congress eventually identified the problem, enacted disclosure laws and stepped aside.

• The point was not to prevent manias, but to give investors the information needed to properly distinguish between investing and speculation. As former SEC Chair Jay Clayton noted: “We don’t regulate… euphoria.”

The Crux: Better Late Than Never. Congress was reactive, not proactive. Ultimately, they gave the public a fighting chance to separate investing from speculation.

2008: Crypto Arrives → Speculation Becomes Investing → Crisis Brewing?

• 2008 - Satoshi Nakamoto publishes the Bitcoin white paper (PDF).

• Satoshi avoided pitching Bitcoin as an investment, but the public still embraced it as one.

• The SEC, tasked with protecting investors, failed to let the sun shine on crypto.

• Their finance stance on Bitcoin is flawed, preventing them from making the best argument to support their legal position. They argued Bitcoin was an investment, but not an investment contract. It’s the other way around: It’s not an investment, but an investment contract.

• Litigation followed (for some of the other coins)–some wins, some losses. Eventually many crypto cases were dismissed when Trump returned to office.

• In the SEC’s eyes, Bitcoin was never a security. According to Atkins, most crypto tokens are not, either.

This disconnect makes a crisis inevitable. Prediction markets only compound the risk. Kalshi even went on-chain recently to offer speculators tokenized prediction markets. A double whammy.

The Crux: The SEC misses the nuance. It cannot be a merit regulator for cash-flow-generating assets, but it can, and should be, a label regulator for assets without cash flows.

2024: Prediction Markets Arrive → Gambling Becomes Trading, Sometimes Even Investing → Potential Crisis Compounds

For over 100 years, U.S. policy held firm: Futures markets are for legitimate trading, not gambling.

• The first crack appeared in 2000, when the CFMA repealed the economic purpose test.

• The CFTC informally upheld it–until 2024, when they decided to disclaim the authority they have on event contracts on all contingent events, and turned the case into a definitional dispute.

• Kalshi seized the opening: Sports event contracts = gaming, election contracts ≠ gaming.

• It worked. Now, Kalshi eyes the even bigger prize–nationalized sports gambling. So now, sports event contracts ≠ gaming, either.

The Crux: Linguistic precision remains critical. Gambling vs. gaming confusion sustained prediction markets. The next narrative, investing vs. gambling, could define their survival. It’s a trap (podcast), but the ambiguity is good news for prediction markets who slid into investing DMs.

When Will the Next Crisis Hit?

It’s a matter of when, not if. Nobody knows the timing and predicting it is a fool’s game. Still, 2029 would be quite the 100-year irony:

If the finance gods have a sense of humor, 2029 might be the year. Great Depression Reloaded–exactly one century later.

The deeper concern is that America is being duped and may find it even more difficult to bounce back this time. The headwinds are everywhere:

→ Gains from technological progress and education may not repeat;
→ The economy is arguably more fragile and hyper-connected;
→ Financial literacy is low, confusion is high, and linguistic precision remains at a premium;
→ Regulators are failing the public on crypto and prediction markets;
→ 24/7 trading and “modernization” of disclosure rules risk erasing hard-won protections;
→ Gambling is more prevalent than ever;
→ The national debt has reached catastrophic levels;
→ All three ratings agencies have downgraded the U.S. sovereign credit rating, increasing the possibility of default;
→ Mental health challenges are rising;
→ Reverse brain drain may begin, especially into China;
→ China is investing in AI the right way; and
→ Social safety nets have largely eroded.

A perfect storm? Challenges for America means opportunities for others. China, in particular, is attracting their talent back to the homeland and continues to make progress in core infrastructure for AI, the new foundation of future power. If the stars align, they may eclipse America.

We are as invested in this country as anyone. We genuinely hope we are wrong. But what if we are right?

Bottom line: If we are right, most everybody loses, most everybody in America at least. It will be painful to watch people suddenly realize that this was all preventable, just as our nation’s previous crises were.

2016 was a banner year for both the casino gaming industry and for AGA. For one, the industry has continued its upward growth trajectory, once again setting a new record for gross gaming revenue. In addition, our industry took major strides into becoming ever more mainstream. A presidential debate was held in Las Vegas, a former casino owner was elected president of the United States, and both the NFL and NHL approved franchises to be located in Las Vegas.

Commercial casinos operated in 24 states. Add tribal, racetrack and riverboat casinos and the number swelled to 40. Commercial casino gaming had finally shaken off its post-2008 recession woes, delivering a record-setting year:

Casinos were everywhere–commercial, tribal, riverboat, you name it. Sports gambling (wagering on single game outcomes), however, was confined to Nevada. Adam Silver, NBA Commissioner then and now, had already penned his infamous New York Times op-ed Legalize and Regulate Sports Betting, calling for reform. With PASPA headed to the Supreme Court, the AGA saw its golden opportunity:

The AGA is honored to harness this momentum and lead the advocacy efforts of the newly formed American Sports Betting Coalition (ASBC), a diverse alliance of law enforcement groups, elected officials and policy organizations that believe in the need to overturn America’s sports betting ban.

It even filed an amicus brief (PDF), passionately arguing for regulated sports gambling:

The AGA—like the majority of sports fans and many leaders in law enforcement—believes it is time to reexamine the nation’s outdated sports-betting laws.

The problem? Sports gambling, was–and still is– a federal issue. States lacked jurisdiction. To expand its reach, the AGA needed states to encroach into federal territory. So it leaned on a “state rights” argument before SCOTUS. However, the case law it cited did not support its position. In fact, we called them out in our own amicus brief (PDF):

As an initial matter, there appears to be a fairly universal consensus that gambling and gaming are equivalent, and the terms are commonly used interchangeably. The American Gaming Association (“AGA”) correctly observes that “[t]raditionally, gaming regulation has been a matter of state and local concern,” but later asserts that PASPA, a law about sports gambling, is problematic because it “contradicts this tradition of federal deference to state gaming laws.” Brief of the American Gaming Association as Amicus Curiae in Support of Petitioner at 18, Gov. Christie et al. v. Nat’l Collegiate Athletic Ass’n et al. (Nos. 16-476 and 16-477) (November 2016). The only case cited by AGA in support of its argument is Greater New Orleans Broad. Ass’n v. United States, 527 U.S. 173 (1999), which according to AGA asserted that: “Federal policy is ‘to defer to, and even promote, differing gambling policies in different States.’” Id., at 187. However, the full sentence shows that this Court made this statement in the context of lotteries and casino gaming: “That Congress has generally exempted state-run lotteries and casinos from federal gambling legislation reflects a decision to defer to, and even promote, differing gambling policies in different States.” Id., at 187.

Our plea for linguistic precision was not heeded and PASPA was repealed. The AGA garnered a couple of mentions in the Supreme Court opinion (PDF) and many states joined in on the gold rush. For 6-7 years (sorry, couldn’t resist), it looked like a triumph.

Until it didn’t.

Now the AGA has lost the narrative and is on the defensive. It opposes prediction markets. It broke up with DraftKings and Fanduel (see our LexBeyond podcast Ep. 2). The AGA is even running anti-prediction market ads:

Source: US iGaming Hub

Kalshi has the states, tribes, and the AGA exactly where it wants them–clinging to a jurisdictional argument that has never genuinely existed. States have never had jurisdiction over sports gambling and may never.

Casino gambling was the golden goose: widespread, steady and socially rooted. Sports gambling was the shiny prize, limited to Nevada and the AGA wanted it all. Instead of nurturing the goose, they tried to cut it open and take the instant gold.

The result? Fierce competition and a shift in consumer behavior. Casino gaming, even with all its flaws, is still a social event: gamblers get dressed up, travel, interact with dealers, chat with strangers, host parties, enjoy drinks and even a steak dinner. Sports gambling, by contrast, is mostly solitary and sedentary–gamblers become couch-bound, phone in hand mindlessly clicking away and pissing away money they likely couldn’t afford to lose.

The states are in quicksand. Early legal victories seem unlikely to hold up and instead of chasing short-term gains, states, tribes and the AGA should be focusing on the long-term viability of casino gambling. The genie is out of the bottle–it will never be 2024 again.

Unless the gaming constituency changes course, it may never be 2017 again, either.

But make no mistake: Bloomberg is no Forbes. When the confusion stems from centuries-old debates, nuance may be lost; that’s understandable. Forbes, however, seems less concerned with nuance and more with spotlighting whoever is “hot” in the business world at the moment. Snap a photo of the entrepreneur making waves–regardless of how those waves were made–and slap it on the cover. It’s the business journalism equivalent of the basketball cliché: Shoot first, ask questions later.

The list of Forbes 30 Under 30 selections that aged poorly is quite long. Entrepreneur Chris Bakke, who has multiple exits under his belt, (including one from Elon Musk), frequently highlights these missteps:

Forbes’s response to the debacle:

As a news organization, Forbes lists capture some of the most prominent people and companies that have profound impact at the time of publication. When fortunes change or new details are discovered, we are among the first to report on the news.

And again:

Forbes lists are a ‘snap shot’ of prominent people at that moment in time. The names mentioned below were on our radar (and many other media outlet’s radar) because they were already raising tens—or hundreds—of millions of dollars for top investors.

In other words: Forbes doesn’t care what’s under the hood. It’s a popularity contest, not a rigorous ranking of businesses built on substance. Once again: Shoot first, ask questions later.

Is that acceptable? We suppose it depends on what you want or expect from a top tier business magazine. Forbes claims its Under 30 lists are vetted by editors and “industry-leading judges.” But vetted under what standards? From where we sit, Forbes appears to have little to no filtration. Is the following acrostic too harsh?

Fraud
Or
Regulatory-
Based
Entrepreneurial
Success

To be clear, this critique isn’t aimed at the hardworking entrepreneurs who make this list. Many are principled builders who gave everything to their ventures. We recently corresponded with Chia Jeng Yang, who reached out to us after reading our Kalshi’s Gambit post; he’s smart, respectful, insightful and appeared on a regional 30 Under 30. This is a new relationship and our first impression is that people like him deserve more recognition. But when Forbes places genuine builders alongside multitudes of fraudsters and regulatory arbitrageurs, it dilutes not only its own brand but theirs as well.

This creates a classic adverse selection problem. Forbes supposedly has more information about the pool than individual candidates. Yet if candidates believe one bad apple will spoil the bunch, they may decline participation. If enough principled entrepreneurs sit out, what remains are those unconcerned with reputation–already not the best “apples.”

Being on the Forbes list should be an accomplishment. It should open doors, serving as a victory lap for sweat equity. But if for every two principled entrepreneurs there’s one bad actor (Bakke’s estimate), the reputational benefits must be weighed against the reputational costs:

Whether 35% is accurate or not, the blunders are undeniable. This brings us to Forbes’s latest cover–will this be yet another negative checkmark?

Shayne Coplan and the Regulatory Wave

Coplan was also on 60 Minutes:

Right out of the gate, Coplan described Polymarket as:

It’s a site where you can basically bet on current events.

Should we appreciate his honesty? Coplan isn’t even pretending that he is running a gambling outfit. By contrast, Kalshi’s CEO, Tarek Mansour, constantly oscillates between describing his platform as gambling and as financial innovation. Dustin Gouker has the receipts.

This reality that Coplan’s honesty reveals, on the other hand, is beyond debate. Just last week, we criticized Bloomberg for painting the entire prediction market industry with too broad a brush, calling it all “wagers.” As a matter of law, that’s simply not true. Yet here is the CEO of one of the largest platforms, reinforcing that very narrative himself.

This raises an even bigger question: If Coplan is just running a giant betting website, what exactly is he doing on the NYSE trading floor? It seems to always come down to the incentives, doesn’t it? Intercontinental Exchange, the company that owns the NYSE, invested up to two billion dollars in Polymarket, recently valuing it at roughly $8 billion, pre-money. Arguably, the valuation is even higher now. But, is it really worth $8 billion?

Valuations tend to hinge on belief. Do you expect SCOTUS to follow the law where it leads, prioritizing legal analysis over market enthusiasm–knowing that their decision will echo across presidencies for decades? We do. And when we tried to estimate the odds internally, we discovered a bit of a variance. But ultimately, two facts stand out:

• America worked hard at keeping gambling out of the futures markets for over a century and that preference is codified in law; and

• The majority of Polymarket’s event contracts are, by Coplan’s own admissions, bets.

Depending on your probability estimate, Polymarket’s valuation may be closer to zero than to $10+ billion. That’s how important definitional clarity is. As we detailed in our latest podcast, this isn’t even a billion-dollar issue, it’s a trillion-dollar one.

Are we surprised Coplan made the cover? Not really. To be clear, we’re not suggesting that he will end up in prison. Under the Commodity Exchange Act (“CEA”), offering a prediction market involving gaming isn’t criminal–it’s simply something the CFTC should take action on. They haven’t, and likely won’t. The proper grievance lies with the regulator itself, not Polymarket or Coplan.

Ironically, under a strict reading of the statute, someone like Jason Robins may be more exposed.1 Offering sports event contracts on a designated contract market (DCM) is less problematic than offering substantially similar contracts off-exchange. Historical realities, like the fallout from the 2008 crisis, help explain why.

Legal voices have already warned that federal preemption could upend state-regulated sports gambling. Brogan Law suggested that as a possibility:

An equilibrium that relies solely on the lack of action by a federal agency implies no right or privilege, and so if these state regimes were ever challenged on this basis, I believe there would be a robust, sound argument that they are preempted.

The Nevada Resort Association echoed this sentiment when it followed the preemption argument to where it leads and concluded:

To the extent that the sports bets offered by Kalshi are considered to be swaps and so the CFTC has exclusive jurisdiction over such swaps, then this could even require other types of sports bets to be only offered on a CFTC exchange.

And in a striking moment before the 3rd Circuit, the state attorney representing the state of New Jersey presented the real “come-to-Jesus” moment:

…[S]waps have to be traded on CFTC-regulated exchanges, on a designated contract market. And in fact it’s a federal crime to trade them outside of those scenarios. And so what we have here, is a definition by Kalshi, that would essentially make all casinos and sportsbooks currently federal felons. (emphasis added)

The state attorney continued until one of the Judges interrupted:

It seems that the definition of swaps is actually quite broad. And I understand you point out some things that seem undesirable to your side but…

Incremental inaction by the CFTC has been pivotal for that undesirable outcome:

• It allowed daily fantasy sports to survive, which was instrumental in getting Murphy to be heard by SCOTUS;

• It enabled state-regulated sports betting, post-Murphy;

• It opened the door for Kalshi and Polymarket;

• And now, it may have paved the way for nationalized sports gambling–the biggest prize of all.

Catch one of these waves and you just might land on Forbes’s cover.

The Wire Act Reminder

A quarter century ago, Jay Cohen went to prison for offering “sports futures.” The basis? The Wire Act. The law hasn’t changed, but government posture has. DraftKings now edges closer to offering sports event contracts through a federally regulated exchange–yet Cohen, who arguably invented this product, was jailed and now cannot even be hired due to “lack of experience.” Someone please make that make sense.

Strip away the regulatory cover, and isn’t Coplan simply repeating history here by copying Cohen’s business model? In theory, nothing has changed, in practice, everything has.

Based on the current regulatory postures, if there were a prediction market on the “Prince of Predictions” facing prison time, we’d take the “no” at nearly any price.

Forbes Could Be a Lead Generator For Regulators, Instead it is Highlighting the CFTC’s Own Failures

Chris Bakke captured this irony well:

Once, the Forbes list might have helped regulators identify wrongdoing. Today, they may highlight which regulators aren’t enforcing the laws they should.

Four years ago, the CFTC scrutinized Coplan’s business, and now he is featured on the cover of Forbes. Why? Because, in our opinion, the CFTC failed on two of its key decisions:

• It abandoned the economic purpose test after 25 years; and

• It failed (PDF) to act on sports event contracts.

Will the Forbes’s curse strike again? SCOTUS may have the final say.

Last week, Bloomberg Markets ran a piece titled Why It’s Harder to Tell Gambling From Investing Nowadays (paywall). Frankly, it’s becoming more difficult to read these articles without frustration. We seem to be stuck in an endless loop: Uninformed media publishing misinformation, respected outlets regurgitating them, and the cycle repeats.

We need a reset.

A reset requires acknowledging that some of the concepts we’ve carried for decades–sometimes centuries–are unsolved confusions. It’s a false dichotomy, a trap we unpacked in our inaugural LexBeyond podcast last week. The investing vs. gambling dichotomy.

These are the kinds of topics we explore here, on our sister blog Full Court Press and on LexBeyond. We dive deep, assume nothing, stress test everything and share our discoveries with you.

With that background, let’s dissect the Bloomberg Markets piece. Why is it more difficult to separate gambling from investing nowadays? The answers are hiding in plain sight, within the article itself.

1. The Subtitle Problem

With a tap on your phone, bet on football, elections and the price a stock will hit just hours from now.

Why is nuance so difficult to grasp? If everything is called a bet, then nothing is a bet. That’s an extreme position.

Dustin Gouker captures the right approach here:

Some prediction markets are worthy and they should be permitted. At the same time, some are unworthy and should be prohibited. The policy answer, then, is not all-or-nothing, it lies somewhere in between. The volume, however, is much closer to one extreme than the middle: As Gouker often notes, volume is heavily skewed toward sports event contracts. Those are the contracts that should never have existed in the first place.

The “everything is a bet” is an extreme position that only deepens confusion and hands ammunition to the other side. Its extreme nature not only makes the other extreme, “nothing is a bet,” equally plausible, but it also makes it more powerful because the latter receives significant support from two critical incentive dynamics:

• Psychological: People feel better calling themselves investors rather than gamblers or speculators.

• Financial: The desire to speculate on sports is innate, so most investors treat legal risks as a cost of doing business, funding platforms in hopes they grow “too big to fail.”

When the subtitle is misleading or flat out incorrect, can we really expect the rest of the article to deliver disciplined reasoning? You’ve likely seen this style of clickbait across the board–finance is no exception.

2. Options As Investments? Where Did That Idea Come From?

Bloomberg highlights Saha:

...a 25-year-old law student, tapped a phone app and bought $128 worth of bullish options, the right to purchase shares of uranium producer Cameco Corp. for $80 within the week. If they surged above that level, he could make many times his initial investment. If they didn’t, the options would expire, worthless—a total loss.

Stocks can be investments. Options, the types Saha trades, are contracts on stocks. Perhaps that proximity led to the mistaken idea that options themselves are investments. But options were designed to be portfolio insurance, not additional investments as part of your basket.

Unlike your health insurance, however, options can be purchased without owning the underlying asset. That wasn’t always the case with insurance either; 18th century England allowed “life insurance” on politicians and other celebrities, paying out on their deaths. The insurable interest rule emerged from that debacle, requiring a genuine stake in the outcome.

Prediction markets love to brand themselves as “innovations.” In reality, they’re older than America–even with contracts outside of sports.

Back to options: Many use them as pure speculation plays, which is just fine, they just should not be sold and marketed as investments because they surely are not that.

3. The Fading Line Between Investing and Gambling–Who’s Responsible?

Bloomberg claims Saha’s extracurriculars illustrate the fading line. Yet the record shows his goal is simple:

The goal is just to make my money grow… If it happens to grow large enough that I can pay my tuition with it, that’d be great.

He’s certainly permitted to do that, isn’t he? Using the options (pun intended) available to him? If one app (looking at you @Robinhood) consolidates every money-making possibility, that’s a policy problem, a legal problem, and a financial literacy problem. It’s not Saha’s problem.

Making money is not the same as investing.

4. PolyMarket: A Betting Platform or More?

In October, New York Stock Exchange owner Intercontinental Exchange Inc. said it would invest as much as $2 billion in the cryptocurrency-­based betting platform Polymarket.

Yes, Polymarket and Kalshi have hosted questionable contracts (i.e. people throwing sex toys during sporting events), and many others. Still, there are a few legitimate contracts out there.

Once the term “bet” is applied universally, platforms and participants can weaponize the ambiguity. A mostly-gambling platform can rebrand itself as “investing,” while investors can dismiss legitimate hedging as “gambling.” The result is a proliferation of gambling, but the result would be different if the statute was interpreted properly.

In other words, if everything is a bet, nothing is a bet.

5. Hey, Bloomberg! Not All Event Contracts Are Wagers

Bloomberg lumps CPI, earnings calls, and NFL games together as “wagers.”

• CPI contracts can hedge debt or rental agreements indexed to inflation.

• Earnings call contracts may serve as hedges if structured properly. But “mention markets” based on CEO chatter? Those should never exist.

• NFL games–we’ll let you decide. ErisX tried to argue economic purpose years ago. We pushed back in a letter to the CFTC (PDF), as did many others. Those contracts went nowhere. The CFTC’s position is very different now, and Commissioner-elect Selig signaled that he will let the courts decide.

Generalizations are dangerous. America worked hard to draw boundaries that Bloomberg casually erases. The reset won’t come from banning all event contracts. It will come from enforcing boundaries with discipline.

6. A Few Good Questions, A Few Bad Errors

Bloomberg finally asks:

If every interface becomes a casino, where does responsibility lie? With the trader? The tech? The system itself?

Great questions to be asking. Responsibility rests with the regulators, though courts will ultimately decide, especially on sports contracts. But courts need sound definitions in order to form the proper framework, which includes a responsible finance ecosystem and a cooperating media.

Bloomberg also misstates facts. The CFTC did try to shut down election contracts. It did not attempt to shut down sports contracts, it chose silence instead.12 These are easy fact checks and shouldn’t be slipping past editors, especially with the presence of AI.

Kalshi argues its contracts help companies hedge against real-world risks, such as a corporation worried about the victory of a politician promising a tax increase or an ice cream shop concerned about cold weather hurting sales.

Where are the editors, honestly? Kalshi may have anticipated making that argument, but in the end it didn’t need to–because the CFTC had already disclaimed authority. To the extent Kalshi continues to float this line now and then, it’s more about shaping public perception than about the actual legal victory. Economic purpose is certainly not why they won the legal fight.

7. Confusion is Not Complete Without Some Crypto

Bloomberg notes:

Under US law, betting on a baseball game is illegal in some states. But wagering on a Dogecoin swing, on the basis of nothing more than vibes, is fair play.

Well, our position remains that sports gambling is prohibited everywhere under federal law, though the Murphy decision, the subsequent proliferation of sports betting under the state regime and the CFTC’s inaction substantially complicated that picture. Our latest amicus brief (PDF) elaborates. But let’s focus on Dogecoin.

Wagering on a Dogecoin swing? That’s almost always gambling when structured as an event contract, because it’s hard to imagine any bona fide commercial risks tied to a memecoin (no economic purpose), which happened to begin as a joke in the first place. Buying Dogecoin outright, however, is not gambling–it’s speculation–and that distinction is paramount.

Final Thoughts

We urgently need a reset around these four words:

Investing, speculation, gambling, gaming.

This isn’t philosophical hair-splitting. These four words literally define the entire ballgame. Misusing them blurs boundaries, distorts policy and confuses the public. We are dedicating ourselves to clarifying these distinctions because we understand the consequences. We hope you will accompany us on that journey.

The Senate Agricultural Committee released a draft of the digital assets market structure bill last week, November 10, 2025 (press release, PDF bill).

Some of the terms in the bill are placeholders for future discussion. That said, there’s one omission that really stands out:

The phrase “investment contract.”

That phrase was central to the Responsible Financial Innovation Act of 2025 (“RFIA”), released by the Senate Banking Committee earlier this year–a bill we covered extensively. It also appeared prominently in the House’s Digital Asset Market Clarity Act of 2025 (H.R. 3633), which passed in July.

Yet in this senate draft, the term is nowhere to be found. Maybe it’s a temporary oversight. Maybe later versions will restore it. What’s striking is that, as of now, most coverage doesn’t even mention the omission.

Let us indulge a hypothetical: What if the final legislation never mentions investment contracts at all? Before we explore the consequences, we need to ground ourselves in three positions.

1. Bitcoin Is Not An Investment

Yes, unpopular opinion. But logic leaves no alternative.

In our inaugural LexBeyond podcast last week, we argued that investing and gambling should never share the same space. Gambling only enters the conversation when the term sheds its legal clothes and dons moral ones. Let’s recall our two critical observations from the podcast and add Bitcoin to the mix for additional flavor:

• The stock market: Investing vs. speculation (never gambling);

• Prediction markets: Speculation vs. gambling (too much speculation tilts a contract into gambling); and

• Bitcoin: Speculation, pure and simple (never investing, never gambling).

Bitcoin is speculation, through and through; and that’s fine–so long as people know what they are engaging in to make informed decisions. As we’ve stated in the past, the government could apply a Surgeon General-like warning to cryptocurrency that states: “This Is Not An Investment” and then get out of the way and let Americans speculate as they deem appropriate.

2. Bitcoin Is an Investment Contract

Bitcoin is not an investment, but it can be an investment contract? Yes. The former is a finance question. The latter is a legal question. And the moment it is an investment contract, it becomes a security.

Not everyone agrees. In fact, most everyone disagrees. Rob Schwartz, former CFTC General Counsel, now a partner at Morgan Lewis, put it this way:

A number of U.S. exchanges now offer bitcoin futures, and nobody claims it’s a security, so there’s no question that bitcoin is now a commodity. (emphasis added)

Here we are again. Daniel Wallach, a sports betting and gaming lawyer, recently highlighted the defendants’ brief (PDF) in the Ohio case and claimed that nobody “identif[ied] the CEA as a statute affecting sports gambling.” We know that’s false because we raised that issue ourselves in Murphy v. NCAA. (amicus brief PDF). Leveraging on that factual nugget, last week we wrote and published an article titled Kalshi’s Gambit: The Bet That Could Break Sports Gambling.

Schwartz’s “nobody claims it’s a security” statement falls into the same trap. “Nobody” is easy to refute. All it takes is one and we are that one. We agree with the beginning and the end of Schwartz’s statement (more on this below), but not the middle.

We do claim Bitcoin is a security. Not the popular opinion, but consistent with Congress’s investor-protection mandate. Purchasers of Bitcoin deserve protections, and yes, this flows through Howey, via an alternative reading we started to advance in three major crypto cases:

• SEC vs. Ripple (amicus brief PDF);

• SEC vs. Coinbase (amicus brief PDF); and,

• SEC vs. Binance (amicus brief PDF).

Does our position preclude Bitcoin being a commodity? Not at all.

3. A Commodity Can Be A Security

Let’s continue to explore the rest of Schwartz’s statement.

The false dichotomy–that securities and commodities are mutually exclusive–has been gaining traction for at least two years now.

The Howey test governs investment contracts. Commodity status is a separate framework. The baskets are not mutually exclusive. On that note, Schwartz’s view conflicts directly with at least three former CFTC Commissioners–a tension we unpacked in The Security “or” Commodity Myth.

Consensus that a commodity can also be a security would be progress, and it is a threshold needed to answer the harder question: Is Bitcoin a security? As noted above, that inquiry runs through the phrase “investment contract.” Its omission from the latest Senate draft is not a minor detail–it’s one of the most consequential gaps in crypto legislation. To understand just how consequential, let’s step forward in time, into the Supreme Court–and imagine how this omission could shape a future legal challenge.

Back to the Future: Time Travel to a Supreme Court Showdown

Imagine Congress never restores the phrase. A Bitcoin purchaser sues, arguing their purchase constitutes an investment contract. They lose in lower courts but the case goes all the way up the chain to SCOTUS. Sports gambling is already resolved. Now the future of crypto is what’s at stake.

The petitioner points to the omission as intentional–a feature, not a bug. The security “or” commodity discussion becomes front and center again, and the petitioner argues that Bitcoin becoming a commodity does not preclude it from being a security.

The counterparty responds: “Not every silence is pregnant.”1 By pointing to certain statements made by the SEC Commissioners, including Gary Gensler’s, they argue that Bitcoin is not a security. They also cite favorable crypto litigation and politicize the debate as a continuation of a Biden-era witch hunt.

The petitioner counters with a classic line from the Supreme Court:

Congress … does not hide elephants in mouseholes.2

And suddenly, the missing phrase becomes the centerpiece of the next great crypto battle. The petitioner elaborates and argues that the phrase “investment contract” is not a mouse, it’s the elephant. They take the position that Congress deliberately omitted the phrase from the final market structure legislation. The logic? Congress was comfortable tasking the CFTC with broad oversight of crypto, but unwilling to go further and strip away the only remaining protection available to the crypto “investor.”

And you know what? They will be right.

Both the House and earlier version of the Senate’s investment contract carve-out never made sense. It rested on the faulty premise that if something is a commodity, it can’t be a security. That false dichotomy gave crypto more ammunition than it deserved. The CFTC as a regulator–even the lead regulator–could work. But pushing the SEC out of the picture through an investment contract carve-out denies the public the protections they urgently need.

Bitcoin at $126,000? That doesn’t make it an investment. Bitcoin at $90,000 (as it most recently nosedived to)? That doesn’t make it gambling or a Ponzi scheme either. Bitcoin is speculation, always and forever. Speculation is about price expectations and crypto prices will fluctuate.

When those prices collapse, purchasers may need a legal vehicle to pursue justice. Yes, they must be accountable for their own actions, but what about the government’s role in providing clarity? To this point, it hasn’t provided the much-needed transparency around what customers are buying, and likely won’t anytime soon. The best legal out, the only one, perhaps–resides in plain sight inside this resilient phrase: Investment contract.

Whether intentional or not, the Senate Agricultural Committee did the right thing by omitting the investment contract language because it prevents Congress from enshrining the flawed premise. Courts and regulators can still apply the Howey test case-by-case, rather than being boxed in by statutory language that narrows investor protections. Sometimes less is more; the missing language enables more investor protection. Let’s hope it stays that way.

Last week, we dismantled the notion that the “sports-is-a-commodity” theory (or, alternatively, the “sports-event-contracts-are-swaps” theory) was some post hoc invention by Kalshi–an argument that came out of left field. Instead, we argued that this idea has been lurking in the background all along.

Our position, in short:

• Did the Supreme Court know that sports event contracts might be a type of commodity futures? Yes.

• Did Congress authorize sports gambling with Dodd-Frank? No.

These two ideas are on a collision course–likely in D.C.; whether in the Supreme Court building, the halls of Congress, or both remains to be seen. In anticipation of that, today, we’re continuing to build the record.

The Broader Strokes

Let’s zoom out. There’s a growing theme in legal circles that dismisses the idea of federal preemption in the context of sports event contracts as laughable, because, supposedly, it wasn’t raised before. Consider this post by Wallach:

(An earlier version of this post actually finished with “None of the parties or amici did either.”)

Wallach doesn’t need to agree with us that the CEA preempts. But his claim that nobody raised these issues? That’s simply not true. How do we know? Because we raised them–as amici in Murphy v. NCAA (PDF).

Now consider this exchange between Wallach and Rob Schwartz.

Schwartz, now a partner at Morgan Lewis, was the former General Counsel of the CFTC. He represented the agency in the Kalshi case, which we covered extensively (start here).

This brief exchange foreshadows a deeper tension that could surface in a Supreme Court showdown. But the real tension isn’t legal–it’s commercial. Backdooring sports gambling is precisely what Congress wanted to prevent. The absence of legal ambiguity only sharpens the business risk.

Three Questions Worth Exploring:

• Who Will The Parties Be?

Will this issue ever reach the Supreme Court? Most likely. Will Kalshi–or another DCM–be a party to the suit? One commenter thinks so (his pick is Maryland). We’re not so sure.

If not Kalshi, then who? It could be the CFTC itself, targeted in an APA action for its inaction on sports event contracts. We discussed this possibility in our New Jersey amicus brief (PDF). No such challenge is on the horizon just yet–likely because it could destabilize state-regulated sports gambling, and few states are incentivized to go there. Eventually, though, someone will.

We love sports analogies so let’s take a look at one! There is a cliché in the NBA: A play-off series doesn’t start until someone loses on their home court. Taken literally, it’s false as some series end without that ever happening. But the point is: Things really don’t get interesting until someone breaks serve by winning on the opponent’s home court.

We suspect the judiciary may end up having its own version of that cliché. By our count, there are roughly 20 sports event contract cases in the pipeline (and likely more on the horizon). But real litigation won’t start until there’s an APA challenge. We believe that’s the case that will crack open the SCOTUS front doors.

• Will Kalshi Lose?

If Kalshi is a party to the suit, they absolutely could lose. All it takes is a finding that there’s no federal jurisdiction over sports event contracts. At that point, Kalshi would either have to shut down their sports event contract operations (which is a majority of its business), or pivot to state licensing.

The more interesting scenario is an APA challenge–where Kalshi might lose without even being a party to the suit. That outcome would likely hinge on two concurrent findings:

1. Sports event contracts are swaps and/or sports is a commodity; and

2. Sports event contracts are contrary to public interest.

That doesn’t exactly seem farfetched, does it?

• Are Sports Event Contracts Contrary to Public Interest?

We believe they are. There are two paths to consider. The simplest path to that conclusion is through the ‘gaming’ prong in the Special Rule–which Kalshi has already agreed includes sporting events. It’s almost poetic: Combine one argument Kalshi made in 2025 with another from 20241, and the result is the company’s own undoing.

The CFTC’s own implementing regulations support this view, but to this point, that somehow hasn’t carried enough weight. Former Commissioner Quintenz believed the regulations were invalid to begin with, so if they get more attention, that issue may be back on the table.

Perhaps one of the strongest arguments for the “gaming” prong isn’t even definitional, it’s based on common sense. If “gaming” doesn’t include sports events, then what does it include? Are we really supposed to believe that, in the wake of the biggest economic crisis in recent history, Congress was worried about someone developing futures contracts involving the World Series of Poker (as referenced by the D.C. District Court opinion (PDF))? And if that truly was the concern, where’s the legislative history that supports this view?

The record may be thin, but what we do have are three examples: The Super Bowl, the Kentucky Derby and The Masters golf tournament–all centered on sporting events. None of them involve non-sporting events.

Taking the second path involves an honest and common-sense interpretation of the statute, which points to a simple conclusion: Sports event contracts are contrary to public interest because the economic purpose test still matters. As far as the Special Rule is concerned, gaming means gambling (PDF).

Rob Schwartz, yes, him again, was in the room when Kalshi agreed with the CFTC on what “gaming” includes. His opening argument:

To build and maintain a thriving derivatives industry that is distinct from the gambling business has been the work of 175 years, and it’s important.

That point is underappreciated. It’s not just the colloquy that needs to be discredited for sports event contracts to survive, it’s Congress’s century-long intent.

Why the CFTC believes it lacks authority over all contingent event contracts, especially against that backdrop, is something of a mystery. Maybe they (the departed Commissioners) saw the writing on the wall: Deregulation was likely en route to futures markets and the fight may have seemed too uphill, too steep to climb.

But in a post-Loper Bright (PDF) world, what the CFTC believes may not matter much. The Court of Appeals for the D.C. Circuit was already leaning toward the resurrection of the economic purpose as the most plausible reading of congressional intent. The Supreme Court likely will too.

You might say: Okay, maybe Kalshi loses–so what. That might upend the sports event contract business. And, if we push a little further, maybe it even destabilizes the prediction markets business, because without sports, they can’t survive. But state-regulated sports gambling will carry on. We’d simply revert back to the 2024 status quo.

We hear that, but that’s not what we have in mind. When we say the potential upending of the sports gambling industry, we mean exactly that.

This Is How It Unravels

Barron’s published an article (paywall) last week titled Sports Event Contracts Are Replacing Bets. Trump’s Regulator Is Standing Aside. It distilled the debate into two questions:

This playoff turns on two questions within the compass of the U.S. Commodity Futures Trading Commission, the federal agency tasked with prediction markets. Are listed sports contracts, like the Broncos proposition, a kind of swap used to hedge events of financial, commercial or economic consequence? And do they involve “gaming” that’s against the public interest?

This framing is close to what we laid out earlier in this post. Quick clarification on the first question: Exclusive jurisdiction can be established even if sports contracts aren’t swaps. Sports being a commodity is an alternative path to the same outcome. Obviously, if they are swaps, the result is the same.

The second question is spot on. If these contracts involve gaming–either because “gaming” includes sports games (as Kalshi once suggested) or because it simply means gambling (a reading Kalshi itself found plausible)—then the contracts are contrary to public interest. Kalshi dodged that nightmare scenario (for them) by pointing out the CFTC didn’t make an economic purpose argument, and then, by being bailed out when the CFTC dropped the appeal; but the logic still stands.

All that said, answering the two Barron’s questions in the affirmative simply takes the nation back to the status quo, which is the allowance of sports gambling in roughly 80% of the states. That’s reversion to status quo, not the destabilization of an entire industry. The path to the latter goes through asking a final question that Barron’s (and many others) are not asking, yet.

Can the States Do Anything?

Consider this exchange that is on point, and Rob Schwartz is in the mix again:

Is this Grewal foreshadowing the idea that once prediction markets win on federal preemption, they’ll discard the notion that federal and state regulation can coexist? Coinbase is trying to be a jack of all trades, after all–and they’ve invested in Kalshi and Polymarket.

This is not a fringe view by the way. Quintenz made the exact same argument:

Got that? All events are commodities, which means all contracts on future events are commodity futures contracts, which means all future event contracts need to be traded on a regulated and registered futures exchange. But if the Commission deems any event contract that involves one of the enumerated activities to be contrary to the public interest, that contract is banned from trading on any registered futures exchange. The contract cannot trade anywhere else either since it is still a commodity futures contract and, if traded off of an exchange would be illegal.

We are in agreement as well. Permissible event contracts must trade on a registered futures exchange. State-regulated entities don’t work. If the event contracts are not permissible, well, state-regulated entities still don’t work. Either way, there is no room for state-regulated sports gambling.

You can imagine where Coinbase is headed. We certainly don’t think any prediction market will care about state-regulated sports gambling. That regime was a gap in legal thinking that never should have happened in the first place (which is exactly what Rob Schwartz is saying). But it did happen, and it served its purpose: Getting enough people over the hump to chase the real prize: Nationalized sports gambling.

Wallach and others are clinging to the idea that states should regulate sports gambling. Maybe they think that even if federal preemption takes hold, states will have a role. Perhaps they are encouraged by Kalshi’s current litigation stance that seems to indicate they can co-exist with the states and tribes. We aren’t so sure about that because, based on their patterns, we believe Kalshi could just as easily change course again.

Kalshi conceded to the impermissibility of sports event contracts when it needed to prevail on election contracts, and then did a full 180. If they win on federal preemption, they’ll just as likely discard the notion that state-regulated sports gambling can coexist with federal oversight. Why wouldn’t they? Fewer competitors. They’ll also have a solid legal argument.

Putting It All Together

Kalshi’s survival depends on the answers to three legal questions:

Question 1 - Is sports a commodity/are sport event contracts swaps (federal jurisdiction)

Question 2 - Are sports event contracts permissible? (gaming/economic purpose)

Question 3 - Can there be an overlap between federal and state powers? (off-exchange futures trading)

Kalshi is making a decent effort to isolate the questions and adjusting its strategy on the fly. That is their legal strategy—moving the ball incrementally.

They answered #2 with a no to kick off the election market business, then did a 180, to shoot for the real prize: Sports. Now, under pressure, they answer #1 with a yes, but simultaneously #3 with a yes as well.2 They are not bothered by states, and state-licensed operators dipping in for a little longer; it’s better to be perceived as extending an olive branch: let’s eat together. Once they’re too big to fail they will likely change their answer on #3 to a no and drive state-licensed operators out of business.3

If that happens, Kalshi will have provided the correct legal answer to each of these questions (yes/no/no) at some point, in some litigation. It is critical for them not to face these questions at the same time.

That’s the real win for Kalshi (and other similarly situated prediction markets). They may lose some battles, to the rejoice of proponents of state regulation, but they seem to be winning the war. The judiciary evaluating these questions in an isolated matter itself is a win for prediction markets. The gaming/economic purpose question was brushed aside early on, their Achilles’ heel. They have much stronger arguments on #1 and #3. But the courts are not really pushing them on #3 at this time, and they prefer it that way. They can fight #1 (preemption), and wait out on #3.

It is heartbreaking to see how all of this is unfolding, and there really is only one way to fix all this. An APA challenge going all the way to the Supreme Court, where these three questions can be looked at holistically.

A quick preview of how the answers change drastically when the questions are looked in the following baskets:

#1 and #2 together

It’s fascinating to consider that if you add the two opposing arguments Kalshi made in litigation within the last year, you can envision their demise.

#1 and #3 together

If the gaming/economic purpose question is tossed out the window, congratulations; our nation just upended a century-worth of congressional intent. In this scenario, prediction markets and state-licensed operators coexist, until one of the prediction markets decides to argue there can be no off-exchange futures trading.

#1, #2 and #3 together

It’s even more thrilling to consider that if you add Grewal’s argument to the mix–or side with Quintenz’s framing, you can wind up with a much more dramatic outcome:

All the dominos fall. The entire sports gambling industry goes down with Kalshi.

When Journalism Misses the Mark

Long-form pieces on prediction markets are becoming a weekly occurrence now, which is a good thing. Attention on this topic is urgently needed. That said, when those pieces contain inaccuracies, misinformation or otherwise contribute to the confusion, that is not a good thing. Attention alone isn’t enough. If society can’t convert that attention into meaningful change, we’ll end up in an even worse spot than before.

Last week, we shed some light on the NYT piece titled Gambling. Investing. Gaming. There’s No Difference Anymore. Just as we were preparing to publish it, the Atlantic released their own take: The Company Making A Mockery of State Gambling Bans. So today, we will offer some commentary on that piece. Long story short: It’s more damaging than it is helpful.

The Confusion Starts Early

Title: The Company Making a Mockery of State Gambling Bans

Subtitle: Thanks to Kalshi, a so-called prediction market, sports betting is now legal everywhere—even where it isn’t.

From the outset, the author signals his stance–consciously or not, by making legal conclusions that are still being litigated, and likely will for some time, possibly all the way to the Supreme Court.

“Making a mockery of state gambling bans…” Implicit in that framing is the assumption that states have jurisdiction over sports gambling. That’s a jurisdictional question still very much unresolved.

On the legality of sports gambling, there are three competing views:

1. Sports gambling can be offered everywhere (the Atlantic’s position as well as Kalshi’s);

2. Sports gambling can only be offered in states where it is “legal” (states’ position); and

3. Sports gambling can not be offered anywhere. (Our position)

As extreme as our position may sound, distilling the preemption puzzle into three questions lands us precisely in that spot:

1. Is sports a commodity? (Yes)

2. Can the CFTC allow it? (No)

3. Is there room for states? (No)

The Confusion is Not Limited to Sports Markets

At some level, the speculator is gambling. “All you’re doing is betting on whether the price of grain will go up or down,” Karl Lockhart, a law professor who studies prediction markets, told me.

This quote reflects a fundamental misunderstanding of futures markets and it’s concerning that it comes from an academic with an article forthcoming in the Boston College Law Review titled “Betting on Everything.”

The distinction is subtle. Extremely so. The speculator in futures markets is speculating–not gambling. Why?

→ If a contract offers sufficient risk management or hedging utility, it’s not gambling. It can be listed and traded. Hedgers hedge their risk; speculators speculate, providing liquidity. Nobody is gambling.

→ If a contract lacks hedging utility and is dominated by speculators, it becomes a gambling contract–and isn’t supposed to be listed and traded at all. In that scenario, nobody would be gambling because the contract isn’t supposed to even exist.

Here’s the nuance: In games, the word gambling attaches to not just the game itself, but also to the players. And crucially, being deemed gambling doesn’t mean the game disappears. The entity offering the game still gets another bite at the apple–because states can choose to allow and regulate it.

Not so in futures markets. In futures markets, gambling attaches only to the contract. And if the contract is deemed gambling? That designation annihilates the contract’s very existence. There’s no concept of individuals gambling in futures markets, because there is no concept of regulating a futures product that is for entertainment only. If the contract is gambling, it’s not supposed to be accessible in the first place.

So, not all futures are gambling, only some are; and those are supposed to remain hidden behind the curtain.

You might ask: Aren’t people accessing sports bets offered by Kalshi? Aren’t they gambling?

Of course they are, and that’s precisely the point. For 175 years, the goal has been to build and maintain a derivatives industry distinct from gambling. That’s the CFTC’s longstanding position, and one we agree with. Why society and the financial markets find themselves at this juncture and also why we are heavily covering this topic, is a result of two connected developments:

• The CFTC recently abandoned Congress’s mandate through their litigation stance in Kalshi v. CFTC, which cracked the door open for sports event markets; and

• Kalshi is trying to capture the ultimate prize after walking right through that door.

At the heart of the sports gambling issue is the CFTC’s broad inaction on sports betting. We actually agree with Kalshi that this is an APA issue, not a state gambling law issue. We said as much in our amicus brief. But we disagree with Kalshi that they can happily coexist with the states. Why? Because if Kalshi can offer sports bets, the state-regulated sportsbooks can’t, and if Kalshi can’t, the state-regulated sportsbooks still can’t. The CFTC could have acted as early 2018 when states began moving to “legalize” sports gambling post-Murphy—this inaction has been years in the making.

Worth noting, we also disagree with Kalshi that sports event contracts are permissible under Dodd-Frank. They’re not permitted if the economic purpose is intact (we believe that to be the case)–and they’re still not permitted even if it isn’t. (Kalshi agreed with us on this point until recently).

Misunderstanding the Market’s Evolution

With the government’s blessing, the futures market continued to evolve. People began trading currency futures in the ’70s, betting on the fluctuations of the pound or the franc or the Mongolian tugrik. Soon after, markets were created allowing banks to buy and sell bets on future interest rates. The banks were hedging, much like the hypothetical Michigan farmer—if interest rates went up, they’d be hurt, so they would bet on interest rates going up, and then their losses wouldn’t be so big. Other financial firms would take the other side of the bet. Were they gambling? Maybe, but they were also helping banks stay solvent. (emphasis added)

Same confusion. If you’re trading currency futures, you’re either speculating or you’re hedging, but you’re not gambling.

Misrepresenting the Kalshi Case

The Biden-era CFTC decided Kalshi’s political expansion was prohibited because it involved “gaming and activity that is unlawful under state law” and was “contrary to the public interest.” Kalshi challenged the CFTC’s order in federal court. The judge ruled in Kalshi’s favor, reasoning that if betting on elections were to count as gambling, then so would betting on the weather, or a merger, or an earnings report, or interest rates.

We followed this case very closely and published a 11-part series on our sister blog, Full Court Press (We recommend starting with the preface). It’s astonishing that such a material misrepresentation made it through an editorial review.

Yes, weather was mentioned in briefs and oral argument. Yes, the judge referenced the weather contracts in her opinion. But did she rule election markets aren’t gambling because otherwise “bets” on weather, mergers or earnings reports would be? Not at all. The words “merger” and “earnings report” don’t even appear in the opinion (PDF); a simple search would have confirmed that.

It’s perfectly reasonable to conclude that weather trades shouldn’t be classified as bets, while election trades should. Some contracts offer more hedging utility than others. If weather contracts meet that bar (here is an example) and election contracts don’t, the former gets through the regulatory velvet rope, and the latter doesn’t. That was the status quo for over a decade–until Kalshi came along.

The more material error from this article, though, is misrepresenting why the judge ruled as she did. Judge Cobb ruled in Kalshi’s favor because she believed the CFTC lacked the authority to even consider whether election contracts are contrary to public interest. Why? Because both Kalshi and the CFTC agreed that the agency doesn’t have authority to evaluate all contingent event contracts. It was a carpe diem moment for Kalshi and they didn’t hesitate to capitalize on the opportunity. When the CFTC countered with a definition that didn’t hold water, the judge became skeptical, and the case unraveled from there. The Atlantic’s summary simply does not reflect what actually happened.

The Grand Finale—A False Binary

At issue, fundamentally, was where the line between gambling and investing really lies.

Nope. That’s not the issue–Not in election markets, not in the prediction markets and not in the stock market either. Prediction markets slid into investing’s DMs, but that doesn’t make them investments. And the concept that gambling infiltrates the stock market goes back to Hamilton, but that, too, is a misconception.

Gambling and investing do not share a boundary. Tune in for our inaugural podcast Thursday, November 13th to find out why.

There’s a real possibility that Kalshi and Polymarket won’t be remembered for their sports event contracts. We believe those will eventually be outlawed by the courts. Election contracts might leave their mark (assuming that those don’t get reversed on economic purpose grounds), but even that may not be their legacy.

Instead, their historical significance may lie in forcing America to rethink what these four words actually mean:

• Investing

• Speculation

• Gambling

• Gaming

Last week, the New York Times ran an opinion piece titled Gambling. Investing. Gaming. There’s No Difference Anymore. We believe they missed the fourth one: Speculation should have been in the mix. Still, any title that includes three of these four words is screaming: Read me.

It’s no surprise this conversation is entering mainstream media. Dustin Gouker nailed the trend:

Prediction markets are raising lots of money and getting bigger, which means major media outlets are starting to cover the industry more closely.

Yes, and coverage is only going to accelerate. These four words are so entangled, untangling them will take time.

The NYT Piece: Timely, But Tangled

The topic is timely, and the attention is certainly deserved. The article offers some solid insights–and some that leave the readers wanting more. Let’s start with the good:

On the app of the investment brokerage Robinhood, users can now buy stocks on one tab, “bet” on Oscars outcomes on another, and trade crypto on a third.

Prediction markets and crypto. That’s our world. We’ve long discussed the perceived equivalence between stocks and crypto, and how that perception leads to subpar societal outcomes. Chief among them: Millions of people speculating without realizing they’re speculating.

The problem isn’t speculation, per se. When it comes to ownership of perpetual assets (as opposed to prediction markets), people should be free to speculate–whether it’s on stock or crypto. The problem exists in them believing that they are investing, when they aren’t–they’re speculating and that is a very slippery slope. That confusion stems from the incentive structure that is blurring the lines between the two.

Generally speaking, when things become entangled, they tend to entangle even more, before they get untangled. Prediction markets are now sliding into investing’s DMs. Why? Because the line between financial instruments and gambling is blurring. By definition, financial instruments serve the public interest, gambling doesn’t. Said differently, prediction markets are one corner of the financial world where people are not free to speculate. Excessive speculation in prediction markets means the contract is gambling, and shouldn’t be listed in the first place.

So how do we get out of this mess? We start untangling–one step, one line, one news article at a time.

Let’s start that process now, by dissecting three lines from the NYT piece that misled more than it clarified:

1) States Have Jurisdiction Over All Forms of Gambling - A Misinterpretation

In 2018, the Supreme Court removed a major roadblock by allowing states to legalize sports gambling.

Not incorrect. But vague language like “a major roadblock” often morphs into “the only roadblock.” Consider this line from a recent InGame article:

And when the U.S. Supreme Court overturned the Professional and Amateur Sports Protection Act in 2018, betting became a states’ rights issue.

Or, last year’s headline from The Atlantic:

Legalizing Sports Gambling Was a Huge Mistake

And again from The Atlantic, just last week:

Since the U.S. Supreme Court opened the door to legalized gambling in 2018…

The Supreme Court’s 2018 decision is widely perceived—by media, the public, and even some legal circles—as having opened the door to legalized gambling. Judge Abelson (Maryland), in Kalshi v. Martin, echoed this sentiment when he wrote (PDF opinion):

It was not until 2018, when the Supreme Court issued its ruling in Murphy overruling PASPA, that states were permitted to legalize sports wagering within their boundaries.

We disagree with Judge Abelson on several points, including this one. The NYT actually has the more accurate description: PASPA was a roadblock, not the roadblock. Dodd-Frank still looms.

As soon as states began “legalizing” sports gambling, the CFTC could have acted. In fact, it could have acted earlier–on daily fantasy sports. DFS is not a game. In essence, each DFS entry is a contract on multiple future contingent events, which makes them either event contracts and/or swaps–squarely within the CFTC’s jurisdiction.

It’ll be fun to watch when people catch up to that argument.

2) Gambling In the Stock Market - A Misnomer

Many Americans, primarily young men, also began gambling on the stock market, their wagers enabled by platforms offering unlimited day trades.

Let us be very clear: You can’t gamble in the stock market!

This one’s tricky, and we certainly get why it may feel like “gambling.” Gambling carries a moral connotation, but it should be understood as a legal concept. Why? Because:

• We need to determine jurisdiction (based on the laws);

• Whoever has jurisdiction then needs to decide whether the activity should be regulated or prohibited; and

• Whoever is deciding, needs a standard for that decision.

The confusion is as old as the country itself. In 1792, Alexander Hamilton wrote:

I observe that certain characters continue to sport with the Market & with the distresses of their fellow Citizens. ’Tis time there should be a line of separation between honest Men & knaves; between respectable stockholders and dealers in the funds, and mere unprincipled Gamblers. Public infamy must restrain what the laws cannot.

Then there’s the influential finance article Who Gambles in the Stock Market?—cited over a thousand times (Wiley), and possibly over two thousand times (Google Scholar).

Our answer: No one. You can invest. You can speculate. If you are somewhere in between, it’s speculative investing. But no one actually gambles in the stock market, no matter how much it might feel that way at times.

Yet the confusion persists–even in legal academia. From a forthcoming Boston College Law Review article titled “Betting on Everything”:

Although the U.S. legal regime doesn’t use this distinction to separate investing from gambling, an echo of it can be found in higher taxes on short-term capital gains. In some ways, this can be thought of as a penalty on those who gamble in the stock market.

Nope. Investing and gambling aren’t neighbors. Not in the stock market. Not in futures markets. That’s why we decided to dedicate our first LexBeyond podcast episode to this very topic–launching on November 13, 2025.

3) All Prediction Markets Are Gambling - A Misalignment

Next came prediction markets, which allow users to bet on anything — from Taylor Swift album sales to the weather — while avoiding the regulations that inhibit licensed gambling companies.

Glancing at our work you might determine us to be anti-crypto or anti-prediction markets. But, if you read us carefully, you’ll see that we are neither.

We’ve never called for a crypto ban. We’re not even convinced that crypto markets are more fraudulent than the banking system or other markets. What we do argue is that crypto should not be allowed to be promoted, marketed or sold as investing. There is a better way.

The same goes for prediction markets. Not all are legitimate financial products. But not all are gambling either. In this case, extreme positions like these do more harm than good; neither is consistent with Congress’s mandate.

Congress wanted essential futures contracts to move forward and the frivolous ones to be left behind. The economic purpose test was the legal tool to separate the two. For nearly 25 years after that test was repealed, the CFTC remained aligned with Congress. Now? Substantial misalignment is rampant and the CFTC no longer believes in economic purpose.

NYT’s weather example is misplaced. Bloomberg published an article nearly 15 years ago featuring a company selling de-icing compounds–highlighting real demand for hedging extreme weather risks. That demand has been soaring thanks to climate volatility. We can debate how much hedging happens in weather markets today, but calling it a bet without even considering its utility (or the lack of understanding how to determine its utility), is not a serious inquiry.

Taylor Swift album sales? Another weak example. If the the NYT authors wanted to highlight actual bets from prediction markets, they wouldn’t have needed to look very far:

• The Seychelles elections markets;

• The Astronomer CEO contract; and

• The infamous dildo contracts.

And many, many more. Simply spend a little more time looking.

It’s tough to take the authors seriously when they don’t even attempt to distinguish socially useful prediction markets from entertainment-only ones. That’s a shame because they’re tackling what may be the most important societal and legal issue of the 21st century.

This topic deserves better. Otherwise, untangling our way out of this hot mess will be a long, uphill battle.

Like clockwork… sports event contracts are coming to Chicago.

This one stings. In my previous life, I saw that building every day. I’d ride the train from the suburbs into Union Station, walk past the CME building and cross the street to the office. It stood tall, not literally (it doesn’t even crack the top 100 tallest buildings in Chicago)--but symbolically, as the financial hub for futures trading. Now? It’s on its way to becoming the epicenter of sports gambling.

Let’s be honest: Did anyone seriously think this wasn’t going to happen?

We flagged this a month ago:

FanDuel partnered with CME group. No word on sports event contracts yet, but when a sports gambling platform (yes, daily fantasy sports is gambling, too) marries a derivatives marketplace… you do the math. What do you suppose their child will look like?

CME is now in the betting–uhm, prediction market–business. Watch how Duffy calls them bets, then corrects himself and switches to “trades,” stealing from Kalshi’s playbook. This is the same Terry Duffy who gave Shayne Coplan the middle finger during the SEC/CFTC harmonization panel, which Coplan capitalized on through social media by responding with: “Hang it in the Louvre.” Word has it they did, but it was stolen during the heist:

So: Are they bets? Trades? Investments?

Here’s what Duffy said when the FanDuel partnership was announced:

Individual investors are increasingly sophisticated and continually pursuing new financial opportunities. To meet this demand, we have created this innovative partnership, which will operate a non-clearing FCM. Together, our event-based products will appeal to the growing public interest in markets, and we will provide education to attract a new generation of potential traders not active in derivatives today.

Subtle one! It doesn’t explicitly call prediction market contracts “investments,” but it does say the deal is designed to meet investor demand for new financial opportunities. Another example of prediction markets sliding into investing’s DMs.

The strategy is clear: Blur the lines between investing, speculation and gambling. Let people trade anything, anytime, from cradle to grave. Robinhood isn’t even pretending anymore.

Crypto deserves an Oscar for Best Supporting Role in making all of this possible. Yet–amid all this noise–some voices of reason remain.

When we saw the headline Bitcoin is ‘not an asset’ and has ‘no intrinsic value,’ says $225 billion investment company–we couldn’t resist. It was screaming: Read me.

The article features a British firm that refuses to board the crypto train: Hargreaves Lansdown. There’s also at least one more on this side of the pond: Goldman Sachs–though their position is more nuanced, as we’ll unpack below.

It’s beyond refreshing. Bitcoin refusal takes courage, discipline and long-term thinking. We’re sure they’re catching heat from customers, shareholders, peers, and who knows who else. But long-term? These firms may turn out to be the real winners.

Let’s give them credit where it’s due:

🏛️ Hargreaves Lansdown

Their position is memorialized in their Crypto Statement:

The HL investment view is that Bitcoin is not an asset class, and we do not think cryptocurrency has characteristics that mean it should be included in portfolios for growth or income and shouldn’t be relied upon to help clients meet their financial goals. Performance assumptions are not possible to analyse for crypto and, unlike other alternative asset classes, it has no intrinsic value.

Not an asset class. Doesn’t belong in a portfolio. No intrinsic value. We’ve been saying the same.123 HL continues:

Despite our investment view, we recognise that some clients will wish to speculate with crypto ETNs…HL will offer appropriate clients to trade in crypto ETNs early next year following careful development of the client journey and appropriateness assessment.

Certainly fair. We’ve never advocated for a crypto ban, either. HL’s stance is: If people want to speculate, they should be able to. We agree, but regulators should adopt HL’s framing–because every single person purchasing crypto is speculating, not investing; and they are naive to the potential harm in not knowing the difference. There is a better way.

🧮 Goldman Sachs

Goldman Sachs Wealth Management released a report earlier this year. It’s not brand new, but the insights are timeless. The section titled Strategic and Tactical Assessment of Gold and Bitcoin (p. 39) is gold (pun intended). Read the whole thing, because it’s a refreshing, consequential take on what’s happening with today’s markets.

It opens with a fascinating statement:

Gold’s 27% return and bitcoin’s 123% return in 2024 have prompted our clients and colleagues alike to ask whether ISG has changed its view of gold and bitcoin as investment asset classes or, at the least, considered a tactical allocation to each asset.

ISG is Goldman’s Investment Strategy Group. Before we get to the answer, let’s unpack two key concepts from that statement.

🏀 Process vs Outcome

Arguably the most critical distinction in the world of investing. We love to use our basketball analogy: It’s not about making the shot–it’s about taking the right shot. If you measure success by the outcome alone, things get weird fast (consider this hypothetical scenario to see how).

Being outcome-oriented is one of our pet peeves. Until recently, it used to be Howard Marks’s too–that was before Bitcoin moonshot and he started listening to his son, who happens to own some Bitcoin. This is the same mindset that led to the questions ISG began to get.

🧩Asset Class vs. Tactical Allocation

Is there a difference? ISG seems to think so. Something may not be an asset class but still be worthy of a tactical allocation. But what is a tactical allocation? Here is a CFA prep video that explains it.

Let’s add some historical context here. Harry Markowitz, Nobel laureate and the father of Modern Portfolio Theory, never mentioned it in his seminal 1952 paper, Portfolio Selection (PDF). Like many things in finance, the concept of “tactical allocation” emerged much later, and arguably was more a tool to serve business needs and less something that was meant to provide clarity to the investing process. This academic paper (paywall), which was published almost 40 years after Markowitz, seems to have helped popularize it. Read that paper and you’ll see that it becomes clear that tactical allocation was about shifting across asset classes, not about adding non-cash-flowing assets to portfolios. From the abstract:

Tactical asset allocation (TAA) is the practice of altering asset class exposures in accordance with model-based risk-reward expectations. An analysis of 17 U.S. managers who use TAA to rebalance between large-cap stocks, long-term bonds and cash equivalents reveals that the vast majority provided positive timing ability at a statistically significant level.

And later:

For stock, bond and cash returns, we used gross S&P 500 total returns, 20-year U.S. bond total returns and three-month Treasury bill returns, respectively. These return series correspond most closely to the benchmarks used by TAA managers.

This is a real portfolio. Notice what is missing there: Gold. There is nothing remarkable about asset managers changing the mix in reaction to changing market conditions, that’s what a prudent investor is supposed to do. Today, tactical allocation may have become a backdoor for non-cash-flow-generating assets to sneak into a portfolio, but there is no historical support for that idea.

What about the idea that one should own gold as an inflation hedge? Well, ISG doesn’t even buy that idea and even backs it up with data:

However, gold does not add value to a well-diversified portfolio. It does not generate income, it does not generate earnings, and-contrary to popular belief-it is not an inflation hedge.

Even if you hold on to gold as “insurance,” that doesn’t mean it belongs in your investment portfolio.

🧭 ISG’s Position

We do not believe that gold and bitcoin (or cryptocurrencies broadly) have a strategic role in clients’ portfolios.

Promising. That’s also HL’s view. We share that view with both of them.

But then comes their hedge and is where we diverge:

However, gold, just like other real commodities, has presented tactical asset allocation opportunities in the past and will continue to do so in the future.

So… Is gold an asset class? The report dances around the question. One chart (Exhibit 63) even labels gold as an asset class–though it’s used to debunk the inflation hedge myth.

Definitions matter. Positions matter. It’s a very simple concept: If gold is an asset class, it might belong in a portfolio. If it isn’t, it doesn’t. The strategic vs. tactical distinction merely muddies the waters.

Then comes their Bitcoin line:

Bitcoin, as we have discussed before, is a speculative digital asset more suited to gambling than investing.

This simple conclusion fails to deliver on two fronts:

1. Why is gold granted portfolio access (even tactically), but Bitcoin isn’t?

2. The investing vs. gambling dichotomy is the wrong question.

Yesterday’s NYT opinion piece raises legitimate concerns while at the same time contributing to the confusion.

🎙️ Coming Soon: LexBeyond Podcast

We’re launching a podcast–LexBeyond–that reimagines legal history as a podcast, where forgotten cases, overlooked concepts and hidden conflicts are heard anew. Each episode explores the people and ideas behind key cases–the debates that shaped doctrine, the words that bent policy, the stories history forgot. Designed for lawyers, policymakers, journalists, as well as the legally and financially curious, LexBeyond sits at the intersection of storytelling and scholarship — revealing what happens when law meets life.

Our first episode will tackle why the investing vs. gambling dichotomy is misleading. Stay tuned!

There were two major developments last week:

First, Kalshi secured a $300 million Series D investment led by Sequoia and a16z, valuing the company at $5 billion. Kalshi also announced plans to go international, expanding its offering to more than 140 countries and is now the largest prediction market in the world.

That announcement came just a few days after ICE invested $2 billion into Polymarket at a pre-money valuation of $8 billion. We covered that move earlier in detail, then unpacked the legal nuances around federal vs. state jurisdiction on Full Court Press.

A trend emerged across both releases: Investing and prediction markets are flirting with each other. Or, perhaps we should say, prediction markets are trying to woo investing? From the a16z piece announcing the Kalshi investment:

Every question—whether about politics, economics, technology, sports, or the weather—becomes an investable asset.

And from Shayne Coplan, quoted in the ICE press release:

By combining ICE’s institutional scale and credibility with Polymarket’s consumer savvy, we will be able to deliver world-class products for the modern investor.

Coplan’s quote begs the question: What exactly is the product for the “modern investor?” Tokenized stocks perhaps? That seems to be in the works. Or is it prediction markets? Because here’s the thing– tokenized or not, stocks can be investments. Prediction markets can’t because you can lose everything, and there is no margin of safety.

The a16z quote, by contrast, leaves no room for interpretation. It explicitly characterizes prediction market contracts as investable assets. This is heartbreaking to see from one of the country’s leading VC firms. Their job, literally, is to invest. So it’s difficult to believe that some of the sharpest minds don’t realize and/or don’t care that if you can lose everything based on a contingency, you’re not investing.

The lines between finance and gambling were already blurring. Now, apparently, a sports bet is an investable asset. What’s next–parlays in portfolios, or, dare we say it, in retirement accounts? Do you see the absurdity here?

This is not sustainable. Either the courts will intervene (hopefully before a crisis), or Congress will react (likely after one), or AI will call out the increasingly nonsensical positions and repackage them in a way a 5th grader can understand–triggering a backlash strong enough to force change. There’s also a darker possibility: If the courts don’t step in and wrangle this issue, we could soon see gambling style prediction markets entering our school curriculums and potentially financial literacy classes, under the guise of investing. Even more stark, your favorite athlete may get hurt because someone, somewhere, had meaningful money riding on it. We pray it doesn’t come to that–but at this rate, we wouldn’t bet against it.

We don’t believe a16z genuinely thinks a sports bet is an investment. More likely, they’re expanding the definition of investing to make their investment thesis work. Crypto went through a very similar journey, but we digress.

So yes, prediction markets are sliding into investing’s DMs. These two announcements were just the latest opportunities for flirtation. But the seduction has been underway for a while.

Robinhood

Two months ago, Robinhood launched pro and college football prediction markets directly within its app. JB Mackenzie, VP & GM of Futures and International, said:

Adding pro and college football to our prediction markets hub is a no-brainer for us as we aim to make Robinhood a one-stop shop for all your investing and trading needs.

Subtle! Prediction markets and investing in the same sentence. More Coplan than a16z. Technically, it doesn’t say prediction markets are investing–the “out” is that investing refers to stocks and maybe crypto, and prediction markets fall under “trading.” But on the Robinhood app, it’s all casually bundled together.

Interactive Brokers

Thomas Peterffy, CEO of Interactive Brokers, is bullish on prediction markets–though he prefers macroeconomic themes over sports.

At 1:35, the host tees up a probing question:

More importantly, the idea of how investment has expanded, Thomas. I’m curious about the idea that the traditional ways of investing have shifted. It’s not just buying the stocks, or buying the bond, or even buying the option. It’s tokenization, securitization, prediction markets, etc. How do you fit in?

Peterffy seizes the moment to make the bull case for prediction markets:

…they are going to become more and more and more important to the point where they will overshadow the equity markets.

But he notably avoids calling them investing.

We respect Peterffy for doing that. A stronger stance would’ve been to correct the host by saying, “Look, this isn’t investing–it’s trading. But the prices generated can be useful, and there are hedging opportunities.” He certainly talked about price discovery and hedging, but remained silent on the investing label; that’s the piece that really matters.

Just when we thought Peterffy might hold the line, he decided to close with:

I think that for serious and analytical investors, prediction markets will be a very very important outlet.

And the lines blur further.

We dug deeper. It doesn’t look like Peterffy plans to distance himself from the “prediction markets as investing” narrative. Quite the contrary. See the snapshot below from Bloomberg’s What Are Event Contracts and Do They Work?

The Markets homepage has changed–we couldn’t find “predictions as investments” on the current version. For a moment, we were hopeful. Maybe Interactive Brokers doesn’t want to be on record saying prediction markets are investing tools.

Scroll a bit further, and hope fades:

Trade the future with ForecastEx’s game-changing Forecast Contracts. Predict economic & climate events, earn from accurate calls by answering “Yes” or “No.” It’s more than trading – it’s a long-term investment strategy, as there’s an opportunity to earn interest even when your prediction isn’t correct. (emphasis added)

So it’s investing not because of the contingency exposure, but because your open position pays interest? Like a money market fund? Interactive Brokers explains: It pays 50 basis points below the fed funds rate. In theory, that could be an investment. Maybe there’s still some hope?

Or, maybe not. Let’s take a look at their About page:

ForecastEx offers a new investment instrument that harnesses the power of crowd-wisdom. Forecast Contracts provide investors with a straightforward way to trade their predictions on economic, political, and climate outcomes, to either hedge against market uncertainty, or profit from their insights. The contracts are simply yes or no answers to questions about future events. Learn more about the contracts on the Forecast Contracts Work page. (emphasis added)

A new investment instrument… And Peterffy’s direct quote sits right below:

Forecast Contracts allow investors to act on the most crucial issues shaping our future. These contracts give traders a direct line to market sentiment on the economy and politics, helping them manage risk or express views on political events. (emphasis added)

And one more:

The only fee charged by ForecastEx is one cent ($0.01) per contract or pair. The fee is included in the pricing, which makes it easy for the investors to know all the risks and costs upfront. There is no exchange, clearing, market data, brokerage, or any other fees. (emphasis added)

Yes, there are mentions of interest payments, but the “this is investing because we pay interest” argument feels incredibly tenuous. Do you really think the average user will make that connection? That’s a bridge too far. If that’s truly the position, the page could’ve been much more explicit.

Bankruptcy happens gradually, then suddenly. Industries–and even countries–are no different. If you want to understand how the lines between investing, speculating and gambling are being shattered, this is how the seeds are planted.

Fortune

You might say expecting clarity from an industry player who profits from ambiguity is asking too much. But what about reputable media outlets? Any hope there?

It doesn’t look promising. Take this Fortune article, which pits investing against gambling:

Are sports prediction markets betting or investing? Two new Robinhood lawsuits could define how they are regulated going forward.

What’s your first thought reading that headline? Ours was: Complaints have been filed and either the complaint and/or the associated memorandum takes the position that prediction markets are investing–not gambling.

The first part is true and easily verifiable-complaints have been filed. The second? Also verifiable–these documents are public. But, we reviewed them (for both cases) and guess what? Our expectation was wrong. The actual complaint doesn’t even talk about investing, except in passing when describing Robinhood generally. The memorandum doesn’t either.

Strange, isn’t it? A senior journalist at a respectable magazine puts out a misleading headline. You can chalk it up to clickbait. But the words ‘prediction markets,’ ‘betting,’ ‘Robinhood’ and ‘lawsuits’ already make a strong headline; nothing else is needed.

Dan Wallach broke the lawsuit out on X, and he, too appears to have been lulled into using the word “investing”:

It’s unclear whether the Fortune author saw Wallach’s post and echoed it in the headline, or whether these were two separate events that happened to converge. Either way, the message is clear: Prediction markets are flirting with investing.

Final Thoughts

What we’re witnessing is the 21st-century version of subliminal advertising in finance. The word “investment” floats around like a ghost–mentioned in the same breath as prediction markets, popping up on websites, disappearing, then reappearing in some other form.

Prediction markets are moving fast! When we started drafting this post last week, we wrote: “Seems like nobody is quite ready to take the position that prediction markets are investments just yet, but…” That’s already outdated. a16z, for one, is ready. Interactive Brokers is nearly there. And when a leading VC firm takes that position, and a major brokerage is about to fully embrace it, it’s not hard to guess what comes next:

All the lines between speculation and hedging or gambling and investing are going away.

But let’s remember: Investing, by definition, means disagreeing with the crowd. When everybody else bets, we’ll invest. We’ll invest in ourselves–and in the future of the country.

The idea of national sports gambling becoming mainstream feels overpriced, especially when only seven percent of America thinks it’s a good thing. We’ll short it. We see at least three pathways for price to converge to value: The judiciary, Congress and AI.

We’re happy to be David against the sports gambling Goliath. It’s a fight worth engaging in.

We must succeed.