Why are crypto VCs betting on prediction markets?

Author: Yogita Khatri, Translated by TechFlow

Prediction markets are in their golden age.

The Clearing Company, founded by former Polymarket and Kalshi employees, just closed a $15 million seed round—a significant sum for a first round.

Kalshi, valued at $2 billion after a $185 million round led by Paradigm in June, has been aggressively expanding, from hiring cryptocurrency executive John Wang to partnering with Robinhood on a soccer market.

Polymarket is reportedly raising over $200 million, led by Peter Thiel's Founders Fund, at a $1 billion valuation.

Polymarket has previously secured over $100 million in funding, including an undisclosed $50 million round earlier this year, and has returned to the US market with a reported $112 million acquisition of derivatives exchange QCEX. Meanwhile, Crypto.com and Underdog are launching sports prediction markets in 16 US states; Coinbase is reportedly exploring its own prediction platform; X has appointed Polymarket as its official prediction partner; and xAI is integrating Grok into Kalshi. Taken together, these recent developments suggest that prediction markets have moved from the fringes into the spotlight. The numbers tell the same story. Data from The Block Pro's funding dashboard, compiled by my colleague Ivan Wu, indicates that 2025 will be the strongest year yet for prediction markets, with over $216 million raised across 11 deals. This follows $80 million raised in 2024 and nearly $60 million in 2021, following years of scant funding activity. Prediction market platforms are attracting more venture capital this year because old assumptions have been shattered. Trading volume hasn't decreased since the US election last November, but has instead shifted to areas like sports, economics, and cultural events. "This continued interest has given many venture capital firms renewed confidence in investing in this market," said Michael Hua (nicknamed Mikey0x), a partner at 1kx. Hoolie Tejwani, head of Coinbase Ventures, went further, calling prediction markets a "killer on-chain application" and stating that they have demonstrated strong product-market fit. Regulatory breakthroughs have further bolstered this momentum. In May 2025, the U.S. Commodity Futures Trading Commission (CFTC) withdrew its appeal in the Kalshi case, effectively confirming the federal court's ruling allowing election contracts—a turning point that Kyle Samani, managing partner at Multicoin Capital (a Kalshi investor), said propelled prediction markets into mainstream consciousness. Just last week, the CFTC approved Polymarket's return to the U.S. market through its acquisition of QCEX and issued a no-action letter regarding record-keeping for event contracts. Brandon Potts, partner at Framework Ventures, called this move proof that regulators are now willing to engage constructively. All of this is built on years of infrastructure development. Alexander Pack, co-founder and managing partner at Hack VC, said, "Prediction markets have needed more than a decade of infrastructure improvements to truly achieve a leap in adoption." He cited smart contracts, secure oracles, stablecoins, and regulatory support as key factors. Overall, persistent demand, cultural visibility, regulatory clarity, and infrastructure maturity—these factors combine to make prediction markets a more lucrative investment opportunity today. The Advantages of Polymarket and Kalshi If the question of "why now" explains the funding frenzy in prediction markets, the more difficult question is why only Polymarket and Kalshi have emerged as leaders. Most competitors—whether on-chain experiments or niche platforms—remain marginalized. Liquidity may be one of the key factors. Kyle Samani, Managing Partner at Multicoin Capital, described it as a "chicken and egg" problem that can't be solved without patience and capital. Kalshi spent five years building liquidity before favorable market conditions emerged, giving it what Samani calls a "huge moat." Polymarket, on the other hand, promotes liquidity by distributing hundreds of thousands of dollars in cash incentives monthly, especially during elections, a strategy cited as key by 1kx's Michael Hua. Kalshi also benefits from its affiliated market makers, which help it deepen trading volume across multiple contracts, Hua added. Marketing and market awareness also give both platforms enduring competitiveness. Dragonfly partner Rob Hadick stated that Polymarket "has become synonymous with the concept of prediction markets," noting that it has become a go-to source for journalists, politicians, and business leaders, and that its high-profile partnership with Platform X has further enhanced its influence. Kalshi, on the other hand, has focused on building institutional credibility, securing partnerships with companies like Robinhood and cultivating a reputation as a regulated financial platform. Hadick noted that "other prediction markets are either too early or too niche to find true product-market fit, and the market size is not yet sufficient to support more than two scalable players." Persistence is also crucial. Alexander Pack of Hack VC stated that despite regulatory pressure and thin trading volume, these two platforms persisted. Their first-mover advantage, combined with their ability to survive, ultimately translated into market dominance, giving them brand influence, liquidity, and distribution capabilities that competitors struggle to match. The future of prediction markets: The next phase of the prediction market may see a pattern of "concentration at the top and expansion at the edges." Dragonfly partner Rob Hadick likened its structure to that of an exchange: a few leading players dominate, but there's still room for smaller, niche, or regional competitors. He believes the potential in this sector is "enormous," limited only by users' willingness to bet on outcomes. Kyle Samani of Multicoin Capital went further, stating that prediction markets have the potential to rival the stock market by allowing people to trade events directly. "There's no reason this space can't be even bigger than the stock market." Institutional adoption could accelerate this process. Colton Conley, a partner at Arrington Capital, expects hedge funds and other institutions to use prediction markets as direct hedging tools, enhancing liquidity and improving accuracy. Prithvir Jhaveri, co-founder and CEO of FactCheck, predicts that popular sports platforms like FanDuel and DraftKings will eventually join the fray—a shift he believes could generate "hundreds of billions of dollars" in revenue for the industry. FactCheck aims to create the "Hyperliquidity of prediction markets." Product design is also crucial. Hoolie Tejwani of Coinbase Ventures stated that they have made "multiple" investments in this area and believe that user-generated markets, on-chain liquidity, and trust-minimized outcome resolution mechanisms will be the biggest breakthroughs. Alexander Pack of Hack VC cautioned that despite progress in infrastructure, prediction markets remain a small fraction of crypto trading, and that more ambitious visions—such as enterprise decision-making and "futarchy"—remain out of reach. Predictive democracy, coined by economist Robin Hanson, refers to a form of governance in which elected officials define measures of national well-being and use prediction markets to predict which policies are most likely to improve those measures. Risks and Challenges While prediction markets are thriving, they face challenges. Liquidity remains fragile, especially for smaller platforms. Hadick points to the outcome resolution mechanism as a structural weakness—many events are not entirely objective and rely on oracles or arbitrators, which can lead to disputes. He warns that this design could lead to "incentive misalignments or problems," but he also suggests that market makers will adapt to prediction markets over time, as has been seen in the sports betting sector. Reputational risks are also not to be ignored. One unnamed investor noted that "bad actors" could create markets around socially harmful outcomes like war or terrorism, potentially sparking public backlash and regulatory crackdowns. Michael Hua also pointed out integrity issues such as "harmful liquidity and insider trading" that could scare off market makers and damage the user experience, especially on crypto-native platforms that do not require identity verification (KYC).