The Philadelphia Stock Exchange was founded more than fifteen years ago. In 2008, Nasdaq acquired it and HedgeStreet bought another exchange. They both stated that they would offer event contracts to their investors. It was designed to let people bet on future events and pay fixed amounts when they occurred.
At the time, it was a novel but controversial idea; it also failed to generate enough interest from investors to succeed. Kalshi is a 33-year-old startup based in New York. It’s now testing the waters with some new investors, including Sequoia Capital and Charles Schwab. The company has received $36 million of funding so far.
This is partly due to the fact that Kalshi, a former MIT classmate and researcher Tarek Mansour, and Luana Lpes Lara won approval last year from the Commodity Futures Trading Commission for a derivatives trading platform.
Mansour claims that Kalshi’s tiny team worked closely at all stages with the agency to make sure it passed. He says that it was a difficult process because the more you have to deal with, the more issues will arise. Bringing aboard a former head of clearing at the CFTC as Kalshi’s head of regulation also helped, he says.
Kalshi also emerges at a time where people consume more news, sometimes in a narrower way, through social media and other outlets.
Lopes Lara believes that this matters because “contracts are pretty closely tied to news and other things in the world, and relevant in today’s world.” Quora is one of the ways the startup advertises on its question-and-answer website Quora. The founders add that there are other tie-ups that can be made “partnership-based”.
Kalshi, in the interim, is on a mission. It wants to show it can attract a new generation, both institutional and retail, to place bets on any outcome. This includes whether Turkey joins the European Union before June next year.
Kalshi, which is partnered with a clearinghouse to hold the funds of all users and ensure every contract is secured, is gaining some momentum. The platform launched in March and has since attracted over 4,000 people who agree to the “yes” and “no” contract. These contracts have only two outcomes, and pay 100% for correct bets or zero if they are wrong. This is a reasonable, but conservative number of users.
According to Mansour, the founders believe things will pick up faster this fall because Kalshi only has “a few avenues for acquiring user and growing our users base.”
One of these products is the one that consumers have been trying out and is now available for anyone to sign a contract on its website.
Kalshi has “a few broker partners that could make Kalshi’s impactful” even more. . . Mansour says that event contracts can be traded in the same manner as stocks or commodities.
Lopes Lara adds, “People using Robinhood, Coinbase, or other brokers, are our first targets, given their knowledge about investing and interest in this type of question-based thinking and event-based planning for their investments.”
What interested parties need to know and what they should expect is event contracts around sporting outcomes (“that’s very similar to gambling, which we don’t facilitate”) Lopes Lara
Federal regulations prohibit certain areas from being used. This includes events contracts that are tied to geopolitical events like the possibility of a conflict breaking out, as well as political events. Although users may be tempted by the idea of betting on whether California Governor Gavin Newsom is recalled in September or not, it would be very difficult to do so.
Mansour says that Kalshi will not be able to set up their own event contracts offerings if other financial institutions or brokerages take off. “A lot [intellectual] property has been created over the past two-and-a half years. Each detail was designed for event contracts. For some institutions, it would be a long time to get in the space.
Time will only tell.
Kalshi is also owned by Y Combinator, Justin Mateen (cofounder of Tinder) and other investors.
Alfred Lin from Sequoia Capital is a member of the board.
Publiated at Tue 31 August 2021, 04:25:52 +0000