Last week a piece of news crossed the tape that deserved a hell of a lot more attention than it got. Kalshi asked the Commodity Futures Trading Commission for permission to introduce margin trading on certain prediction market contracts.
Apparently allowing people to speculate on what topping the President of Argentina will put on his breakfast toast at the next G20 Summit wasn’t batshit insane enough. Now somebody needs to be able to bet on “marmalade” with leverage?
The request came from Kalshi Klear, the company’s clearinghouse, and is aimed primarily at attracting institutional traders. The proposal has not yet been approved, and Kalshi says access would initially be restricted to qualifying self clearing members meeting certain capital requirements. There are safeguards built into the proposal, which I’ll get to, but my reaction is pretty simple: I think this is a horrific, horrific idea.
Part of the reason is that I already wrote about where I thought all of this was heading earlier this year, in a post that is already one of my most read posts of the last 5 years.
Back then, I wasn’t even talking specifically about leverage. I was writing about how uncomfortable I had become with the transformation of ordinary life into one gigantic, permanently open casino. And I wasn’t just observing it, I had lived it.
I wrote that “prediction markets, sports betting, options trading, crypto leverage, gambling apps...life has been turned into a tradable hamster wheel like dopamine loop.” I also wrote: “Every event is now a market. Every opinion is now a wager. Every moment of boredom can be monetized by putting money at risk on your phone.”
I tried Kalshi myself and eventually deleted the app because I found it frightening how seductive and accessible the experience was. I also received sponsorship offers from several prediction market companies and ultimately decided I couldn’t, in good conscience, take them.
I wasn’t arguing then, and I’m not arguing now, that prediction markets should disappear overnight. What worries me is the direction of travel. Earlier this year, I wrote that I didn’t think we fully appreciated “how psychologically corrosive it is to live in a world where you can gamble on literally anything, all day, every day.”
Months later, the proposed next step is apparently to add leverage. Wonderful.
I understand why leverage exists in traditional financial markets. It allows institutions to hedge enormous portfolios efficiently and means firms don’t have to fully fund every dollar of notional exposure.
But prediction markets are a bizarre place to start importing more of Wall Street’s leverage machinery because these contracts 1) aren’t anywhere near as liquid as most normal Wall Street securities and 2) almost always have eventual binary outcomes. Something happens or it doesn’t. A candidate wins or loses. An economic statistic lands above or below a number. An event occurs by a particular date or it doesn’t. When the event resolves, the contract resolves.
This is the reason most brokerages don’t let you use margin on to buy option contracts. You need the matching cash/buying power because they can lose 100% of their value very quickly.
That makes leverage particularly interesting because you aren’t merely magnifying exposure to an asset whose price can fluctuate indefinitely. You’re potentially magnifying exposure to a contract ultimately heading toward one of two endpoints.
Kalshi argues margin could make longer dated contracts more attractive to institutions, and its proposed framework would reportedly increase collateral requirements as settlement approaches. Sports, culture and “mention” markets would also be excluded. Those are meaningful safeguards, but they don’t change my basic objection.
People quickly forget that leverage doesn’t merely increase potential returns...it reduces the amount of error you can survive. If you own something outright and it temporarily moves against you, you can potentially wait. When you’re leveraged, the market can make that decision for you, a trend I have a feeling we’re going to see a lot of in equity markets in the near future.
You don’t have to look far for a modern example. Crypto has repeatedly demonstrated what happens when enormous leverage gets piled onto an already volatile and fragmented market that has also been plagued by fraud and manipulation. Leveraged positions get liquidated, those liquidations exacerbate price moves, more traders get wiped out and the cycle can feed on itself with breathtaking speed.
There’s also the inevitable arms race. If one major platform receives permission to offer leverage, competitors have an incentive to seek comparable treatment. Then somebody wants better margin terms. Somebody introduces portfolio margin. Somebody builds correlations between contracts that supposedly reduce risk. Somebody creates increasingly elaborate hedges. Eventually, a product that started with the wonderfully simple question “Will X happen?” accumulates layer after layer of financial engineering, and everybody involved will have a sophisticated model explaining why it’s safe. They always do.
Earlier this year, I admitted that despite everything I’ve gotten right over the years, active trading did more damage to my portfolio and mental health than almost anything else I’ve done in investing. The problem wasn’t simply being right or wrong. Constant action creates constant opportunities to make mistakes. I compared active trading to live betting a baseball game because both create the illusion that every moment requires a decision and every movement demands a reaction. And once your brain is in this pattern, it’s incredibly difficult to get out of it. Ask me how I know.
Prediction markets take that impulse and expand the universe of things you can wager on: sports, politics, inflation, interest rates, elections, economic data, geopolitics, crypto and virtually anything else someone can turn into a contract. There is always another market, another price movement and another opportunity to convince yourself you have an edge.
And now we’re discussing adding another seductive thought: why risk $1 when I can get several dollars of exposure? Why offer up people that “a ha” moment that so many gamblers in recovery talk about when they first realized they can bet on *credit *with a bookie? This point almost always immediately precedes major problems in every gambler’s story I’ve heard. Some lead to big losses. Some lead to visits “reminding” people to pay.
That’s the progression that bothers me. First we put the casino in everybody’s pocket. Then we made the casino operate 24 hours a day. Then we created markets on practically everything happening in human civilization. Now we’re discussing levering it up. At what point do we stop pretending every increase in someone’s ability to slip into gambling addiction constitutes financial innovation?
Leverage doesn’t create the underlying problem. It takes whatever problem already exists and makes it bigger. Earlier this year, I wrote that the modern economy increasingly felt “engineered around addiction, distraction, and impulsivity.” This proposal does absolutely nothing to change my mind.
Finance has an almost pathological tendency to take something useful, financialize it, lever it, optimize it and keep turning the dial until somebody discovers why the dial had a limit in the first place. Maybe this time we don’t need to find out how much more exciting this becomes when borrowed money gets thrown on top. Or maybe the bond market will just make that decision for us.
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Since 2026, I have been making an attempt to no longer actively trade as much as I once did ( read my story here). In an attempt to lead a healthier lifestyle, I’ve also excluded myself from most fantasy sports, sports betting, online and in-person casinos and prediction markets.
My goal is for my investing/saving to be done by recurring contributions mostly to sector ETFs and a few select equities, trusted third parties who oversee my accounts, and advisors. Such advisors or funds, through individual equities, options, index funds, mutual funds, ETFs, or other securities, may have positions in, exposure to, or holdings of names mentioned herein that I know nothing about. Basically, it is possible I could own, have exposure to, or not own anything, at any point.
You are on your own. Do not make decisions based on my blog. I exist on the fringe. Again, I get shit wrong a lot, both in the market and in life, but am trying my best. If you see numbers and calculations of any sort, assume they are wrong and double check them. I failed Algebra in 8th grade and topped off my high school math accolades by getting a D- in remedial Calculus my senior year, before becoming an English major in college so I could bullshit my way through things easier. Hence, I am a writer. I write these posts after a couple beers sometimes. Many times I edit after my posts are published because I’m impatient and lazy, so if you see a typo, check back in a half hour. Thanks, you’ve been a great crowd and don’t forget to tip your servers.
