Why are crypto VCs betting on prediction markets now?

Prediction markets are experiencing a significant surge in venture capital investment and mainstream attention, driven by regulatory progress, sustained user demand, and improved infrastructure. Key developments include:

Major Funding Rounds: Polymarket is reportedly raising over $200M at a $1B valuation, while Kalshi secured a $185M round led by Paradigm. The Clearing Company closed a $15M seed round.
Regulatory Advances: The CFTC's recent actions, including approving Polymarket's return to the U.S. and issuing a no-action letter for event contracts, have provided much-needed clarity.
Market Leaders: Polymarket and Kalshi are pulling ahead due to their first-mover advantages, strong liquidity, strategic partnerships (e.g., Polymarket with X, Kalshi with Robinhood), and brand recognition.
Future Potential: The sector could see institutional adoption for hedging, expansion into user-generated markets, and integration by major fantasy sports platforms. Some investors believe prediction markets could eventually rival the stock market in size.
Persistent Challenges: Risks include fragile liquidity for smaller platforms, contentious event adjudication, potential reputation damage from harmful markets, and issues like insider trading.

Source: the block

Compiled by: Zhou, ChainCatcher

Prediction markets are having a moment. The Clearing Company, founded by former Polymarket and Kalshi members, just closed a $15 million seed round—an impressive sum for a first-time round. Kalshi, valued at $2 billion after a $185 million round led by Paradigm in June, has been aggressively expanding, from hiring crypto chief John Wang to partnering with Robinhood on a football market. Polymarket is reportedly raising over $200 million at a $1 billion valuation, led by Peter Thiel's Founders Fund; it has raised over $100 million to date.

dollars, including an undisclosed $50 million round earlier this year, and returned to the U.S. with the acquisition of derivatives exchange QCEX for $112 million.

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 margins into the spotlight.

The data also tells the story. According to The Block Pro's funding dashboard, 2025 was the strongest year yet for the prediction market, with 11 deals raising over $216 million. This surge follows $80 million in 2024 and nearly $60 million in 2021, while earlier years saw only sporadic activity.

Prediction market platforms are attracting more venture capital this year because old assumptions are being shattered. After the US election last November, trading volume didn't subside, but instead shifted to sports, economic, and cultural events. "This continued interest has given many VCs renewed confidence in investing in this market," said Michael Hua (aka Mikey0x), a partner at 1kx. Hoolie Tejwani, head of Coinbase Ventures, went further, calling prediction markets a "killer on-chain use case" that has demonstrated lasting product-market fit.

Regulatory breakthroughs have also solidified this momentum. In May 2025, the CFTC withdrew its appeal in the Kalshi case, effectively locking in a federal court ruling allowing election contracts—a turn 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 US through its acquisition of QCEX and issued a no-action letter regarding recordkeeping for event contracts—a move Brandon Potts, partner at Framework Ventures, described as evidence that regulators are now willing to engage constructively.

Behind all of this is years of infrastructure development. “Prediction markets will need more than a decade of infrastructure improvements before they really see an inflection point in usage,” said Alexander Pack, co-founder and managing partner at Hack VC, citing everything from smart contracts and secure oracles to stablecoins and regulatory support.

Overall, a combination of enduring demand, cultural visibility, regulatory clarity, and mature infrastructure makes prediction markets more investable today.

Advantages of Polymarket and Kalshi

If “why now” explains the surge in funding, the harder question is: why are only Polymarket and Kalshi breaking out? Most competitors — from on-chain experiments to niche platforms — remain on the fringes.

Liquidity could be a decisive factor. Samani calls it a chicken and egg problem, unsolvable without patience and capital. Kalshi spent half a decade building liquidity before conditions improved, creating a significant moat. Hua notes that Polymarket can offer hundreds of thousands of dollars in cash incentives each month to encourage liquidity—which they did during election month. Hua adds that Kalshi also benefits from its affiliated market-making team, which helps further enhance trading volume across various contracts.

Marketing and mindshare also give both platforms staying power. Dragonfly General Partner Rob Hadick says Polymarket has become synonymous with the concept of prediction markets, serving as a go-to source for journalists, politicians, and business leaders, and securing a high-profile recent partnership with X. Kalshi, on the other hand, focuses on institutional credibility, partnering with companies like Robinhood to build a reputation as a regulated financial platform. "Other prediction markets have so far been either too early or too niche to find sufficient product-market fit, nor have they been large enough to support more than two scalable players," says Hadick.

Persistence is equally important. Pack noted that both platforms persisted despite regulatory pressure and sluggish trading. This first-mover advantage, combined with survival, ultimately translated into a dominant position, giving both platforms brand power, liquidity, and distribution capabilities that competitors currently lack.

The Promise of Prediction Markets

The next phase is likely to be one of concentration at the top and diffusion at the edges. Hadick compares its structure to that of an exchange: a few players dominate, but smaller, niche, or regional competitors also survive. He believes the upside potential is enormous, limited only by people's appetite for betting on the outcome. Samani, on the other hand, believes this category can rival the stock market because it allows people to trade directly on events. He says, "There's no reason this space can't be bigger than the stock market."

Institutional adoption could accelerate this path. Colton Conley, a partner at Arrington Capital, expects hedge funds and other institutions to use prediction markets as direct hedging tools, deepening liquidity and improving accuracy. Prithvir Jhaveri, co-founder and CEO of FactCheck, which aims to create a prediction market version of Hyperliquid, predicts that fantasy sports platforms like FanDuel and DraftKings will eventually join the fray—a move he believes could generate hundreds of billions of dollars in revenue for the industry.

Product design will also be crucial. Tejwani stated that Coinbase Ventures has made several investments in this area, and that the biggest breakthroughs will come from user-generated marketplaces, on-chain liquidity, and trust-minimized adjudication. Pack warned that despite advances in infrastructure, prediction markets still only account for a small portion of crypto trading, and that the broader vision, from corporate decision-making to futarchy (governance by prediction markets), remains a distant prospect. Futarchy, coined by economist Robin Hanson, is a form of government in which elected officials define measures of national well-being and use prediction markets to predict which policies will best improve those measures.

Risks and Challenges

Momentum won't eliminate obstacles. Liquidity remains fragile, especially for smaller platforms; adjudication/settlement is also a structural weakness—many events are not entirely objective and rely on oracles or arbitrators, which can be contentious. Hadick warned that this design could create incentive misalignments or other issues. However, he suggested that over time, market makers will become more familiar with prediction markets, as has happened in the sports betting sector.

Reputation is also at risk. One unnamed investor noted that bad actors could create markets around socially harmful outcomes like war or terrorism, potentially triggering public backlash and regulatory crackdowns. Hua also mentioned integrity issues, including toxic traffic and insider trading, which can discourage market makers and worsen user experience, especially on crypto-native platforms that don't require KYC.