Prediction Markets: Financialized Gambling and Social Risks

Name: The Bizarre World of Prediction Markets
Uploaded: 2026-04-18T16:15:06+00:00
Duration: 31 min 1 s
Channel: Patrick Boyle
Description: Summary and key takeaways on The Bizarre World of Prediction Markets: Summary & Key Takeaways, covering The Evolution of Betting “Event contracts” rebrand

Patrick Boyle

Apr 18, 2026

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31 min video

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2 min read

YouTube video ID: e0nsou-1Q2k

Source: YouTube video by Patrick Boyle — Watch original video

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“Event contracts” rebrand traditional gambling to sound more respectable, yet the platforms function like 1920s betting shops with glossy user interfaces. Advocates claim these markets serve a public good by aggregating information more accurately than polls, but retail participants consistently lose. The narrative of a “truth machine” masks the reality that most bettors experience net losses.

Regulatory History and Conflict

The Commodity Futures Trading Commission (CFTC) was created to oversee futures for commodities such as wheat and cotton, enabling hedging. Over time, the definition of “commodity” expanded to include interest rates, stock indices, and Bitcoin. The 1958 Onion Futures Act remains the sole major exception that explicitly bans futures trading. Platforms like Kalshi exploit federal commodity law to sidestep state gambling regulations, while the Department of Justice and the CFTC intervene to block states from enforcing local gambling laws against these services.

The Mechanics of Prediction Markets

These markets are often thinly traded, allowing wealthy actors to shift odds and influence public perception or media coverage. Quantitative trading firms such as Susquehanna and DRW deploy algorithms that extract value from retail participants, creating a “shark vs. fish” dynamic. Insider trading is defended by proponents as a way to incorporate “valuable information” into market prices, even when a military officer leaks classified plans to profit on a crypto‑betting site. Unlike traditional sportsbooks, prediction platforms are peer‑to‑peer; they do not restrict winning players, but the “winners” are typically algorithms.

“We haven't so much invented a truth machine as put a glossy user interface on a 1920s bedding shop.”

Broader Economic Consequences

Academic research links the rise of mobile betting to a 12‑point drop in average credit scores and higher personal bankruptcy rates. The financial fallout from these failures is eventually socialized through safety nets and the broader financial system. Prediction markets do not raise capital for new businesses or infrastructure; they merely transfer wealth from retail bettors to quantitative algorithms.

“Prediction markets don't raise capital for anything. They don't fund new businesses or build infrastructure. They just move money from the pockets of retail betters into the pockets of quantitative algorithms.”

Social Impact

The accessibility of mobile betting correlates with negative financial outcomes, including lower credit scores and increased bankruptcies. As more individuals treat betting as an investment, the line between gambling and investing blurs, fostering a financial product that is “too sophisticated to be called gambling and too simple to be called investing.”

“A financial product that is too sophisticated to be called gambling and too simple to be called investing.”

Takeaways

Event contracts rebrand gambling but operate like modern 1920s betting shops, leading to consistent retail losses.
The CFTC’s expanded commodity definition lets platforms bypass state gambling laws, while the Onion Futures Act remains a rare prohibition.
Quantitative trading firms use algorithms to dominate thinly traded markets, creating a shark‑vs‑fish advantage for retail bettors.
Mobile betting’s rise is linked to a 12‑point drop in credit scores and higher personal bankruptcy rates, costs that are socialized.
Prediction markets transfer wealth from retail participants to algorithms without raising capital for productive investment.

Frequently Asked Questions

Why are prediction markets described as a form of financialized gambling?

They rebrand traditional betting as “event contracts” and use sophisticated interfaces, but the core activity remains wagering on outcomes. The financialization lies in treating these bets as tradable assets, shifting risk from gambling to a market‑like structure without creating real investment value.

How do quantitative algorithms create an advantage over retail traders in prediction markets?

Algorithms can process large data sets and execute trades instantly, allowing firms like Susquehanna and DRW to move odds and capture value before retail participants react. This speed and informational edge turns thinly traded markets into environments where wealthy actors consistently profit at the expense of casual bettors.

Who is Patrick Boyle on YouTube?

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Helpful resources related to this video

If you want to practice or explore the concepts discussed in the video, these commonly used tools may help.

Books On Behavioral Finance And Decision Making Recommended

Provides a deeper understanding of the cognitive biases that lead retail traders to lose money in speculative markets.

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Personal Finance Book For Debt Management

Offers strategies for financial recovery and credit score improvement for those affected by the negative impacts of gambling.

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Books On The History Of Financial Markets

Explains the evolution of commodities and futures trading, providing context for the regulatory debates mentioned in the video.

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Full Transcript YouTube

It's traditionally been understood that
financial markets exist to allocate
capital to its most productive uses.
Recently, however, the definition of a
productive use has been expanded to
include betting on whether a regaton
artist will wear a dress to a football
match. In the past, if you had wanted to
place a bet on Bad Bunny's wardrobe
choices or perhaps the precise timing of
an Iranian missile strike, you had to
find a man who conducted his business
behind a local pub. Today, the process
is a bit smoother. Through a rather
impressive piece of legal rebranding,
what the authorities used to call
gambling is now referred to as trading
event contracts. This means that when
you inevitably lose your money on these
platforms, you're no longer a degenerate
gambler. You're a retail liquidity
provider contributing to a truth
machine, which sounds much more
respectable. I wouldn't necessarily put
it on your CV, though. Reading up on
prediction markets is somewhat
exhausting. Unfortunately, we seem to be
determined to financialize every single
aspect of human existence. It used to be
that if you wanted to know if it might
rain tomorrow, you'd just look out the
window, but now it seems you have to
check the bid ask spread on a
precipitation swap. The advocates for
platforms like Cali and Poly Market
argue that they're providing a vital
public good. The theory is that by
allowing people to bet on anything from
congressional control to the next
Federal Reserve decision, the
information fed back will be far more
accurate than traditional polling, which
is a lovely idea. But looking closely at
how these markets actually work, it
appears that we haven't so much invented
a truth machine as put a glossy user
interface on a 1920s bedding shop. and
to make it even better, invited a group
of quantitative algorithms to come in
and extract money from the public.
Today, we're going to look at how these
markets actually work, the legal
absurdity surrounding them, why the
commodities regulator is suddenly
interested in elections, and whether any
of this makes the world a better place,
or if we've just turned the whole world
into a casino. To understand why the US
government is fighting with itself over
who gets to regulate a bet on a football
game, we need to go back to the origins
of American financial regulation and
specifically onions. In the United
States, there's a federal agency called
the Commodity Futures Trading Commission
or the CFTC. They were originally
established to oversee futures contracts
on things like wheat and cotton. The
idea was that these markets would allow
farmers and factory owners to hedge
their price risks while making sure that
these contracts weren't just illegal
gambling. For a long time, the CFTC
applied what it called an economic
purpose test. They only approved
contracts that served some hedging or
price discovery function. But over the
years, the exchanges realized that they
could generate significantly more
revenue by listing futures on interest
rates and stock indices. The CFTC went
along with this and the definition of a
commodity future was slowly expanded to
include things that are not really
commodities at all. A few years ago,
Bitcoin was even classified as a
commodity. while it's about as far from
being a basic raw material, agricultural
product, or physical asset as anything
could be. So, almost anything can be
considered a commodity with one notable
exception. Thanks to the 1958 Onion
Futures Act, you can trade futures on
almost anything in America, but it's
illegal to trade futures on onions. This
happened because in the 1950s, two
traders managed to corner the Chicago
onion market, artificially inflating the
price before crashing it entirely. The
chaos led to angry farmers and naturally
an act of Congress. So to summarize the
current state of American financial law,
you can legally bet on the outcome of a
geopolitical conflict. You can bet on
the future price of an internet meme
token. And thanks to platforms like
Kalshi, you can now bet on who will
control the United States Congress. But
if you attempt to hedge your exposure to
French onion soup, or really any onion
soup, the federal government will step
in to protect the public from you.
>> No soup for you.
>> Now, regulators used to frown on
gambling, but things have changed. But
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10% off. Now, up until recently, the
CFTC has been quite skeptical of what
they call event contracts. They
explicitly banned contracts involving
war, terrorism, assassination, and
gaming. They also tried to ban election
contracts, arguing quite sensibly that
approving them would effectively turn
the commodities regulator into an
election cop. And this is not an
unreasonable concern. If you allow
people to trade contracts on election
outcomes, the CFTC is then responsible
for making sure no one is manipulating
those outcomes, which means that they
now would have to worry about whether an
election has been rigged or if foreign
governments are getting involved. The
CFTC was set up to make sure that wheat
prices are fair. Election monitoring may
be even further outside their mandate
than Bitcoin. One way or another, the
prediction market platforms decided to
push back. They took the regulator to
court, arguing that predicting an
election is not gaming. And somewhat
surprisingly, a federal judge agreed
with them. Having established the right
to offer election contracts, the
prediction market platforms naturally
decided to push their luck. Their logic
is fairly straightforward. If a
presidential election is just an event,
then a football game is surely also just
an event, too. So, earlier this year,
Kalshi began self-certifying sports
contracts. They started offering bets on
the Super Bowl, the NBA, and the
Masters. I say bets, but Kali would
obviously prefer if I said event
contracts. The distinction is important
to them, if not to anyone else.
This came as something of a surprise to
the individual American states. Since
the Supreme Court struck down the
federal ban on sports betting in 2018,
nearly 40 states have spent a great deal
of time and money setting up highly
regulated, heavily taxed sports betting
regimes. They have set up state gambling
licenses, compliance departments, tax
collection, the whole thing. No sooner
was that done when these tech companies
turned up offering what appears to be
functionally identical bets, but they're
claiming that they're completely exempt
from state gambling laws and state taxes
because their bets are technically
federal commodity swaps. If you are a
state gaming regulator who has spent the
last six years building out a licensing
framework, you might find this argument
somewhat frustrating.
A number of states have responded by
sending seize and desist letters.
Arizona has gone a step further and
simply filed criminal charges against
Kalshi for operating an illegal gambling
business, which is a bit of a step up
from a cease desist letter. Ohio has
taken an even more creative approach. A
company there is suing Kashi using the
statute of an. This is a British law
from 1710 passed during the reign of
Queen Anne, which allows third parties
to sue to recover other people's
gambling losses. The theory is that if
Kelshi is operating an illegal sports
book in Ohio, any enterprising person
can sue them to get the losing betters
money back. It's the sort of 18th
century legal instrument that you would
expect to find in a museum and not in an
active federal lawsuit against a Y
Combinator startup. But this is where we
are now. You might expect the Federal
Commodities Regulator to step in at this
point and clarify that a bet on the New
York Knicks is not in fact a vital
financial derivative. But they have not.
According to the Financial Times, the
CFTC has mostly just been avoiding the
question. Well, it's actually a bit
worse than that. Under the new
administration, the CFTC and the
Department of Justice have gone to
federal court to block the state of
Arizona from enforcing its gambling laws
against Koshi. So, the federal
government now appears to be deploying
its legal resources to defend a tech
platform's right to operate what Arizona
considers an unlicensed sports book,
overriding state law in the process.
Whatever your views may be on prediction
markets, you have to agree that this is
a rather unusual use of the Department
of Justice's time.
Now, if you're wondering why the new
administration might be so accommodating
to these prediction platforms, there's
one small detail that's probably worth
mentioning. A fellow named Donald Trump
Jr., who seems to be some sort of
relative of the sitting president, is
currently serving as a strategic adviser
to both Kalshi and Poly Market. I looked
up this fellow's background and he
appears to have no real work experience
in either strategy or advice. He seems
to be a reality TV star who also worked
for his dad's real estate company. I
can't think of why they hired him, but I
suppose it's still worth noting that the
president's son advises the companies
that the federal government is currently
shielding from state prosecutors. I'm
sure that it's it's all a coincidence.
Anyhow, if you ask the executives at
these firms why they deserve special
treatment from regulators, they won't
talk about the strategic advice they've
received. They'll instead talk about the
truth machine. The core argument in
favor of prediction markets is that they
provide more accurate information than
traditional polling or expert analysis
does. The idea is that when people have
to back their opinions with their own
money, they strip away their biases.
They bet on what they think will happen,
not what they hope will happen. The idea
is that the market absorbs all available
information and price is an objective
probability of an event occurring. It's
the efficient markets hypothesis applied
to everything, not just stock prices,
but elections, wars, weather, and
apparently bad bunny's wardrobe. Now,
this might sound great in a university
lecture hall, but the problem is what
happens when these ideas meet reality?
Because prediction markets are often
quite small and thinly traded, it
doesn't take too much money to move the
odds. And if the media is treating those
odds as objective truth, then buying the
odds might be a really efficient way of
buying positive press coverage. This has
happened already. During the 2012 US
presidential election, a single trader
lost around $7 million systematically
buying contracts on Mitt Romney to
artificially inflate his chances on a
platform called Inrade. The goal wasn't
to win the bet. The goal was to make the
race look closer than it actually was
and to keep voter enthusiasm high. $7
million is a lot of money to spend on
something that isn't a bet, but as a
media strategy, it's not bad. Cable news
covered in trades odds constantly.
More recently, in 2021, a YouTuber named
Brian Rose ran for mayor of London.
During the campaign, he was accused of
gaming the odds on the betting exchange
markets by allegedly having people place
bets on his unlikely victory. He could
then point to those betting markets as
evidence that he was a serious candidate
with real momentum, which journalists
then reported. So, if a wealthy
individual or a political campaign can
spend a few million dollars to move the
odds on a thinly traded prediction
market and then point to those odds as
evidence of public support, you haven't
really built a truth machine. You've
built a PR tool, but one that comes with
a chart. So, if prediction markets are
not entirely reliable as truth machines,
what are they actually for? To
understand the current boom, it helps to
look at the broader shift in retail
investing over the last few years.
Dimmitri Cafenus of the Hidden Forces
podcast uses the term financial nihilism
to describe what's been going on. The
idea is the traditional paths to
building wealth feel increasingly out of
reach for a lot of young people. So
instead of saving and investing
carefully, they try to get rich quickly
by putting money into crypto tokens
featuring pictures of dogs that were
pitched to them by edgy billionaires or
buying shares in bankrupt companies.
Prediction markets slot in perfectly
here. If you go back 5 years, crypto was
the exciting product that everyone was
talking about. But crypto is kind of
dull today. Bitcoin is up about 25% over
five years, which sounds okay until you
realize that a money market fund paying
4% with no risk at all would have gotten
you most of the way there. Your dad has
achieved triple the return of Bitcoin
over the last 5 years with his index
fund. And he didn't have to check his
phone at 3:00 in the morning or pretend
to understand what a layer 2 rollup is.
Michael Sailor is desperately trying to
make crypto seem exciting again by
structuring leveraged payouts that could
give you a return of 10% or wipe you out
entirely, which might not be the kind of
excitement most people need. At least
with prediction markets, you can watch
the sports you've bet on and have
something exciting to talk about, like
the fact that someone just bet $100,000
that the US government will announce the
existence of aliens at some point this
year. The problem with all of this is
that whenever a large pool of
enthusiastic retail money shows up
somewhere, the professionals are usually
not far behind. According to the
Financial Times, large quantitative
trading firms like Susahana and DORW,
firms that normally act as market makers
on stock exchanges, are now setting up
dedicated prediction market desks.
They're reportedly paying traders base
salaries of $200,000 a year to build
algorithms that systematically identify
mispriced contracts on these platforms.
So, on one side of the trade, you have a
person betting on the Super Bowl because
it seemed like fun, and on the other
side, you have a machine that does this
24 hours a day and never gets excited
about anything. This brings us to what
the gambling industry calls the sharks
and fish problem. In the early 2000s,
there was a huge boom in online poker.
Millions of amateurs, the fish, logged
on to play. But it didn't take long for
the professionals or the sharks to show
up. The professionals didn't play for
fun. They played the odds methodically,
and eventually they deployed bots to do
it for them around the clock. The
survival time of a new recreational
player on these sites was eventually
reduced to not very long. The amateurs
worked out that they were no longer
really playing a game. They were
donating their money to a server farm in
New Jersey. They stopped logging in. The
liquidity dried up and the whole
ecosystem collapsed. The sharks had
eaten all of the fish and then starved.
Today, prediction markets are full of
retail money and the platforms are
growing quickly. But unlike trading a
meme stock where the price is just
whatever the next person is willing to
pay, an event contract eventually
resolves to either true or false. There
is an actual answer. And if you're a
retail trader betting on a geopolitical
event based on a feeling and the person
on the other side of your trade is a
gamma neutral algorithm being run by a
multi-billion dollar hedge fund, the
odds are not in your favor. This is not
a skill gap that can be closed by doing
more research. It's a structural
disadvantage. When the quants have
extracted enough money from the retail
public, the excitement will wear off.
The platforms will likely be left with
sports betting, which the states will
eventually either regulate or shut down,
and a few novelty contracts that exist
entirely for marketing purposes. You'll
still be able to bet on whether Bad
Bunny wears a dress to a football match,
but the truth machine will be mostly
empty. Now, in fairness, there is one
thing prediction markets do better than
the traditional alternative. If you walk
into a sports book or open a DraftKings
account and you start winning
consistently, the sports book will
reduce your bet size, restrict which
markets you can access, or simply close
your account. This is standard practice.
The house is your counterparty and a
winning better is bad for business.
Several states have tried to pass laws
making this illegal, which tells you how
widespread it is. Prediction markets
don't do this because the platform isn't
your counterparty. It's a peer-to-peer
exchange. It just matches buyers and
sellers and takes a small fee. If you're
winning, the platform doesn't care.
someone on the other side of your trade
is losing and the platform collects its
fee either way. So in that sense,
prediction markets are structurally
fairer than sports books. Of course, the
reason you're winning on a prediction
market is most likely that you're a
quantitative algorithm. So this is
primarily good news for quantitative
algorithms. The traditional sports books
have noticed all of this. By the way,
DraftKings, FanDuel, and Fanatics have
all quietly launched their own
prediction market products while
simultaneously spending $48 million on a
super PAC to push for sports betting
legalization in states like Texas and
Georgia. So, they're fighting prediction
markets with one hand and copying them
with the other, which is a reasonably
common strategy in American business. If
you are a retail trader who's tired of
losing money to hedge fund algorithms,
you might be tempted to look for an
edge. In traditional financial markets,
acquiring non-public material
information and trading on it will
generally result in a conversation with
the authorities and eventually a lengthy
stay in a federal facility. In
prediction markets, however, insider
trading is often described by proponents
as a feature, not a bug. That's right, a
feature. If we look at recent events,
this feature appears to be working
remarkably well. Last summer, a Poly
Market user operating under the
pseudonym Rico Suave 666 made a series
of highly precise and highly lucrative
bets regarding the exact timing of
military strikes in the Middle East. It
later turned out that Rico Suave 666 was
not just a very astute reader of
geopolitical tea leaves. The Israeli
government arrested two men, including
an army reservist, for allegedly placing
bets using classified military
intelligence. So to be clear, a soldier
with advanced knowledge of when bombs
were going to be dropped used that
information to win money on what is
essentially a crypto gambling website,
which is not really what people have in
mind when they talk about the wisdom of
crowds. We saw something similar with
the capture of Nicholas Maduro. Shortly
after the United States announced the
operation, someone placed a series of
very large and very confident bets on
Poly Market that he would be removed
from office, walking away with a few
hundred,000.
It's not clear who placed those bets,
but they appear to have had a better
understanding of US foreign policy than
most of the US Senate. Now, if you ask
the operators and advocates of these
markets about this sort of thing, they
are surprisingly relaxed. They argue
that insider trading is actually a good
thing. The logic is that the insider
brings valuable information to the
market which makes the price more
accurate. The market absorbs the leak,
the odds adjust, and society gets a more
accurate forecast. This, they say, is
the troop machine working exactly as
intended. It's a rather creative
argument. If a military officer leaks
classified operational plans so that his
friend can win a few hundred,000 on a
cryptobetting site, we should apparently
all be grateful for the positive
externality of slightly more accurate
price discovery. I'm sure that the
soldiers involved in those operations
would be reassured to learn that their
safety was compromised in the noble
pursuit of market efficiency. The reason
insider trading is banned in the stock
market is fairly simple. If ordinary
investors believe the game is rigged,
that only insiders can win, they will
stop investing. And if people stop
investing, companies can't raise capital
to build factories, fund research, or
hire workers. The whole system depends
on participants knowing that the market
is at least roughly fair. One of the
reasons the US economy has been so
successful over the last 90 years is
that it's had some of the best
institutions in the world. fair
securities regulation, good consumer
protections, and a functioning legal
system. Americans invest confidently
because they broadly trust the system.
And American businesses have access to
capital because investors are willing to
put money in. In countries where
investors know they'll be ripped off,
they behave like the fish on the poker
websites did and log off. This is
extremely economically harmful.
Prediction markets don't raise capital
for anything. They don't fund new
businesses or build infrastructure. They
just move money from the pockets of
retail betterers into the pockets of
quantitative algorithms and apparently
people with highlevel security
clearances, which is a rather elegant
system if you think about it, just not
for the retail bers. You might think
that it doesn't matter. Prediction
markets aren't the stock market. But if
this market is overseen by the same
securities and commodities regulators
that oversee investment markets and the
public decide that it's all rigged, they
might not just log off from prediction
markets. They might start to wonder if
the entire system is rigged too. And
that kind of distrust once it sets in is
very difficult to reverse. So, if the
retail better is structurally
disadvantaged against quantitative hedge
funds and people with high level
security clearances, the obvious
question is what happens to them when
their money runs out. Since 2018, when
the Supreme Court cleared the way for
states to legalize sports betting, the
United States has essentially been
running a largecale experiment in what
happens when you make it very easy for
people to gamble from their phones. Now
that we've added prediction markets to
the mix, that experiment has now been
expanded to cover politics, pop culture,
and monetary bets. You can now lose
money on almost anything at any time of
the day without even getting out of bed.
The results of this experiment are
starting to come in too, and they are
not great. Recent academic researcher
highlighted by the economist shows that
the introduction of online betting in
the state is associated with a roughly
12point drop in average credit scores
along with higher rates of personal
bankruptcy and loan delinquencies.
If you make it incredibly easy for
people to gamble from their smartphones
24 hours a day, it turns out that a
rather large number of them will do
exactly that, right up until the point
where their credit cards are declined.
Now, you could argue that adults in a
free society should be able to spend
their money however they like. And I
mostly agree with that. I don't want to
be told how I can spend my money. It's
mine. If someone wants to bet their rent
money on a basketball game or the exact
date of a Federal Reserve rate cut,
that's their right. The prediction
market platforms would certainly agree
with this. They describe themselves as
neutral marketplaces facilitating price
discovery, which is a very dignified way
of describing a website where you can
bet on whether it'll snow in April. The
problem is that when millions of people
simultaneously damage their personal
finances, it stops being a private
problem. Loans start to go unpaid,
mortgages default, and eventually the
costs get absorbed by the broader
financial system. And the individuals
who fall into bankruptcy end up relying
on state and federal safety nets funded
by taxpayers who in many cases were
sensible enough not to gamble their rent
money on a basketball game. So when you
look at the mechanics of the whole
thing, prediction markets start to look
less like a truth machine and more like
a wealth transfer mechanism. The
platform takes a transaction fee. The
quantitative algorithms extract capital
from retail betterers. The insiders
extract capital from everyone and
society picks up the tab for the
bankruptcies and the unpaid bills. It's
a wonderful business model for everyone
except the people using it. Look,
prediction markets are not going to
destroy the American financial system.
The stock market survived bucket shops
in the 1920s, penny stock boiler rooms
in the 1980s, and whatever was going on
with crypto in 2021. It'll likely
survive this, too. But it's worth
noticing what has actually been built
here. a set of platforms that are
regulated as commodity exchanges,
advised by the president's son,
populated by hedge fund algorithms, and
the occasional military insider, and
marketed to 25 year olds as a fun way to
make sports more exciting. You can bet
on elections, wars, the weather, and the
wardrobe choices of regaton artists. You
just can't bet on onions because that
would be irresponsible. The advocates
call it a truth machine. The states call
it an illegal sports book. The quants
call it a new source of alpha. The
retail betterers call it entertainment.
The reality is probably somewhere
between all of these. A financial
product that is too sophisticated to be
called gambling and too simple to be
called investing. operating in a
regulatory gray zone that exists mainly
because no one in Washington can agree
on what it actually is. We haven't
really invented a truth machine. We've
just found a more elaborate way of
losing money and given it a chart. If
you found this video interesting, you
should watch my video on Micro
Strategies infinite money glitch next.
Don't forget to check out our sponsor
Plaude using the link in the video
description. Talk to you in the next
video. Bye.