Chinese AI Just Made History

**Jon Quast** (0:02)
Chinese AI just made history. We're listening to Motley Fool Hidden Gems Investing.
Welcome to Motley Fool Hidden Gems Investing. I'm your host today, Jon Quast, and I am joined by Foolish contributors, Matt Frankel and Rachel Warren. Today on the show, we have multiple topics. We're going to be talking about that lead Chinese AI. We're also going to take a question from the mailbag regarding digital advertising. First, we want to talk about what happened yesterday. Millions of soccer fans around the world watched Spain defeat Argentina in the World Cup final. I think that we were all just moved throughout the tournament as many people from around the world visited North America and shared their experiences online. That was so much fun. But one of the things that maybe we didn't hear about was how much the World Cup has really propelled adoption for the predictions markets.
Cal she specifically said that they got three million new users during the World Cup. So clearly that is pushing this whole space forward. And Rachel, I want you to talk about where we're at competitively in the prediction market space because you have companies such as DraftKings and Fandual out there. But you also have Meta looking to get in on this space. So what can you tell us about how this market is growing and how these companies want to profit from it?

**Rachel Warren** (1:29)
The trading activity that we saw around the World Cup final with Spain's victory over Argentina, that was one of many examples we've seen that sort of are serving as proof of concept for sports event contracts, which if you're not familiar, these essentially treat match outcomes like peer to peer financial derivatives rather than traditional sport wagers. So, Kalshi, which you mentioned, Jon, they cleared about $1.9 billion in trading volume on the final match alone. So, to understand exactly how this works and where it differs from, say, traditional gambling. So, traditional gambling tends to involve an individual wagering directly against a bookmaker, for example, who profits from their losses. Event contracts, like these, operate as an exchange where peers trade financial derivatives against each other and then the platform collects a flat transaction fee. So, Cal-Shea, for example. Now, because these contracts are legally classified as commodities, they actually fall into the jurisdiction of the Commodity Futures Trading Commission, or the CFTC, instead of state gaming boards. And that's a very important distinction because it essentially allows these prediction markets to bypass the state-by-state licensing laws and heavy gaming taxes that the traditional sports books have been forced to navigate.
Obviously, there are some vulnerabilities in these business models. You tend to see trading volumes and even liquidity plummet once some of these cultural events wind down.
But you're seeing a lot of the big tech and legacy sports book players deploy their own opposing strategies to try to capture and retain the user engagement, that they're seeing these platforms like Cal-She and others capitalize on. So talked about recently how meta-platforms, they're entering the space with their internal application that they code named Arena. This is essentially an AI-driven, non-monetary framework and because of that, they're able to bypass really strict financial compliance rules and capture engagement data from their billions of users and avoid a lot of the regulatory friction. You've got the traditional players like DraftKings and Fandool, which you also mentioned Jon, they're dealing with severe margin compression right now. They're launching their own low-fee event contract products to try to really protect those embedded customer bases from churning to those lower-cost financial platforms like the Kalshis of the world. So we're seeing this shift towards event contracts, if you will. That's the term, very much this asset-light exchange model. I mean, this is a market that's expected to approach a trillion dollars by the end of the decade. So there's a lot happening in this space and a lot to watch whether or not you participate in it.

**Jon Quast** (4:01)
Matt, I wanted to bring this topic to the table today because of a Kalshi study that came out fairly recently, and it really bothered me personally. So according to the study that Kalshi released, 89% of people say that buying stocks or mutual funds isn't gambling, okay? That's fine, but the majority of the people in the study also felt like predicting on the outcome of events, like what we're talking about, such as Spain versus Argentina, predicting the outcome. Most people also view that as not gambling, and that's such an interesting thing. For most people out there, according to this study, they would view it fundamentally the same, investing $100 in the stock market and betting $100 on the outcome of the event, such as Spain winning.