Robinhood’s house of cards

Unlike the friend who’s been “one win away” from breaking even, Robinhood is making money from its gambling habit.

The trading platform’s third-quarter earnings show that prediction markets generated $173 million in revenue last quarter, more than six times as much as a year ago and more than Robinhood earned from either stock trading ($121 million) or crypto ($120 million). In fact, prediction markets added roughly $146 million in revenue year-over-year, almost perfectly offsetting $148 million lost from crypto trading.

The shift helped Robinhood notch record quarterly revenue of $1.42 billion, up 12% from a year earlier. Still, shares fell 3.30% today as net income declined 14% to $476 million and EPS missed estimates. Operating expenses also climbed 16% to $739 million.

Life, liberty, and the pursuit of parlays

It’s not hard to see why Robinhood is betting big on prediction markets. As prediction platforms put it, why settle for picking winning stocks when you can wager on whether Jesus returns before GTA VI, or whether Zelenskyy wears a suit to meet Trump?

Just this past weekend, prediction markets recorded more than $14 billion in notional contract volume, their busiest two-day stretch ever, fueled by the NFL, NBA, World Series, and college football. Kalshi alone accounted for more than $10 billion. By this week, the NBA announced official partnerships with both Polymarket and Kalshi.

Politics are seeing the action, too. With midterms less than a week away, more than $1.4 billion has already been traded on election-related prediction markets. Traders are getting increasingly specific with bets, wagering on everything from victory margins to voter turnout. In fact, 58% of this year’s congressional election markets focus on winning margins, compared with just 16% on outright winners.

Not so fast

Just because Americans can’t get enough of prediction markets doesn’t mean they’re bringing new customers to Robinhood. “Prediction markets are becoming a second outlet for the same core active traders ‌rather ⁠than a funnel for new customers,” Bill Birmingham, research head at REX financial, told Reuters. That’s an important distinction for a company counting on prediction markets to become its next big growth engine.

Regulators could end the party, too. Sports-related event contracts occupy a legal gray area between federally regulated financial derivatives and state-regulated gambling. Robinhood has already sensed the pressure, agreeing in September to stop offering new sports-related contracts in Michigan amid a legal dispute with state regulators.

Will Robinhood hit the jackpot on America’s gambling obsession, or will regulators send it home with empty pockets? We’ll leave you to place your bets.—SY