Speculation vs. Gambling: Where’s the Line and What Are The Differences?

by Chris Gerlacher

Updated on: June 11, 2025

Trade on Prediction Markets » Speculation vs. Gambling: Where’s the Line and What Are The Differences?

Betting on the future is an important part of finance, but it’s also an entertaining pastime. Courts and lawmakers have long had to grapple with where to draw the line between legitimate speculation and idle gaming.

That line has moved as derivatives not only became more heavily regulated, but also more tailored to increasingly niche risks. Speculators went from making agricultural prices more stable to eliminating the need for proxy stock packages to hedge against events. Speculation has never looked more like gambling.

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In his book Speculation: A History of the Fine Line Between Gambling and Investing, UCLA Law Professor Stuart Banner chronicles how the line between gambling and speculation has moved since the 1790s. He includes previous attempts to draw the line that explain the differences and similarities between speculation as an investment and speculation that appears to be only gambling.

Is there a long or short-term interest in the asset?

The first line one can draw between investing and gambling is what the trader hopes to get from the asset.

“One possibility was to draw a line between investors who had a long-term interest in the success of a venture and those who had no such interest but were merely hoping ot sell after a short-term rise in the value of an asset,” Banner wrote.

For example, some early Bitcoin traders wanted the coin to become a viable alternative – or even replacement – for fiat currencies like the dollar or the pound. Many others hoped Bitcoin’s price would increase so they could cash out.

Alexander Hamilton hadn’t imagined crypto, but he did separate stockholders from gamblers in his writings about national debt holders shortly after the United States’ founding. He perceived a moral difference between those with “an interest in the long-run welfare of the United States” and those who “invested in the debt just to make money in the short run.”

Will the trader use or sell the asset?

One Congressman from the 1800s anticipated a fight the United States would resolve in the early 1900s. Gulian Verplanck, a representative from New York, wrote that when lands or goods were bought “with reference…to a future and anticipated state of the market,” that was speculation. Hoping only for a rise in value with no regard for settling land would separate those who were gambling on prices from those who had a stake in the asset they purchased.

The Supreme Court would resolve that question in 1923 in Board of Trade of City of Chicago v. Olsen. The Grain Futures Act permitted the Chicago Mercantile Exchange (CME) to sell grain futures, which were contracts to deliver grain at a future price. In practice, these contracts could be used as wagers on the future price of grain.

However, the Supreme Court ruled that the Grain Futures Act was constitutional, and that the CME did have the right to offer those contracts. The CME testified that the futures reduced price variations for farmers and eliminated middlemen who would have cut into farmers’ profits.

There may have been speculators in the grain futures market, but they were providing a useful service.

Is the risk necessary or unnecessary?

Another line was whether traders were taking risks that were reasonable or excessive. Letters from an American Farmer, a series of essays published in 1782, praised whalers who absorbed the costs of unprofitable trips and tried to turn a profit on the next one.

“[Whalers] bear such misfortunes like true merchants, and, as they never venture their all like gamesters, they try their fortunes again; the latter [gamesters] hope to win by chance alone, the former [merchants] by industry, well-judged speculation, and some hazard.”

The essay acknowledged the risk inherent in a business like whaling. However, it also judged those who took risks the authors viewed as too extreme. On this view, speculators were people who took too great a risk and lost rather than “honest” tradespeople who were dealt a bad hand.

Is this a positive or zero-sum transaction?

Another line to draw between speculating and gambling is whether the transaction creates value. A Mechanic’s Magazine article from 1835 posits:

“One of these ways may be properly denominated enterprise, the other speculation. The first of these ways creates the wealth it accumulates by bringing into existence the articles of which it is composed, or by increasing the value of articles which existed before; the other draws the wealth, generally, by some kind of deception or delusive practices, out of the possession of its right owner, without increasing its value, or adding anything to the public stock.”

So, speculative investments enhance the value of the goods, services, land, or business, while gambling only delivers value to one stakeholder decided by chance. This writer also viewed a moral difference between gamblers and speculators.

Is there a purpose to this trade beyond the risk itself?

American jurisprudence tended to support the right to speculate as long as there was a reason for the risk. Banner writes:

“In the transactions proscribed as ‘wagers’ – bets on horse races, card games, and the like – there was no purpose beyond the participants’ enjoyment of the risk itself. The transactions called ‘speculation,’ on the other hand, involved some other useful societal end, even if the risks associated with speculation were indistinguishable from the risks associated with gambling.”

These legal arguments made by 19th-century lawyers are still being used today. Kalshi’s CEO, Tarek Mansour, has often emphasized the hedging utility that event contracts offer. In an interview with TechCrunch, Mansour defended event contracts on Brexit:

“If you’re betting on sort of the outcome of on of whether Brexit is going to happen or not like there’s a real event that impacts real people you know some people may want to speculate on it…but some may actually want to reduce their risk or very simply know there’s a 55% or 60% chance that Brexit happens…and so there is an economic utility.”

Morality and finance are intertwined

Throughout two centuries of American law, lawyers and commentators have tried to separate risky investments from gambling. Those reasons included a blend of economic and moral arguments. Speculation was tolerated and even encouraged if there was a greater end to the risk, but gambling was viewed as a degenerate and wasteful activity.

Banner begins Speculation by explaining that the “moral critique of speculation has always rested on the belief that speculators are not providing value to society in the same way that producers are.” The economic and moral arguments are separate, but they haven’t gone away.

For example, was it ethical for Polymarket to offer contracts on Pope Francis’ death before he died, or should it have waited until after his death to offer a market on the next pope like Kalshi did?

There’s an argument to be made that it’s economically important. There are about 1.4 billion Catholics in the world, many of whom will be swayed by the pope’s stance on a broad range of issues that could be consequential for certain businesses. Non-profits that provide reproductive services could be impacted by hostility or support from Pope Francis’ successor.

None of the arguments from early American law settled the argument over which contracts are gambling and which are risky investments. They may offer guides for modern debates, but they will continue to rage all the same.

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Chris Gerlacher

Chris is the senior political reporter and industry analyst at PredictionNews. He specializes in the ever-changing political betting markets, while also covering the emerging prediction market industry. Previously, he was the lead writer at Catena Media, where he contrasted the parallels between sports betting and prediction markets. Chris also is a political contributor for The Center Square.