Is Sports Betting In The United States About To Get A Reality Check?

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Ever since the Supreme Court of the United States overturned the Professional and Amateur Sports Protection Act back in 2018, the sports gambling industry has enjoyed virtually unchecked growth. Even in states that were quick to green light sports betting early on, the novelty has yet to wear out. The American market has turned into a 12-figures-per-year industry as a result. 

Yet, more recently, sports betting appears to be under siege. It isn’t time-eroding growth. Nor is it the uptick in public scandals, though they certainly have a bearing on public sentiment. No, it’s all about the meteoric rise of sports prediction markets.

These services have seemingly exploded onto the scene overnight. In reality, they have been around for a while. For the most part, though, prediction markets have predominantly trafficked in politics, business and entertainment. The sports sector was left largely untouched. Prediction-market operators left those transactions to the seasoned experts you read about at Online Sports Betting. 

Over the past year or two, this has shifted. Prediction markets dipped their toe into the sports realm. Then, they cannonballed all the way in. They have become so popular, and so effective at circumventing classic sports betting restrictions in other states, that bigwig sportsbook operators such as FanDuel and DraftKings have opened up their own prediction markets. 

This explosion is leading to a simple yet salient inquiry: Do sports prediction markets pose a threat to traditional sports betting operations?

Why Sports Prediction Markets Are So Appealing

Before diving into whether prediction markets warrant an existential sports betting crisis, it’s first important to understand what they are, and why they are appealing. Let’s begin with what they are.

On the surface, sports prediction markets don’t seem much different from traditional sports betting. Customers put on yes-or-no event outcomes. These transactions run the gamut of big-picture competitions like “Will the Los Angeles Rams win the Super Bowl?” to micro outcomes such as “Will Stephen Curry hit more than four three-pointers during the Golden State Warriors’ game against the Houston Rockets?” 

Reading through these examples, you can’t identify the distinction between prediction markets and sports betting. Rest assured, state officials and sports gambling operators are quick to point out the same. However, thus far, prediction-market operators claim their event contracts are derivatives. Customers, they argue, are investing in outcomes; they are gambling. Their interpretation is holding up largely because the odds on a given event outcome are not determined by linemakers, as they are with sports betting operators. Instead, the odds of something happening are inextricably tethered to what other users are saying.

Let’s go back to our “Will the Rams win the Super Bowl?” example. If the odds say the Rams have a 2 percent chance of winning the Super Bowl, it’s because the vast majority of “contract investments” favor the “no” side of the potential outcome. 

Select experts believe this logic is flawed. And they have a point. Some prediction-market operators essentially employ shadow linemakers. This is to say, they have a department whose job it is to tilt the odds of a given outcome by making their own investments.

Still, to this point, the “We offer derivatives” justification is holding up. In turn, this subjects prediction-market operators to federal regulation rather than state oversight. Not only are derivative regulations looser than sports betting regulations, but it’s easier to obtain a license for the former. Effectively, this allows prediction markets to offer sports betting alternatives rather than having to wait for a state to legalize gambling, or instead of paying for the attainment of a sports betting license and bankrolling the subsequently higher tax rates.

Could Prediction Markets Render Sportsbooks Obsolete?

This brings us back to the original question at hand: Are sportsbooks in danger of getting upended by prediction markets? The mere notion of DraftKings and FanDuel dipping their toes into the latter suggests this could be the case. 

Rich Duprey of Yahoo Finance recently expanded upon this very topic. This excerpt explains how prediction markets can eat into sportsbooks’ business models: 

“For instance, during the recent NFL playoffs, Kalshi [which offers prediction markets] saw its five highest-volume games of the season, highlighting how these markets thrive on tentpole sports moments. State regulators have labeled some products illegal and urged shutdowns, but the platforms remain and continue to pressure sportsbooks.The threat is amplified because sports betting forms the core revenue for DraftKings and Flutter. For DraftKings, sports betting accounted for approximately 52 percent of its revenue in the third quarter, totaling $596 million out of a total $1.14 billion. Similarly, Flutter’s U.S. segment, driven by FanDuel’s sportsbook, generated $1.37 billion in Q3, representing about 36 percent of its total $3.8 billion revenue, with sports betting being a key driver within that.

Prediction markets undermine this by siphoning bets, especially on major leagues like the NFL, where user engagement peaks. Lower barriers to entry, such as no state-specific approvals, enable faster user acquisition and higher volumes during events, potentially reducing sportsbook handle and margins.”

On top of all this, prediction markets currently have access to clients traditional sportsbooks do not. The state of Texas, as one example, has yet to legalize sports betting. So, FanDuel and DraftKings cannot offer their sports betting services in The Lone Star State. But since prediction markets operate under a different umbrella, those providers can technically set up shop in Texas. This is a huge deal, particularly in the event sports betting comes to The Lone Star State. If and when it does, sportsbooks could be a market-share disadvantage because so many would-be customers are already signed up with prediction-market operators.  

With all of this said, we do not yet have concrete evidence of prediction markets materially knifing into sports betting business models. Most states that have both report little to no change in the sports betting side of things. 

But remember, sports prediction markets remain in their infancy. What’s true now may not be true a half-decade down the line. The fact that sportsbooks are monitoring prediction-market behavior, if not entering the business themselves, says it all: Sports betting may not be under imminent threat from prediction markets, but its future is far from Teflon.