Bank of America analyst Shaun Kelley has offered his prediction of the prediction markets entering into the sports betting space that online sports operators and investors should closely monitor.
Since late December, prediction markets such as Kalshi, Crypto.com, and Polymarket have rapidly joined the U.S. sports betting scene, offering an expanding number of markets and betting options on a national rather than state-level basis.
Prediction markets are market-based exchanges offering futures contracts, a derivative product that “resolves” after a key event like an election or sports contest, Kelley said. These markets match buyers and sellers and typically collect a fee per transaction like a stock exchange, rather than calculating odds and taking a vig like a sports book.
U.S. prediction markets are regulated federally by the Commodities Futures Trading Commission (CFTC), unlike state-level regulation of traditional house-backed sportsbooks. Historically, CFTC rules prohibited gambling (including on elections and sports betting), but Kalshi won a court case last fall to offer election markets, post-election changes to CFTC leadership, and a broader deregulatory policy environment, which might allow more expansive definitions of these markets, Kelley said.
An upcoming CFTC roundtable, coupled with an expected ruling on Crypto.com’s launch of sports contracts, are both expected in late March/early April and could be key catalysts for adoption of these products, Kelley noted.
“At their best, we see prediction markets as a complimentary product that can drive new customers, expand the total area market of sports betting, and blur the line between sports betting and financial technology,” Kelley said. “At their worst, they could be disruptive new entrants, with deepening products/markets, access to national scale and cost advantages that need to be closely monitored. We see multiple ways these technologies could work together, but coming incremental regulatory clarity from the CFTC in late March/early April could be a material catalyst for interest in this nascent area.”
Polymarket offers more than 400 sports markets, with another 40-plus offered on Kalshi.
Strategically, prediction markets offer several advantages to existing online sports betting, including the immediate national scale with access to key states like California and Texas, no state gaming taxes, and no market access requirements or fees, Kelley said.
But Kelley added they also face challenges that include requiring liquidity to be an active market, lower promotions, lower product and market depth, especially as parlays have become the dominant online sports betting product, and regulatory uncertainty.
Positives for the product include favorable pricing and higher limits while cons for exchanges are liquidity, lower promotions, and limited depth of markets so far, Kelley said.
