Prediction Markets Fuel Gambling Gold Rush

Sports betting via online platforms such as FanDuel and DraftKings is legal in some form in more than three dozen states, but an even more lucrative payoff for the gaming industry may come from America’s love affair with wagers on random events. 

Prediction market platforms such as Polymarket and Kalshi allow millions of Americans to buy contracts on the outcome of everything from sports plays to presidential elections, a business that may benefit from scrutiny of sports betting after a headline-making scandal in the US.

‘Face Card’

In October, the Justice Department announced indictments of more than 30 people, including NBA legend Chauncy Billups and Miami Heat guard Terry Rozier, in connection with gambling schemes. Billups was accused of serving as a “face card” to give credence to poker games rigged to steal millions from participants, the BBC reported, while Rozier was accused of sharing private information that might influence a game’s outcome (such as player injuries) with sports bettors.

Both Billups and Rozier have pleaded not guilty to the charges. In an effort to cut the inside trading of NBA player information, the NBA issued a league-wide memo last week outlining steps to increase the frequency of public injury reports, reducing their value, ESPN reported. 

But not all bets are off:

• While the effect of the cases on demand for sports-betting platforms is not yet clear, DraftKings announced plans in November to join PolyMarket, Kalshi and FanDuel in the trending event contract market. 
• Since DraftKings’ attempt to merge with FanDuel was blocked by the Federal Trade Commission in the late 2010s, Morgan Stanley has projected that a push into prediction markets could be what the company needs to buoy its longer-term growth profile. 

Robinhood and Coinbase have also recently incorporated event contracts into their platforms, with the latter announcing plans to snap up prediction market startup The Clearing Co. to accelerate its entry.

The business case is obvious: Polymarket and Kalshi handle more than $2 billion in bets each week, according to Dune Analytics data from November reported by Bloomberg. The amount has more than doubled from the end of last year.

The challenge is that offering event contracts will embroil the companies in a growing fight over how they should be classified by the Commodity Futures Trading Commission (CFTC) and how, if at all, they should be regulated. 

The Best Defense: Coinbase, meanwhile, has gone on the offensive against regulation of prediction markets by individual states, filing federal lawsuits in December against Michigan, Illinois and Connecticut for what the cryptocurrency company says are attempts to “gain jurisdiction over something they have no legal right to regulate.”