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Prediction markets are rapidly transforming the US sports betting industry, drawing fans away from traditional gambling apps and unsettling investors who once viewed the sector as a near-guaranteed growth story. The shift has come into sharp focus ahead of the Super Bowl, a tent-pole event that is no longer delivering the boost bookmakers once expected.

Shares in major gambling companies have slid as newer platforms such as Kalshi gain traction by offering sports-related wagers outside state-level betting rules. Analysts say the rise of these markets is reshaping how Americans bet on sport, with significant consequences for established operators and their share prices.

Prediction Markets Move Into the Mainstream

Jordan Bender, senior equity analyst at Citizens, expects prediction markets to post record trading volumes during this year's Super Bowl weekend, even as traditional sportsbook wagering — known as handle — declines by around two per cent from last year.

'A big piece of why we think Super Bowl handle will be down is that prediction markets are taking a bite out of that,' Bender told Bloomberg.

This marks a dramatic reversal for an industry that surged after the US Supreme Court's 2018 decision allowing states to legalise sports betting. Since then, Super Bowl wagering had grown uninterrupted for eight years, creating a sense of near-inevitable expansion for gambling operators.

Kalshi's Regulatory Loophole

Kalshi's ascent has caught much of the industry off guard. Until early 2025, the company focused on niche event contracts tied to elections and pop culture, operating under the oversight of the Commodity Futures Trading Commission (CFTC). Sports betting had long been considered off-limits.

That changed after Donald Trump's election victory. Kalshi quietly launched Super Bowl contracts in early 2025, and when the CFTC declined to intervene, the platform accelerated its expansion. Sports now account for more than 90 per cent of Kalshi's trading volume, according to figures cited by Bloomberg.

Billions at Stake

Some analysts still expect traditional sportsbooks to post record figures. Ed Birkin of H2 Gambling Capital forecasts that wagers excluding prediction markets will rise nine per cent year on year to $1.78 billion (£1.3 billion) . However, he estimates that prediction markets could attract $630 million (£463 million) in Super Bowl bets, accounting for roughly 80 per cent of annual growth in wagering activity.

Investors have reacted swiftly. Bloomberg data show fourth-quarter adjusted earnings estimates for Flutter have dropped 49 per cent in just three months, while DraftKings' earnings forecasts have fallen 29 per cent over the same period.

Executives Push Back

Not all gambling executives see prediction markets as an existential threat. BetMGM chief executive Adam Greenblatt said the company has not identified any direct impact, noting that prediction markets appear strongest in states where online sports betting remains illegal, such as California and Texas.

BetMGM reported record fourth-quarter sports bets in 2024, driving a 63 per cent year-on-year revenue increase. Greenblatt added that many prediction market users are 'sharps' — experienced bettors who are often less profitable for traditional sportsbooks.

Slowing Expansion and Shifting Habits

Still, signs of strain are emerging even in established markets. Around 10 per cent of DraftKings users were also active on Kalshi in January, while Kalshi's app was downloaded four times more than either DraftKings or FanDuel, according to Apptopia.

Traditional sportsbooks are also running out of new states to enter. Missouri is the only state newly allowing Super Bowl betting this year, highlighting what analysts describe as a shift from expansion-driven growth to incremental gains.

A Legal Battle Looms

DraftKings and FanDuel have responded by launching their own prediction market apps, but early uptake has been modest compared with Kalshi's surge. Meanwhile, regulators in several states are challenging prediction markets in court, with many expecting the issue to reach the Supreme Court.

For now, momentum appears firmly with the newcomers. The CFTC's new chair, Michael Selig, has indicated he will allow sports-related contracts to proceed, signalling that prediction markets may remain a disruptive force well beyond this Super Bowl season.

Originally published on IBTimes UK