Prediction Market Threat to Sportsbooks May Be Overstated, Says Analyst

September 04, 2025

Prediction markets are gaining plenty of attention, but the extent to which startups like as Kalshi and Polymarket constitute competitive risks to online sports betting (OSB) operators may be overblown.

According to Jefferies analyst David Katz, the hoopla around the total addressable market (TAM) may be overblown, even though Kalshi and Polymarket trade volumes are rising, largely because of exchanges' increased sports offerings.

A chart detailing the lead, in handle terms, possessed by online sports betting operators over Kalshi and Polymarket. 

“While reported prediction trading volumes will likely continue to grow due to the breadth available (entertainment, financials, elections, sports, etc), and we see a global potential TAM of >$100B, this greatly overstates the potential profitability of these markets,” observes the analyst.

Katz draws attention to a significant, if sometimes disregarded, distinction between the business strategies of conventional sportsbook operators and those of firms like Kalshi and Polymarket.  Derivatives exchanges get a fee each time an event contract is traded whereas sportsbooks are dependent on results, but that doesn’t necessarily benefit the former.

“The low fee structure of prediction markets implies a consumer benefit at the expense of OSB profitability. Further, core OSB business is driven by 1) breadth of offerings, including parlays (60% of US bets), and 2) ease of use/engagement, which are not comparable in prediction markets in our view,” adds the analyst.

Prediction Markets ‘More Sizzle Than Steak for Now’

The beginning of football season has brought a flood of prediction markets headlines, including Kalshi releasing parlays and player props, Robinhood Markets offering yes/no football contracts, and a partnership between Crypto.com and Underdog Fantasy, but a lot that could simply be hype.

According to Katz, the current situation between prediction markets and OSB is "more sizzle than steak," noting that the former would appear much less spectacular if the volume of prediction markets were assessed in a manner similar to that of OSB handle.

Translation: Kalshi’s and Polymarket’s sports contracts businesses currently pale in contrast to DraftKings (NASDAQ: DKNG) and FanDuel parent Flutter Entertainment (NYSE: FLUT).

“To this point, we estimate that comparable US OSB handle from Kalshi and Polymarket combined was just ~$1.5 billion in 1H25, compared to $25.4 billion and $26.3 billion for DKNG and FLUT, respectively,” says Katz. “Furthermore, on this comparable handle, the prediction operators’ LSD hold implies a 1H25 net gaming revenue (NGR) of just ~$40 million, vs. $1.88 billion and $2.35 billion for DKNG and FLUT.”

Texas and California  Access Could Also Be Overhyped

One of the widely claimed advantages of prediction markets is that the operators are licensed at the federal level, meaning they can court clients in all 50 states – a luxury not offered to gaming enterprises, which are controlled by each state in which they do business.

Because of this regulatory edge, there is talk that derivatives exchanges will outperform sportsbook operators in Texas and California, two states that don't seem to be prepared to authorize sports betting anytime soon. Kalshi and Polymarket are already collecting website traffic from the two most populated states, but the run-rate pales in contrast to what DraftKings and FanDuel would produce in handle in those areas.

“We estimate that ~25% of Kalshi and Polymarket web visits are already coming from CA & TX, though this has only generated a run-rate of ~$1 billion/year in comparable OSB handle,” concludes Katz. “This compares to our prior estimate of $10 billion+ in OSB handle/year with full legalization, based on CA & TX populations and a GGR per cap estimate of $122.”