MW Here's why Wall Street is betting against DraftKings and FanDuel - and going all in on Polymarket and Kalshi

By Gordon Gottsegen

Kalshi and Polymarket could pose an existential threat to sports-betting companies

Sports-betting companies have worked hard to associate their brands with various sports leagues.

For the past few years, the sports-betting throne has been shared by two major players: DraftKings and FanDuel. These betting platforms have millions of users and generate billions of dollars in revenue. Turn on any major league sports game and there's a good chance you'll see ads or promotions for one of these companies.

Yet investors are unsure about their future. Shares of DraftKings $(DKNG)$ and Flutter Entertainment $(FLUT)$, the parent company of FanDuel, have fallen dramatically over the past few weeks as investors weigh a potential threat coming from outside the sports-betting industry: prediction markets like Kalshi and Polymarket.

Shares of DraftKings fell by more than 22% in September, while Flutter shed over 17%, as investors sold their positions in the companies, anticipating a future in which prediction markets poach customers from betting platforms.

Some short sellers think we're in the early days of a takeover by prediction markets. They think prediction markets have access to greater distribution and offer bettors better value than sports-betting platforms. On top of that, prediction markets are challenging what was seen as a gambling duopoly, which could mean the likes of DraftKings and FanDuel have a fair amount to lose.

The rise of prediction markets

Prediction markets are platforms that allow people to bet on all sorts of future events - such as the outcome of the presidential election, the possible firing of Fed Chair Jerome Powell, the occurrence of natural disasters and the performance of a Taylor Swift album. Bettors participate by buying "event contracts" that state whether something will or will not happen, and they get paid if their prediction is correct. These contracts and their corresponding markets are regulated on the federal level by the Commodity Futures Trading Commission.

Prediction markets have been around for a few years, but they gained momentum following the last U.S. presidential election. Their popularity has even gripped Wall Street, where investors and strategists increasingly rely on their odds as a kind of gut check. That growth is now being dwarfed as the platforms expand into sports.

Kalshi surpassed $1 billion in monthly contract volume in mid-September, coinciding with the start of the NFL season. It then saw $538 million worth of contracts traded Sept. 27-28. According to LegalSportsReport, 98% of that volume came from sports-related contracts.

Kalshi has pushed hard to grow its sports-prediction markets, partnering with popular retail brokerage Robinhood Markets Inc. (HOOD) to bring its football event contracts to Robinhood's 26.5 million customers.

Kalshi became the largest prediction market last month, surpassing Polymarket, which had previously seen more volume. But Polymarket still sees hundreds of millions of dollars in weekly contract volume, according to third-party data from Dune. Its MLB World Series prediction market currently has about $64 million in volume.

On top of that, Polymarket is expected to re-enter the U.S. soon. The company was previously barred from offering its contracts to customers in the U.S., but regulators have recently given the company the green light. New York Stock Exchange parent company Intercontinental Exchange Inc. $(ICE)$ also recently invested $2 billion into Polymarket to fuel its growth.

So while Kalshi and Polymarket compete with each other, both are growing at a rapid pace, especially when it comes to sports contracts. This could put prediction markets and sports-betting companies on a collision course.

How prediction markets differ from sports betting

On the surface, sports betting and sports-related prediction markets seem pretty similar. People can wager money on whether a team will win a game or players will score a certain amount of points. But there are a few things that differentiate the two types of bets.

When it comes to traditional sports betting, gamblers bet against a sportsbook or "the house" - this is an institution that comes up with the odds for each bet and pays out if the bettor wins. The house wins if the bettor guesses incorrectly, so it has an incentive to shift the odds so it comes out ahead across all bets.

But in prediction markets, people are betting against each other. Every bet must have a counterparty, and the odds are set based on what real people and market makers are willing to pay. Kalshi and Polymarket get paid by taking a small percentage of each transaction or by charging platform fees, which means they don't care about the odds or the event outcome.

Often, that means better odds for sports bettors.

"They are giving a better user value proposition. At least in my test, you can get better odds from Kalshi than DraftKings and FanDuel," Edwin Dorsey, who publishes a newsletter called The Bear Cave, told MarketWatch.

Dorsey's newsletter, which has over 80,000 subscribers, publishes content geared toward short sellers. He wrote about the threat that prediction markets pose to DraftKings in September and again in October.

Also read: Polymarket authorized for U.S. return just days after Donald Trump Jr. joins as adviser

The crux of his argument is twofold. First, he says that sports bettors can get a better value proposition from prediction markets. This includes better odds on bets and parlays, the ability to cash out whenever they want, the ability to earn interest on open bets and more liquidity. His second point is that prediction markets have a larger potential customer base due to the legal differences with sports betting.

Sports betting is regulated on a state-by-state basis, and it's not legal in every state. Meanwhile, prediction markets are federally regulated and legal in every state. On top of that, you have to be at least 21 years old to bet on sports in many states, but prediction markets are available to anyone 18 or older.

This gives prediction markets a much larger potential customer base, along with the ability to enter markets that regulated sports betting cannot.

"Anytime you have new competition, that's bad when there's an effective duopoly. When your new competition has a better value proposition ... that's an even bigger threat," Dorsey told MarketWatch. "And they have really outstanding distribution."

Tailwinds for prediction markets may create headwinds for traditional sports betting

Investors may be wondering whether the downtrend for DraftKings and FanDuel will continue, and some short sellers believe the answer is yes.

Last week, Spruce Point Capital Management put out a report predicting 35% to 60% potential downside for DraftKings, stating that it believes Wall Street is underestimating the risk prediction markets pose to future revenue. Analysts had forecast DraftKings' revenue staying flat in 2026, according to the report, but few predicted a significant decline.

"We believe analysts have taken a cautious approach to reducing 2026 revenue estimates despite growing evidence that prediction markets are gaining traction. Further revenue estimate reductions are likely to pressure DraftKings' share price," Ben Axler, the chief investment officer of Spruce Point, told MarketWatch.

Not everyone on Wall Street is as pessimistic about the future of the sports-betting companies. Morgan Stanley analysts said the selloff is an excuse to buy shares of the companies at a bargain. Jefferies analyst David Katz went on CNBC to say that the fears are overstated, and that prediction markets are thriving because the regulatory environment is uncertain.

Read: Morgan Stanley says buy into weakness in Flutter and DraftKings after Kalshi enters parlays market

Prediction markets face a handful of legal challenges from state litigators, but Spruce Point reported that these challenges are likely to go to the U.S. Supreme Court, and if they do, that will give the prediction markets more time to operate.

So what options do DraftKings and FanDuel have? They may try to enter the prediction-market space themselves by offering their own event contracts. FanDuel previously announced a partnership with CME Group to build an events-contract trading platform, and DraftKings Chief Executive Jason Robins has said he sees opportunity in entering the prediction-markets space.

Still, Spruce Point noted that DraftKings is already working with state regulators.

"We believe DraftKings may tread carefully in entering the prediction market given warnings from certain state regulators. We also believe it would take many months to launch a prediction market which gives competitors ample time to continue gaining share," Axler said.

If you can't beat them, join them. But even if DraftKings and FanDuel enter the prediction-market space, they'll still have to compete with the likes of Kalshi and Polymarket.

-Gordon Gottsegen

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October 08, 2025 15:38 ET (19:38 GMT)

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