Bank of America analysts discuss prospects for forecasting markets in future scenarios
The Rising Tides of Prediction Markets in Sports Betting Shedding light on the regulatory landscape Buck Wargo, our website
Get your eyes on the prediction markets. They're making some serious waves in the sports betting industry. Bank of America analyst Shaun Kelley believes these markets expansion into sports betting should be on investors' and online sports operators' radars.
Since the chilly days of late December, markets like Kalshi, Crypto.com, and Polymarket have been storming into the U.S. sports betting scene, bringing a plethora of markets and wagering options, covering the nation, no longer limiting themselves to individual states.
Kelley describes prediction markets as market-based exchanges, dealing in futures contracts—derivatives that resolve after a crucial event, like an election or sports contest. Unlike traditional sportsbooks, these markets work by matching buyers and sellers, collecting transaction fees like a stock exchange, rather than calculating odds and taking a cut like a typical sports book.
Prediction markets deal with federal regulation under the Commodity Futures Trading Commission (CFTC), whereas traditional sportsbooks operate under state-level regulation. Historically, CFTC rules have prohibited gambling, including on elections and sports betting. However, Kalshi successfully battled it out in court last fall, gaining the right to offer election markets[1].
Kelley points out that recent changes to CFTC leadership, coupled with a broader deregulatory policy environment, may allow broader definitions of these markets, potentially opening up new avenues[2]. Upcoming CFTC discussions and an expected ruling on Crypto.com's launch of sports contracts (expected in late March/early April) are anticipated to be key turning points for the adoption of these products[3].
As Kelley puts it, prediction markets have the potential to be a boon to the betting world, but they could also be disruptive game-changers, with deepening products, access to national scale, and cost advantages that need close monitoring[4].
Polymarket offers over 400 sports markets, while Kalshi boasts another 40-odd. Strategically, these markets offer several advantages to traditional sports betting, such as immediate national reach and key markets like California and Texas, avoidance of state gaming taxes, and no market access requirements or fees[5].
However, challenges remain. Prediction markets need liquidity to stay active, have lower promotions, shallower product depth, especially considering the dominance of parlays in online sports betting, and are clashing with regulatory uncertainty[6].
The pros for exchanges include competitive pricing and higher limits, while cons include the issues of liquidity, promotions, and limited depth[7]. Stay tuned as the regulatory landscape for U.S. sports prediction markets unfolds. Future discussions from the CFTC and challenges faced by platforms like Crypto.com will play a significant role in shaping the path for these markets.
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Current Regulatory Status
Overall:
Prediction Markets Overview: Prediction markets, operating in sports event contracts, find themselves in a web of legal uncertainty in the U.S. The CFTC supervises these markets under the Commodity Exchange Act, but state authorities have issued cease-and-desist orders, arguing the contracts mimic unauthorized sports wagering[8].
NBA's Call for Regulation
The NBA has urged the CFTC to create a regulatory framework for prediction markets, citing concerns about integrity. They advocate for oversight similar to state sports betting markets[1][2].
Sporttrade's Regulatory Approach
Sporttrade, a state-licensed operator, seeks CFTC approval to offer sports prediction markets. Their objective is to establish a level playing field with federally regulated competitors like Kalshi[3].
Future Outlook
Upcoming CFTC Roundtable: As the CFTC prepares for a roundtable, there's a strong chance discussions will revolve around finding more effective ways to regulate prediction markets. As regulatory attention grows from the NBA, state authorities, and other stakeholders, the CFTC will likely work to address the concerns raised and clarify the regulatory landscape for these markets[9].
Crypto.com's Launch and Regulatory Response: Following Crypto.com's entry into the sports prediction market, state authorities have challenged these activities as similar to unauthorized sports betting[10]. The platform's future will be influenced by the CFTC's decisions regarding regulatory oversight of prediction markets.
- Buck Wargo's analysis emphasizes that the expansion of prediction markets into sports betting should be a focus for both investors and online sports operators, as these markets, like Polymarket and Kalshi, are proving to be significant players in the U.S. sports betting scene.
- Unlike traditional sportsbooks, prediction markets, such as derivatives offered by Polymarket and Kalshi, work by matching buyers and sellers, collecting transaction fees like a stock exchange, rather than calculating odds and taking a cut like a typical sports book.
- Prediction markets, dealing with federal regulation under the Commodity Futures Trading Commission (CFTC), could potentially see an expansion in their offerings due to recent changes in CFTC leadership and a broader deregulatory policy environment.
- While prediction markets offer several advantages over traditional sports betting, such as immediate national reach and avoidance of state gaming taxes, they also face challenges like requiring liquidity to stay active, having lower promotions, and facing regulatory uncertainty.
