When DraftKings’ stock plummeted at the end of September, it amplified concerns around potential long-term revenue impact of prediction markets on traditional sports betting companies. Kalshi had just launched its parlay product and continues to post record trading volume thanks to the popularity of its NFL markets.
Concerns about the drop in stock price have come from the perceived threat of prediction markets to traditional sportsbooks. Prediction markets have competitive live trading experiences, offering liquidity to users that sportsbooks are reluctant to match. Kalshi’s ability to offer parlays, one of sports betting’s most popular and lucrative products, has been viewed by many as a mortal threat to the traditional online sportsbook.
However, some financial analysts suggest that DraftKings’ deflated stock is still worth buying. On Oct. 20, analysts at CDC Gaming suggested that the pullback on DraftKings was “overdone.” Barrons (paywalled) also concluded that DraftKings was a “buy” on Oct. 22, the day after DraftKings announced its Railbird Exchange purchase.
DraftKings’ Railbird acquisition secures its path into the prediction market space. $DKNG stock price rose about 4% the day after the announcement. However, the company’s stock is still a long way from fully recovering from the 30% drop it sustained during September 2025.
Many questions remain around the full, long-term impact sports event contracts will have on the sports betting industry. But major OSB companies like DraftKings and FanDuel (Flutter) are flipping the script on that one-way influence. Both companies have been exploring ways to compete in the prediction market industry, DraftKings with the Railbird acquisition and Flutter which partnered with CME Group. In doing so, they could find a critical new revenue generator, and a way back to bullish stock territory.
The prediction market opportunity for sportsbook companies
Prediction markets offer an intriguing business opportunity, in part because of the regulatory structure under which they operate. There are many reasons sports betting companies might prefer to be regulated by the CFTC than state gaming commissions.
Sportsbooks must secure state gaming licenses separately in every state with regulated sports betting. Licenses require financial disclosures, background checks, and the physical testing of geofencing technology around state borders. Fees can also cost hundreds of thousands of dollars, and tax rates vary across states (many of which are rising).
In contrast, CFTC-regulated derivatives exchanges pay one corporate tax rate and enjoy access to all 50 states. There is one licensing regime, a welcome change from state sports betting license procedures, which are often frustratingly duplicative, Sporttrade’s Alex Kane pointed out at a recent G2E panel.
Two of the largest potential sports betting markets, Texas and California, along with more than a dozen others, have not passed legal sports betting. Prediction markets provide an avenue for offering a proxy to sports betting in these huge markets via peer-to-peer sports event contract trading.
The peer-to-peer element differs from sports betting where customers place wagers against the house. In that case, the house take or “vig” is baked into the odds, which are set by the book. In prediction markets, traders can buy contracts at the prices they want as long as a counterparty is willing to take the other side.
That peer-to-peer trading dynamic not only places these derivatives exchanges in a different regulatory structure — it also creates potential hedging opportunities for sportsbooks.
Potential synergy: Lessons from a U.K. betting exchange
A 2018 Harvard working paper examined the relationship that betting exchange Betfair had with traditional bookmakers in the U.K. The study found that while Betfair competed with traditional sportsbooks, there were important ways the exchange and bookmaker could cooperate. The paper found:
“…Betfair allowed traditional bookmakers to more cheaply hedge their positions, thereby reducing their operating costs. Moreover, Betfair attracted sophisticated high rollers, drawing them away from bookmakers, for whom they were the least profitable customer segment…These high rollers were delighted to join a platform that enabled them to take on the lay side of the market without restrictions. As they gravitated towards Betfair, they brought liquidity to the exchange while simultaneously improving the profitability of bookmakers.”
Prediction markets may take some of sportsbooks’ customers or betting handle, but it’s possible that many of those customers will include sharp bettors that traditional sportsbooks don’t necessarily want on their platforms. If that plays out, it’s a strong argument against prediction markets posing a dire threat to sports betting platforms. And on the contrary, it suggests that sportsbooks could actually benefit from the transfer of a certain segment of customers.
The American Gaming Association has accused platforms like Kalshi of offering illegal gaming products that circumvent state sports betting laws. State gaming regulators have argued that sports contracts are primarily for entertainment and offer little to no hedging utility. However, daily fantasy and sportsbook operator Underdog is reportedly considering using Kalshi to hedge based on its own exposure. This strategy is not new for sportsbooks in the U.K., which have used platforms like Betfair to lay off risk and reduce operating costs for years.
Why DraftKings stock could be a good buy
Possible areas of cooperation between sportsbooks and prediction markets don’t negate the competition for ordinary sports bettors. However, the effect of sports contracts will likely be more nuanced than the overwhelmingly destructive picture the gaming industry often paints.
DraftKings’ price drop rested on the assumption that prediction markets were a threat to traditional sportsbooks’ long-term viability. This happened before DraftKings secured a path to 50-state access through the prediction market exchange, Railbird.
The drop also took place before one of the major four sports leagues, the NHL, just this week embraced prediction markets by partnering with both Kalshi and Polymarket. Kalshi founder and CEO Tarek Mansour called it “an important milestone for Kalshi and the industry at large.”
We also learned this week that “DraftKings Predictions” plans to use Polymarket’s clearinghouse for its prediction market exchange, which could help expedite its entry and help it compete right away. Through acquisitions and partnerships, one of the largest sportsbooks in the country has bought its way into the prediction market industry, but its stock value remains depressed (just under $35 at time of writing).
Even though DraftKings Predictions won’t offer sports initially, if the well-known DFS/sportsbook brand is able to compete with Kalshi and Polymarket, the new vertical could drive a strong recovery for $DKNG stock. But many unknowns remain, including how sports event contracts play out in court, and whether DraftKings loses any footing in the regulated sports betting and online casino industry as a result of its entry into prediction markets.
