Prediction Market Valuations Hitting Stratosphere: Is $20 Billion Realistic?
Credit: Flying Logos/Wikimedia Commons
Prediction market fever may be hitting its apex.
The Wall Street Journal reported on Saturday that leading prediction market operators Kalshi and Polymarket are “eyeing $20 billion valuations” as they seek their latest rounds of investment funding.
Just a few months ago, in December, Kalshi proclaimed an $11 billion valuation. Since then, its daily trading volume numbers have roughly doubled from around $200 million to around $400 million.
Seemingly, every national news outlet has covered the prediction market phenomenon. Not all of it is favorable, but for prediction market bulls, it may be a case of “no such thing as bad publicity.” The more awareness mainstream America has of these products, the more potential customers they have lined up.
Almost everything that has transpired since the appointment of Mike Selig as the Commodity Futures Trading Commission (CFTC) chair has indicated it’s full steam ahead for prediction markets.
However, in many ways, the future looks far cloudier than these indicators would have one believe.
Comparing Kalshi, Polymarket Valuations to Major Sportsbooks
Online sportsbook valuations provide an interesting frame of reference for these numbers. DraftKings currently has a market cap of around $12 billion. Flutter, the parent company of FanDuel, has an even bigger number, right around the same $20 billion target that WSJ associated with the prediction markets.
In that sense, these numbers look perfectly reasonable. After all, DraftKings and FanDuel have a theoretical addressable market of 32 states. That’s the number of states that have legalized online sports betting, although in reality, a few of them, like Oregon and New Hampshire, operate as state-sanctioned monopolies.
A common advertising claim from Kalshi has been “legal in all 50 states.” That’s a point of serious dispute, one that the courts will likely clear up at some point.
But at least on paper, the prediction markets appear to have an advantage. They can operate sportsbooks to a larger customer base while also catering to customers from the more traditional finance world, those interested in things like oil and gas price speculation.
Are Prediction Markets and Sportsbooks Directly Comparable?
It’s not quite that simple, though.
For one thing, Flutter operates an extensive portfolio of gambling assets. It has an international presence, with exposure to market-leading brands across multiple verticals. For instance, PokerStars has long been one of the premier names in online poker. Betfair and Paddy Power, while hardly recognizable to most Americans, are powerhouse sports betting brands in Europe.
Even on the domestic front, it’s not clear that Kalshi and Polymarket have the edge over DraftKings and FanDuel.
Product is a major issue here, especially the availability of wildly popular same-game parlays. These offer both wide-ranging appeal to recreational customers and a sportsbook hold that’s far greater than the yes/no contracts available at prediction markets. It’s not clear that there’s a viable way to offer these at prediction markets.
DraftKings and FanDuel have opened their own prediction markets, but they’re only offering sports event contracts in states where they can’t operate traditional online sportsbooks. Opening up their customer base to states like Texas and California has obvious appeal, but it’s telling that when given the choice, the sportsbook is the operator-preferred vertical.
Future Remains Cloudy for Prediction Markets
Even looking beyond the aforementioned court cases — far too numerous to list here — and issues with product, it’s difficult to say with any confidence what the future looks like for prediction markets.
The government’s attitude toward prediction markets may be the biggest swing factor. As long as Donald Trump remains in office, things look rosy. The business interests of the Trump family completely align with the bull vision for prediction markets. For instance, Donald Trump Jr. holds roles with both Kalshi and Polymarket, while the Trump social media platform Truth Social has a partnership with Crypto.com.
However, Trump won’t remain in office forever. And other parts of government have prediction markets in their crosshairs. Congress members are already proposing laws that would rein in prediction markets. Last year, more than 30 state attorneys general submitted briefs in support of New Jersey in its court case against Kalshi.
Interestingly, in at least this one sense, Polymarket seems more insulated against a future governmental attitude turn compared with rival Kalshi. While Kalshi has primarily built its business in the U.S., Polymarket will always have its crypto-based international product to fall back on.
Ironically, perhaps the most telling cautionary tale against the skyrocketing values of prediction markets comes from DraftKings. Once booming with a market cap north of $20 billion, DK stock peaked around $70 per share in the midst of post-COVID betting fever, when entertainment options remained somewhat limited. It now trades around $27 per share and has lost approximately 30% of its value, even year-over-year.
It’s easy to get caught up in prediction market fever and simply project further growth down the road. However, headwinds are developing, and the future is anything but clear.
More investors will line up and throw dollars toward Kalshi and Polymarket. We can say that with near certainty. Less certain is whether that investment pays off.
Image credit: Flying Logos/Wikimedia Commons (license)
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