Prediction Market Boom Raises Investors’ Fears of Impending Bubble
Amid a prediction markets gold rush are investors wary of legal risk and a glut of market participants.
Kalshi and Polymarket are pitching investors on $20 billion valuations. The biggest players in sports betting and DFS are pivoting to prediction markets. Aspiring exchanges are applying in droves for CFTC approval.
Prediction markets insist their value goes deeper than point spreads and props, but these massive investments are largely predicated on the companies’ ability to offer sports event contracts.
While bulls are running into the space, the reliance on sports makes some potential investors nervous.
The legality of sports event contracts seems destined for the Supreme Court, and momentum in courtrooms isn’t on the prediction markets’ side. Meanwhile, Donald Trump’s second term is up two-and-a-half years, and the next administration may not be nearly as friendly to the at-the-moment rising asset class. There’s also movement afoot on Capitol Hill to strip sports (plus markets related to war, terrorism, etc.) from the platforms.
“It gives me concerns about investing directly into the space, into a sports-heavy prediction market,” Davis Catlin, managing partner of Discerning Capital, said of the legal uncertainty. “I think there is very good legal standing for prediction markets as a financial product and marketplace. There’s a lot of ways to use that to do really innovative stuff, but the question really comes down to the sports side.”
Trump-Dependent?
President Trump’s prediction market-friendly policies bode well for his son’s roles with Kalshi as a strategic advisor and Polymarket as an investor.
Trump appointee Mike Selig has made it clear that under his watch, the CFTC will continue to support prediction markets’ sports-based endeavors, and other moves made under the administration – namely the 90% gambling loss deduction cap – are seen as favorable to exchanges.
As of January 2029, though, Trump will be out of office, and the Democratic Party is favored to reclaim the White House in 2028 (56%, per Kalshi and Polymarket odds).
“One thing that really scares me is how much Donald Trump Jr. is involved on both sides of the major US platforms,” Catlin said during a phone conversation with Gambling Insider. “I worry about a change in political party on top and then that becoming a lightning rod. … Just given how closely prediction markets are tied to Trump and his family, I just really worry that if the next group that comes in are Democrats, this is an easy area to go at.”
Bubble Watch
Even if prediction markets are allowed to keep doing what they’re doing, how many of them can flourish?
The gold rush feels familiar. After the Supreme Court struck down PASPA in 2018, the newly legal sports betting market became oversaturated with sportsbooks. Eight years later, two are dominant, half a dozen or so are scraping market share, and multiples more have shuttered.
Certainly, there’s opportunity in the emerging space, Catlin believes. For example, Outlier, an asset within Discerning Capital’s portfolio is prediction markets adjacent – the sports betting analytics platform syncs with prediction markets just as it does with sportsbooks.
But while he’s been presented with figures showing prediction markets can be as or more profitable than sportsbooks, the glut of companies crowding into the space concerns him. Some of the innovations will work, some won’t.
Catlin and other investors he’s spoken to, for example, have been pitched by prediction market companies that are building random number generators to produce outcomes users can “trade” on. A reasonable regulator may have a hard time finding the economic utility in that.
“Some of the things we’re seeing are really interesting, others are just sort of people who read about it in the Wall Street Journal, and they wanna build a business around it because it’s hot,” Catlin said.
“Given all of the interest of public and private businesses – everyone – focused on prediction markets, this has all the hallmarks of a growth pipe cycle bubble.”
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