The explosive growth of prediction markets is driven by regulatory arbitrage. They capture immense value from the highly-regulated sports betting industry by operating under different, less restrictive rules for 'prediction markets,' despite significant product overlap.

Kalshi argues its market-based system for sports events is superior to traditional sportsbooks because anyone can be a price maker, not just a price taker. This results in better odds and a user win/loss ratio closer to 50/50, framing it as an equitable financial market rather than a house-always-wins model.

Prediction markets are cannibalizing the traditional gaming industry by framing gambling as an intellectual activity. This creates a more compelling 'product' that is already impacting gaming stocks and tourism, while introducing severe societal harms like addiction and new forms of insider trading.

Prediction markets like Polymarket operate in a regulatory gray area where traditional insider trading laws don't apply. This creates a loophole for employees to monetize confidential information (e.g., product release dates) through bets, effectively leaking corporate secrets and creating a new espionage risk for companies.

While both involve risk, prediction markets like Polymarket allow for bets on real-world events where an individual can have a genuine analytical edge. This contrasts with the uninformed, "degenerate" speculation common in meme coins, offering a potentially more rational outlet for risk capital.

While often promoted as tools for information discovery, the primary business opportunity for prediction markets is cannibalizing the massive sports betting industry. The high-volume, high-engagement nature of sports gambling is the engine to acquire customers and professional market makers, with other "informational" markets being a secondary concern.

Extreme conviction in prediction markets may not be just speculation. It could signal bets being placed by insiders with proprietary knowledge, such as developers working on AI models or administrators of the leaderboards themselves. This makes these markets a potential source of leaked alpha on who is truly ahead.

While gaining traction, prediction markets are on a collision course with regulators. Their expansion into domains resembling sports betting is unsustainable without government oversight and revenue sharing. The current "lawless" phase, where they claim not to be gambling, is unlikely to last, leading to a stalled 2026.

Analysis shows prediction market accuracy jumps to 95% in the final hours before an event. The financial incentives for participants mean these markets aggregate expert knowledge and signal outcomes before they are widely reported, acting as a truth-finding mechanism.