Prediction markets serve a dual purpose. Beyond being a product, they are a strategic wedge to enter massive, untapped markets like California and Texas. Because they operate under a different regulatory framework, they provide a foothold where traditional sports betting is banned.

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.

New platforms frame betting on future events as sophisticated 'trading,' akin to stock markets. This rebranding as 'prediction markets' helps them bypass traditional gambling regulations and attract users who might otherwise shun betting, positioning it as an intellectual or financial activity rather than a game of chance.

Though functionally similar to users, prediction markets and sports betting operate under different regulatory frameworks. Prediction markets are lightly regulated by the federal government, while sports betting is heavily regulated state-by-state. This distinction allows prediction markets to legally operate in jurisdictions where sports betting is banned, fueling rapid growth.

Scott Galloway predicts Kalshi, a CFTC-regulated prediction market, will become the next major IPO. He cites its 2,700% year-over-year growth in trading volume and notes its rise directly coincides with the underperformance of established sports betting stocks, indicating a major market shift.

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.

Kalshi’s key strategic move was getting its prediction markets regulated by the federal CFTC, similar to commodities. This established federal preemption, meaning state-level laws don't apply. This allowed them to operate nationwide with a single regulator instead of seeking approval in 50 different states.

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.

While traditional sports betting is restricted in many areas, prediction markets like Kalshi are often regulated as commodity markets. This arbitrage allows them to legally offer wagering on sports outcomes in most states, effectively operating as back-door sportsbooks and reaching a national audience.