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.

Financial personality Vivian Tu warns against platforms marketing "prediction markets" as an investment class. She clarifies they are simply a modern form of gambling on outcomes, akin to sports betting, and will likely deplete wealth rather than build it.

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.

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.

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.

Prediction markets are accelerating their normalization by integrating directly into established ecosystems. Partnerships with Google, Robinhood, and the NYSE's owner embed gambling-like activities into everyday financial and informational tools, lowering barriers to entry and lending them legitimacy.

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.