Are Prediction Markets Eating from the OSB Table?

The narrative for the U.S. sports betting industry in 2026 shifted from the “path to profitability” to “defend the castle.” In H2 2025, a structural fissure appeared in the American gambling landscape: the rise of federally regulated prediction markets. Once dismissed as niche financial experiments, Kalshi and Polymarket, have evolved into a formidable industry with investors more than curious about how much liquidity is being siphoned directly from regulated sportsbooks like FanDuel and DraftKings.

To investigate this topic, we turned to evidence from a variety of sources: equity research, blockchain data, and regulatory filings to estimate how much handle has been “cannibalized” and where each industry appears headed.

The Evidence: Quantifying the Shift (2025–2026)

The “$8 Billion Leak”
The most concrete evidence of cannibalization found so far comes from a landmark January 7, 2026 report by Citizens JMP Securities. Lead analyst Jordan Bender quantified that approximately 5% of the total legal U.S. sports betting handle had migrated to prediction markets as of the end of 2025.

• The Number: This equates to an annualized “leak” of roughly $8 billion handle (not revenue) moving from state-regulated sportsbooks to federal event contracts.
• The Driver: The primary catalyst was naturally the 2025 NFL season. In September alone, Kalshi reported it processed over $2.5 billion in sports-related contracts, a volume that exceeds the peak monthly handle of FanDuel’s sportsbook in mature state New Jersey in 2025 (November ~1.28B).

The “Duopoly” Explosion
According to The Block (the leading research and news provider for digital assets) and Kaiko (the gold standard for institutional crypto market data), prediction market growth is being fueled by a massive influx of traditional finance (TradFi) capital and a pivot toward high-frequency event contracts.

Data from The Block and Kaiko reveals that the prediction market sector is no longer a fragmented startup scene but a concentrated duopoly.

• Volume Surge: In 2025, Kalshi and Polymarket generated a combined $37 billion in trading volume.
• November Peak: November 2025 set a historical record, with Kalshi alone processing $5.8 billion in a single month. While political betting drove headlines, granular data shows that sports event contracts (e.g., “Will the Chiefs win on Sunday?”) accounted for the majority of recurring daily active users (DAU) post-election.

1. State-Level Arbitrage (The “California Loophole”)
   Most significantly states where Online Sports Betting (OSB) remains illegal are deemed to be driving Predictions Markets growth.

• The Mechanic: Platforms like DraftKings and FanDuel (OSB) are geofenced out of California, Texas, and Georgia. However, because prediction markets are regulated by the CFTC as financial derivatives (not state gambling), they operate legally in these jurisdictions.
• The Impact: Estimates suggest 42% of prediction market volume originates from these OSB unregulated giant states, effectively capturing the black market handle that sportsbooks were hoping to eventually legalize.
  

Wallet Share: Cannibalization vs. Expansion
Is this a zero-sum game? Not entirely. A crucial distinction must be made between replacing bets and expanding betting behavior.

According to transaction data analysis (cited in the Citizens JMP report), the average bettor’s behavior shifts upon joining a prediction market:

Cannibalization: Users tend to reduce their traditional sportsbook spending by roughly 11%.

Expansion: However, their total combined betting activity (Sportsbook + Prediction Market) grows by 9%.

The lower fees involved in exchange contracts compared to take out rates with sportsbooks, maybe driving a volume “wallet expansion” phenomenon where “sharps” and high-frequency traders are increasing their total turnover, with most price-sensitive liquidity (sharps) drawn away from high-vig sportsbook offer situations.

Future Outlook: The $435 Billion Threat

• A January 13, 2026 report by Eilers & Krejcik Gaming provides a staggering forecast medium term, projecting U.S. prediction markets potential $1 trillion volume at maturity.
• Sports Dominance: Of that trillion-dollar figure, $435 billion is projected to come directly from sports-prediction events.
• Strategic Pivot: The threat is credible enough that DraftKings and FanDuel have both launched their own prediction products (DraftKings Predicts and FanDuel Predicts) in late 2025 to operate in states where they have not yet rolled out OSB product offerings.

Conclusion: The Verdict on Cannibalization
Based on the available evidence from Q4 2025 through January 2026, we feel Citizens JMP & bank data provides the best current cannibalization rate estimate of ~5% total OSB Handle ($8B annualized).

Prediction markets have started to pierce the interest of traditional sports bettors in regulated states. However, traditional sportsbook’s continue to hold product and promotional advantages where they are regulated to operate. Predictions are attracting high-volume “sharp” and price sensitive straight bet action while having a first mover advantage in states where sportsbooks are as yet legally forbidden to tread.