Image Source: Stephanie Stacey,Sam Learner
Key Takeaways:
- Kalshi and Polymarket are racing to build enough liquidity to offer lucrative multi-leg sports bets, known as "parlays" or "accumulators".
- Prediction markets allow gamblers to bet on binary outcomes of future events, but struggle to facilitate parlays due to the need for individual liquidity pools.
- The introduction of parlays could lure gamblers away from conventional sportsbooks and towards prediction market providers.
- Kalshi and Polymarket are offering incentives to traders who help build liquidity on their exchanges.
- The popularity of prediction markets has exploded, with Kalshi achieving an $11bn valuation and Polymarket in talks to raise money at a valuation of between $12bn and $15bn.
Introduction to Prediction Markets
The US sports gambling industry is a $14bn market, and prediction market providers such as Kalshi and Polymarket are looking to upend it by offering lucrative multi-leg sports bets, known as "parlays" or "accumulators". These bets deliver a big payout if a series of wagers come good, but are difficult for prediction markets to facilitate. As Adam Rivers, a managing director at consultancy Alvarez & Marsal, notes, "The current downfall [of prediction markets] is their inability to offer the same range of exotic bets that US gamblers love so much, like same-game parlays . . . but the market is beginning to find a way to serve certain sports." According to Bank of America Merrill Lynch analyst Shaun Kelley, parlays are the "killer app" of sports betting, and have "structurally changed" the industry’s win rates and economics.
The Challenge of Offering Parlays
To offer parlays, prediction markets have to establish liquidity pools for each individual bet, whereas traditional gambling groups can simply bundle preset odds. This makes it difficult for prediction markets to compete with conventional sportsbooks. As Jason Robins, chief executive of DraftKings, notes, "Just having to have individual liquidity pools makes it hard because then you spread out your liquidity." However, Kalshi and Polymarket are working to overcome this challenge by offering incentives to traders who help build liquidity on their exchanges. Kalshi, for example, offers individual liquidity providers payments of up to $1,000 per day, and has signed a partnership with Susquehanna International Group as its "first institutional market maker".
The Rise of Prediction Markets
The popularity of prediction markets has exploded since they rose to prominence in the run-up to last year’s US presidential election. Americans can use prediction markets to bet against each other on everything from the frequency of Elon Musk’s X posts to the likelihood of the US government announcing this year that aliens exist. Kalshi, which counts Donald Trump Jr as a strategic adviser, achieved an $11bn valuation in a $1bn funding round last month. Polymarket, where he is an investor, has recently been in talks to raise money at a valuation of between $12bn and $15bn. As Luana Lopes Lara, co-founder of Kalshi, notes, the company is committed to building a robust and liquid market, despite the challenges posed by parlays.
The Response from Traditional Sportsbooks
Traditional sportsbooks such as DraftKings and Flutter have been dismissive of the efforts of prediction market providers to offer parlays. Peter Jackson, chief executive of Flutter, notes that punters will always prefer traditional sportsbooks because "you don’t have anywhere near the same breadth of choice [on a prediction market exchange]". However, Kalshi and Polymarket are pushing ahead with their efforts to offer parlays, with Kalshi rolling out its first customisable parlay-style feature, called "combos", to all users in December. As Tarek Mansour, chief executive of Kalshi, notes, these bets delivered more than $100mn in volume in a single week.
The Future of Prediction Markets
The introduction of parlays could be a game-changer for prediction market providers, allowing them to lure gamblers away from conventional sportsbooks. As the market continues to evolve, it will be interesting to see how traditional sportsbooks respond to the challenge posed by prediction market providers. With the popularity of prediction markets continuing to grow, it is likely that we will see further innovation and development in this space. As Adam Rivers notes, "the market is beginning to find a way to serve certain sports", and it will be exciting to see how this plays out in the coming months and years.
https://www.ft.com/content/56304201-db2d-46e7-9113-7edfd6e39453