The online sports betting giant DraftKings is getting into the prediction market game. The company has acquired Railbird, a platform that offers “events contracts” — basically prediction markets, where you put money on whether or not you think a particular event will occur.

But the distinction is an important one. Unlike traditional gambling, which is regulated state by state — and heavily at that — prediction markets fall under federal commodities rules. Meaning they can operate even in big states where gambling is illegal like California and Texas.

Until fairly recently, prediction market platforms like Kalshi and Polymarket were mostly known as places you’d go to bet on politics or cultural questions, like who’ll win the presidential election? Will Taylor Swift get engaged? 

“And then this year, those prediction market companies moved into the sports betting area,” said Chad Beynon, an analyst at Macquarie Capital.

He said Kalshi and Polymarket have seen explosive growth since then. It sent traditional sportsbook stocks on a losing streak in recent months: Shares in DraftKings and FanDuel parent company Flutter have fallen by more than 15%.

“The view has been that prediction markets could take market share,” Beynon said.

It was only a matter of time until the sports betting operators got in on the prediction market action, said BTIG analyst Clark Lampen.

“It's sort of the confirmation of what people have expected for a while,” he said.

DraftKings acquisition of Railbird follows a FanDuel partnership with financial services company CME earlier this year. Both companies have said they plan to offer contracts on prediction markets — but they haven’t decided whether those will include sports.

Translation: They’re still feeling out what’s legal, said Lampen.

“Because you worry that in some states that a regulatory body might look at you in a sort of negative light,” he said.

DraftKings and FanDuel put in a lot of effort and expense to get licensed for legal sports betting in the roughly half of states that allow it. Some have explicitly warned them not to offer sports on prediction markets and have told Kalshi to cease and desist.

“We have a tension here between that state regulation of gambling and that federal regulation of financial markets,” said John Holden, a business law professor at Indiana University.

And it hasn’t been resolved. He said there are multiple ongoing lawsuits over whether this practice counts as gambling, but no federal ruling yet.

“It's a wild, wild time,” Holden said.

He said these companies might offer sports prediction markets only in states that don’t have regulated gambling, but there are also legal challenges there too.