The rise of prediction markets ahead of Super Bowl weekend has become a major overhang for legacy sportsbooks, prompting investors to de-risk their equity positions and sending shares of Flutter Entertainment (owner of FanDuel) and rival DraftKings sharply lower year to date.

Today's matchup between Seattle and New England at Levi's Stadium in Santa Clara is expected to drive record trading volumes on prediction markets, according to Jordan Bender, a senior equity analyst at Citizens.

"A big piece of why we think Super Bowl handle will be down is that prediction markets are taking a bite out of that," Bender said.

Since the 2024 presidential election cycle, prediction markets such as Kalshi and Polymarket have attracted growing trading volumes that would have traditionally flowed to sportsbook apps.

Professional sports gambler Rufus Peabody told Bloomberg, "It really feels like everything's prediction markets, prediction markets, prediction markets."

Peabody, who began trading on Kalshi in September, noted, "Maybe not for the average recreational bettor, but certainly in the sharp community."

Kalshi and other federally regulated exchanges have opened prediction markets to millions of Americans living in states where sportsbooks remain illegal, sparking a fierce legal battle with federal and local gaming regulators.

These event contracts are not just for sports but also offer bets across markets, elections, and geopolitics. The fastest growth, however, is in sports betting.

According to the Dune data dashboard, Kalshi saw nearly $10 billion in contracts traded in January, with the vast majority tied to sports betting (about $8.5 billion).

Traders on Kalshi and rival Polymarket have swapped $800 million worth of contracts tied to the Super Bowl so far, the American Gaming Association wrote in a report. This compares with $1.8 billion Americans are expected to bet on the game through traditional regulated sportsbooks.

In November, Polymarket received regulatory approval from the Commodity Futures Trading Commission to return to the US markets.

"Polymarket is back. Polymarket's U.S. app is now being rolled out to those on the waitlist," Polymarket states on its platform.

Despite the rise of prediction markets, several Wall Street analysts still expect the existing US sportsbook companies to take in a record Super Bowl haul this weekend.

H2 Gambling Capital senior analyst Ed Birkin forecasted that total wagers - before prediction markets are taken into account - will soar 9% this year to $1.78 billion. He pointed out that prediction markets will attract $630 million in bets for the Super Bowl and account for 80% year-over-year growth in wagering activity for the event.

Polymarket's latest Super Bowl bets:

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Let the games begin.