“Anytime crypto markets go bearish, someone frames it as a morality tale about excess crashing into regulation. That’s a tidy argument, but incomplete.”

If you want a permissive channel for betting on uncertainty, crypto hits the spot: All digital, vaguely regulated, truckloads of volatility, and realistic prospects for gains.

Prediction markets are now contesting that role. Their rapid rise has sucked up some of crypto’s speculative energy and made the current bear market worse.

When one trading route narrows, another tends to open. A chunk of crypto’s risk appetite has been diverted elsewhere, down a road with fewer frictions and clearer rules.

Key takeaways

• Prediction market volumes are up ~25x, driven largely by sports betting
• Research shows that retail crypto attention declines when sports betting is legalized
• Stablecoins are becoming the medium of choice for on-chain speculation

Risk-Seekers Get A New Channel

Pundits pin crypto’s latest downturn on predictable factors: higher interest rates, regulatory drag, TradFi hoarding, trade uncertainties, etc. Those all count, but what if another force has been attacking crypto trading indirectly, absorbing some of its speculative attention?

Since the Supreme Court cleared the way for state-by-state sports betting in 2018, online gambling has skyrocketed. It was the second-fastest growing sector between 2019 and 2024 (only software beat it). Last year, licensed sportsbooks generated ~$170 billion in wagers.

The upsurge normalized one of the riskiest forms of financial gain-seeking, undermining crypto’s role as the most widely accessible, always-on outlet for speculative risk. 

There’s strong evidence that both activities draw from the same retail pool and share similar risk appetites. But gambling has started crowding crypto out.

The Substitution Effect

A 2025 Cambridge study found that crypto commanded less retail attention in US states that had green lighted gambling.

That’s not to suggest sports bets are directly responsible for declining coin prices. But in a market that runs heavily on retail engagement and operates in regulatory limbo, even modest shifts in attention might become headwinds. 

Is it a stretch to assume that when new, legally sanctioned venues emerge, older ones might lose some share? That’s where prediction markets enter the picture. 

Polymarket and Kalshi have seen volumes jump over the past year, driven largely by sports-related markets. That’s ramped up the competitive pressure.

Paradoxically, a lot of that activity settles in stablecoins, and Polymarket is built explicitly on blockchain rails. That makes prediction markets one of crypto’s most compelling mainstream use cases, even as they compete directly with crypto trading. 

The tension is heating up. Indian Tribes in states like California, Connecticut and Wisconsin have taken legal action against Kalshi (and sometimes partners like Robinhood), alleging they engage in illegal sports betting, affecting tribal lands and diverting revenue. 

While the complaints target prediction markets, you can apply the idea more broadly: new betting venues have become a magnet for speculative activity, pulling it away from incumbents. Crypto is now one of them.

Exclusivity Lost

Anytime crypto markets go bearish, someone frames it as a morality tale about excess crashing into regulation. That’s a tidy argument, but incomplete. 

When betting was legalized, a load of speculative activity that had been operating at the margins was invited indoors. Crypto, still treated by regulators as a problem rather than a product, suddenly had a competitor with the legal blessing of the courts.

Prediction markets stepped in since with a new format that’s gambling-like but untainted by the sector’s lose-it-all stigma, it absorbed even more of crypto’s speculative heat.

Legal, always-on sportsbooks reduced the need for pseudo-anonymous alternatives. Prediction markets narrowed the gap by offering speculation with clearer outcomes and lower volatility. When traders can wager their views on sports, politics, or macro events in stablecoins, Dogecoin’s ups and downs might seem less appealing.

Maybe things will shift back. Stablecoin balances held on prediction platforms represent latent liquidity that could rotate back into crypto under the right conditions. But if crypto hopes to reignite retail participation, the speculative opportunities on offer will need to be as intuitive, compelling, and accessible as the betting markets now drawing users away.

Quick Hits:

Watchlist: Keep an eye on Polymarket stablecoin volume and open interest, Kalshi-related regulatory developments, and stablecoin issuers benefiting from non-trading velocity. On the crypto side, monitor high-beta, event-driven assets, i.e. memecoins tied to real-world catalysts, sports-adjacent NFTs, and protocols experimenting with faster outcome resolution.

Hot Take: As legalized betting and prediction markets absorb speculative attention, assets that behave more like wagers than investments may regain relevance first. The next retail wave is likely to favor clarity of outcome over ideological ambition.

Risk Note: Substitution cuts both ways. Liquidity parked in stablecoins on prediction markets is still liquid, but rotation is not guaranteed. Regulatory shifts, platform enforcement, or market shocks can reverse flows quickly.

Disclaimer: Not financial advice. Do your own research.

Feature image credit: Author

Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.