Problems at DraftKings (DKNG)
DraftKings (NASDAQ: DKNG — $21.2 billion) is on a mission “to make life more exciting by responsibly creating the world’s favorite real-money games and betting experiences.” DraftKings offers its millions of customers sports betting, including player-specific bets and parlays, fantasy sports leagues, and other traditional gaming options like lotteries and online casino games. Investors have viewed DraftKings and its main competitor, FanDuel, as an effective duopoly aggressively wooing players with signup bonuses in hopes of ultimately establishing a high-margin base of repeat customers. The Bear Cave believes that narrative is being disrupted by prediction markets like Kalshi, which often offer customers better odds with deeper order books. In short, The Bear Cave believes prediction markets are a real and growing headwind for DraftKings and will turn an effective duopoly into a competitive marketplace with DraftKings on the defensive.
Prediction markets like Kalshi and its rival Polymarket allow users to trade on events as varied as elections, the weather, inflation rates, Rotten Tomatoes scores, whether certain CEOs will resign, and even if Jerome Powell will say “Good afternoon” at the start of his press conferences. Prediction markets involve no “house” and instead let users directly trade with each other on “Yes/No” shares that pay $1 per share for binary outcome events, with prices set by the market forces of traders.
At their best, prediction markets can be a source of truth in a world filled with misinformation, an alternative to mainstream media in understanding the world, and a way to peer into the future.
Prediction markets like Kalshi, which is available nationwide to anyone over 18, are also increasingly an alternative to traditional online sportsbooks like DraftKings, which is generally available 21 and up in about half the country.
For example, Kalshi had a market titled “Tampa Bay at Houston” that let users bet on the Monday night football match between the Tampa Bay Buccaneers and Houston Texans. About fifteen minutes before kickoff, The Bear Cave bet $49.95 on Kalshi to acquire 115 Yes shares on the Buccaneers at 43 cents per share with a 50-cent fee. At the same time, The Bear Cave used DraftKings to place a $50 bet on the Buccaneers, with a potential payoff of $107.
The Buccaneers won 20-19 and The Bear Cave collected $115 from Kalshi and $107 from DraftKings. The Kalshi market ended the game with $36.6 million in total volume.
On Tuesday evening, The Bear Cave reviewed prices for all upcoming Sunday NFL games and found in many cases Kalshi offered better odds than DraftKings. For example, for the Kansas City Chiefs at New York Giants, DraftKings will pay $157.50 for a $50 bet on the underdog Giants, while the Kalshi market offers $170, after fees, for the same bet.
Likewise, a $50 DraftKings bet on the Panthers this Sunday would pay out $147.50 while a $49.73 bet, including fees, would pay out $158 on Kalshi.
On Tuesday evening, The Bear Cave analyzed all 14 Kalshi markets for Sunday NFL games and found that in 8 of the 14 markets Kalshi offered better odds while in 6 of the 14 markets DraftKings offered better odds.
Moreover, The Bear Cave expects Kalshi’s value proposition to improve over time because its transaction fees may come down as the platform matures and the platform is actively exploring sub-penny pricing, which will allow for even smaller bid-ask spreads.
Better odds, higher liquidity, a simple user interface, and nationwide availability for anyone over 18 have attracted significant customer interest.