A new American Gaming Association analysis finds underage sports betting is flourishing on prediction markets

Too young to wager, but old enough to predict: Young bettors have flocked to prediction markets as a backdoor to sports betting.

When it comes to sports betting, people in the 18 to 20 age bracket who want to put some skin in the game while getting around the age requirements of sportsbooks like DraftKings (DKNG) and FanDuel $(FLUT)$ by placing bets with prediction markets like Kalshi and Polymarket instead.

A new tracker from the American Gaming Association, which uses data from Kalshi, shows that an estimated $5.1 billion has been wagered on sports on the Kalshi platform by users age 18 to 20. The AGA represents U.S. gambling-industry stakeholders.

"An entire cohort that's locked out of sportsbooks can trade functionally identical products," said Shahrzad Shams, a director at the Roosevelt Institute research firm. "I don't think we should be surprised" that young people are willing to take on this gamble, she added.

Sportsbooks have surged in popularity since the 2018 Supreme Court ruling that effectively legalized sports betting in the U.S., leaving it to be regulated by states. But over the last 18 months, sports event contracts on prediction markets have been gaining in popularity, too. These contracts offer "yes" or "no" outcomes on events, like a specific tennis player winning the U.S. Open. Each contract ranges in price between $0.01 to $0.99, representing what the collective market thinks of the likelihood of an event happening. A winning contract goes to $1, and a losing contract goes to $0.

(Prediction-market operator Polymarket has a data partnership with Dow Jones, the publisher of MarketWatch.)

While both prediction markets and sportsbooks offer ways for people to risk money on sports contests, there is one important difference for younger people: Nearly every state doesn't allow sports betting before the age of 21. Montana, New Hampshire and Rhode Island are among the four states where you can bet beginning at 18, but the rest restrict it to those age 21 and up.

In contrast, prediction markets are not regulated by states. They're governed by the Commodity Futures Trading Commission, a federal agency, and are allowed in every state, with some exceptions like Nevada and Michigan.

"Most parents and grandparents don't realize that 'prediction markets' are offering a backdoor into sports betting in jurisdictions where the legal betting age is 21," AGA President and CEO Bill Miller said in a written statement to MarketWatch. "This means their freshman son or daughter may be prohibited from entering a legal sportsbook, but can simply pull out their phone and use Kalshi to bet on football."

The estimated $5.1 billion wagered by those under 21 on Kalshi represent what critics in the sports-betting industry consider a backdoor way into gambling, as they are essentially betting money on sports in states where it would not normally be legal to do so, via prediction markets. And many in the industry see this as a major issue as far as young people are concerned.

"It's absolutely a problem, and one that harms not only individual users but society as a whole," Shams told MarketWatch. "These are 18- to 20-year-olds accessing gambling-equivalent products below the age their own states have set for sports betting, and doing it without the protections licensed sportsbooks are required to provide, such as deposit limits, self-exclusion or problem-gambling referrals. Early exposure is also a recognized risk factor for gambling harm later on."

The rise in problem gambling - defined as gambling behavior that damages a person's life or finances - has been well documented. Gambling-disorder diagnoses rose more than 60% since 2018 in states with legalized sports betting, according to an Epic Research study of health records, with the biggest increase being among young men.

What's more, there's some data to suggest that emerging investors are looking at sports betting as more than just a gamble.

Robo adviser Betterment's annual survey of retail investors found that 26% of Gen Z investors treated sports betting as a "deliberate part of their long-term financial strategy," while 52% redirected money originally intended for investing toward sports betting in the previous year - more than any other generation.

In a few states, including New York, Utah and Nevada, there has been ongoing legal controversy about whether prediction-market platforms must comply with state laws surrounding sports betting. Industry experts have wondered if this fight will eventually reach the Supreme Court.

Kalshi did not immediately respond to request for comment. Polymarket declined to comment.

On Tuesday, New Jersey Attorney General Jennifer Davenport filed a petition asking the Supreme Court to review a recent string of court decisions about whether sports events contracts are sports bets governed by state gaming laws.

"We're calling on the Supreme Court to resolve this issue and recognize that Congress did not silently make the sports-betting industry immune from state law," Davenport said in a statement.

A Supreme Court decision to force prediction markets to be governed by the same rules as sportsbooks would restrict 18- to 20-year-olds from betting on sports in most states. For now, the legal distinction means an 18-year-old in much of the U.S. can open a prediction-market account and wager on week 1 of the upcoming NFL season, even though that same person generally cannot place the same bet at a sportsbook.

Whether that distinction survives could ultimately be up to the Supreme Court.

-Weston Blasi