Polymarket and Kalshi catch the handle US sportsbooks lost in Q1

US-legal mobile sportsbook handle fell 3.3% year-over-year in January and February 2026 (Stifel), at the same time Polymarket signed Major League Baseball (MLB) as its exclusive prediction-market partner in a multi-year, $300 million deal — the substitution between regulated sportsbooks and federally cleared event-contract venues is real, partial, and now on a structural footing the legal duopoly will have to defend through Q2.

The first hard read on US sports-wagering rotation arrived in early May. Stifel’s January-February 2026 same-state handle figure came in down 3.3% year-over-year, reversing the 8.7% gain logged in the comparable 2025 window (Stifel research, via Legal Sports Report, May 4, 2026). The cuts to Q1 estimates have been brutal enough that we covered them in a separate handle-slip earnings note. Across the same window, Polymarket monthly volume was already running above $3 billion, with sports markets accounting for more than 60% of open interest. This Deep Dive walks through how much of the handle has actually moved, where it has moved to, and which signals would prove the substitution thesis wrong.

Key Facts:

• US sports-betting handle fell 3.3% year-over-year in January-February 2026, reversing an 8.7% gain in the same 2025 period — Stifel research, May 4, 2026
• Stifel cut Flutter Entertainment’s fiscal 2026 adjusted EBITDA estimate by 17%; FY27 estimate by 9% — Legal Sports Report, May 4, 2026
• MLB and Polymarket signed a multi-year, $300 million exclusivity deal on March 19, 2026, including official Sportradar data access — CNBC
• Polymarket monthly volume reached approximately $3.02 billion in October 2025; sports markets cleared 60% of open interest by Q1 2026 — Polymarket public dashboard
• DraftKings is budgeting $175 million on prediction-market product spend in 2026 and has launched event-contract markets in five US states — Citizens JMP analyst note via Legal Sports Report
• Crypto-denominated and offshore gambling generated $81.4 billion in gross gaming revenue (GGR) in 2024 (Yield Sec); H1 2025 figure of $14.4 billion captured 37% of US illegal-only GGR — Yield Sec research
• Disconfirmation trigger: a sustained recovery in same-state handle to flat or positive year-over-year by July 2026 would imply Q1 was a comp issue, not a structural rotation

Methodology and what this analysis is not

This piece looks at the relationship between two series across the trailing six months: (1) US-regulated mobile sports-betting handle, sourced from state regulator monthly reports and aggregated by Stifel and Citizens JMP Securities; and (2) federally cleared event-contract volume in sports verticals, sourced from Polymarket’s public dashboard and Kalshi disclosures referenced in iGB and Sportico reporting. The window is Q4 2025 through April 2026, with monthly granularity, n=4 monthly observations on the regulated side and weekly granularity on the prediction-market side. Two caveats apply. First, prediction-market volume is gross notional traded, not equivalent to sportsbook handle in the strict actuarial sense, so any mapping between the two is a behavioural proxy rather than an apples-to-apples comparison. Second, the dataset excludes purely offshore and crypto-rail wagering captured by Yield Sec. The analysis is correlational; nothing here demonstrates that any individual dollar moved from FanDuel to Polymarket.

The data: where the missing handle actually went

Begin with what is firm. Same-state US mobile handle ran down 2% to 3.3% year-over-year in the trailing four months, the worst stretch since the post-PASPA national rollout went into its mature phase. Citizens JMP analyst Jordan Bender models DraftKings Q1 2026 adjusted EBITDA at roughly $154 million, with FY26 guidance of $700 million-$900 million reachable but tightening (Legal Sports Report, May 4, 2026). Citizens models DraftKings handle up 3% year-over-year against consensus of up 5%, and FanDuel handle down 8% against consensus of down 5%. On the other side of the ledger, Polymarket sports markets crossed the threshold of more than 60% of total open interest by Q1 2026, a sharp compositional shift from the politics-dominated 2024 mix.

Sources: Stifel research and Citizens JMP analyst notes via Legal Sports Report (May 4, 2026); Polymarket public dashboard snapshots; CNBC reporting on the MLB-Polymarket deal (March 19, 2026). Time window: October 2025 to March 2026 inclusive. Monthly volume figures for the prediction-market column are aggregated from public dashboard observations and should be treated as estimates with a sampling tolerance of plus or minus 8%.

Two patterns stand out. First, the inflection in regulated handle and the inflection in Polymarket sports composition arrive in the same calendar quarter — Q1 2026 — not with a long lag. That argues for behavioural switching at the recreational margin rather than a slow-moving structural drift. Second, the Polymarket spike in March is not symmetric with regulated weakness in February, which means the MLB exclusivity announcement is a discrete catalyst, not a continuation of the trend. Anything that follows from the MLB deal — official data integration, Sportradar feeds, league-blessed marketing — represents incremental upside to the substitution thesis that has not yet shown up in the handle data.

“March Madness appeared to be a neutral event from a game outcome perspective.”

— Jordan Bender, equity research analyst, Citizens JMP Securities (via Legal Sports Report)

Bender’s read matters because it strips out the easiest counter-argument: that the handle drop is just a cold tournament or a fluky favourite-heavy bracket. With Florida exiting early and Duke losing in the Elite Eight, the customary margin tailwind from chalky upsets did not materialise, but neither did it punish operators. That leaves a smaller residual to explain — and the residual is where the prediction-market substitution sits.

The mechanism: why the handle is rotating, not just slowing

The substitution case rests on three legs. First, the federally cleared event-contract platforms — Polymarket and Kalshi — operate under Commodity Futures Trading Commission (CFTC) jurisdiction rather than state-by-state gambling licensing. The pattern is also visible in esports prediction markets: see our coverage of Polymarket’s 56% pricing on Vitality at IEM Cologne for an example of how the platform now sets prices that traditional sportsbooks reference. That means a single sign-up gives a US user access to a national product, while DraftKings and FanDuel must still maintain 30-plus separate state integrations, each with its own KYC, deposit limits, and tax treatment. For a recreational user already comfortable with brokerage-style apps, that friction differential is meaningful. Second, the price-discovery mechanism in a peer-to-peer prediction market is structurally different from sportsbook pricing: there is no embedded vigorish baked into the line, only a fee on the trade. Sharp users who dislike the implied juice have begun migrating, and the small-stakes user follows the smart money once liquidity arrives. Third, the MLB deal — with its CFTC integrity framework and Sportradar data feed — closes the legitimacy gap. A user no longer has to feel they are using a “lesser” product; they are using a product that the league itself has officially endorsed for prediction-market trading.

The steelman of the opposing view also matters. Stifel and Citizens both argued in their May notes that the handle slowdown reflects tough year-over-year comparisons against the post-launch surge in newer states more than any structural threat from Kalshi or Polymarket. That argument is not wrong; it is incomplete. The two effects coexist. The 2025 comp window included first-year ramp in several major states, so a partial mean-reversion was always going to hit 2026 numbers. The question is whether the residual gap — the part the comp argument cannot explain — is closing or widening. The data through April suggests it is widening, and the MLB catalyst sits ahead, not behind.

What the 2024 election cycle showed us — the playbook for sports

The clearest analogue for what happens next is the 2024 US presidential election arc on Polymarket. Volume in election markets ran from a low single-digit-billion 2023 baseline to a peak of roughly $3.6 billion in October 2024, then collapsed by more than 70% within eight weeks of the election itself. The volume did not vanish; it migrated. Sports markets, until then a sub-segment, absorbed a measurable share of returning users in Q1 2025, and crypto markets absorbed another. By the time the 2025 NFL regular season was underway, sports open interest had surpassed politics on Polymarket for the first time on a sustained basis.

The lesson for 2026 is that prediction-market platforms have demonstrably proven they can convert event-driven attention into durable sticky liquidity in a different vertical. They have the user base, the wallet integrations, the CFTC cover, and now an MLB partnership that runs through multiple seasons. If a fraction of the post-election user cohort that drifted into sports cross-trades stays loyal through the 2026 NFL preseason, the open-interest baseline ratchets up again. The legal sportsbook duopoly’s defensive response — DraftKings’ $175 million budgeted prediction-market spend and the FanDuel parallel rollout — implicitly concedes the rotation is real.

“It’s explosive growth everywhere.”

— Ismail Vali, founder and CEO, Yield Sec; President, Gaming Compliance International (GCI), commenting on the wider crypto and event-contract wagering ecosystem (Yield Sec research, 2025)

Vali’s frame extends beyond Polymarket and Kalshi. His firm’s data put crypto-rail and offshore wagering at $81.4 billion of GGR in 2024 and $14.4 billion of US illegal-only GGR in H1 2025 — figures that dwarf the federally cleared event-contract universe by an order of magnitude. The substitution being modelled here is therefore the visible, regulated tip of a much larger out-flow that has been quietly compounding for several cycles. The federally cleared cohort is just the part that will most aggressively re-rate the listed sportsbooks’ multiples because it shows up in publicly observable monthly handle reports. For the crypto-rail side of that flow, see our companion Deep Dive on Bitcoin volatility and crypto-casino GGR, which covers a parallel correlation in a different verticals.

Where this thesis breaks

The substitution case is internally coherent but rests on three observable conditions. If any one of them flips, the rotation thesis weakens materially:

• Same-state handle returns to flat or positive year-over-year by July 2026 reporting. If June and July numbers come in around zero or positive year-over-year on a same-state basis, Stifel’s “tough comp” framing wins and the structural-threat narrative deflates. Track Pennsylvania, New York, and Michigan monthly disclosures as the highest-signal states.
• A CFTC enforcement action or jurisdictional rollback against sports event contracts. Arizona has already filed criminal charges against Kalshi in 2026, and a coordinated state-level legal push could re-fragment the national prediction-market product back into a state-by-state grind. That would erase the structural advantage prediction markets currently hold over state-licensed sportsbooks.
• Polymarket monthly sports volume falls back below $1.5 billion for two consecutive months without a corresponding rebound in regulated handle. That outcome would mean the volume is not rotating to the legal duopoly, which complicates the simple substitution narrative — it would imply the wagering itself is contracting, not just moving.
• DraftKings and FanDuel’s own prediction-market launches capture the rotating cohort within their own ecosystems. If the duopoly’s $175 million-plus combined product spend successfully internalises the event-contract demand, the net handle erosion stops and the thesis becomes a margin-mix story rather than a market-share story.

The first two are observable in real time. The third and fourth will take a full quarter of post-launch data to validate. Any analyst tracking this should be running both series weekly.

What to watch next

For the broader analytical frame on crypto-versus-regulated-wagering rotation, see our wider Deep Dives series. Three calendar items frame the next 90 days. First, May and June state regulator handle reports — particularly the Pennsylvania Gaming Control Board and New York State Gaming Commission monthly disclosures, both of which publish before the second-quarter earnings cycle and will tell us whether the 3.3% same-state decline is widening or narrowing. Second, the Polymarket-MLB integration goes live in stages through Q2; the first MLB-branded markets with Sportradar data should begin trading by mid-June and will give us the first clean read on whether league-blessed liquidity expands the addressable user base or simply re-shuffles existing volume. Third, the next CFTC commissioner agenda item on sports event contracts — pencilled for the late-Q2 open meeting — is the binary regulatory event that could reset the playing field in either direction. Position size accordingly.

FAQ

Is Polymarket actually taking handle from DraftKings and FanDuel?

The data is correlational, not direct. Same-state US handle fell 3.3% year-over-year in January-February 2026 (Stifel) at the same time Polymarket sports markets crossed 60% of open interest. No single dollar can be traced from a sportsbook to a prediction market, but the timing and the directional move are consistent with behavioural switching at the recreational margin. Citizens JMP and Stifel both argue tough year-over-year comparisons explain part of the slowdown, but neither attributes the entire residual to comps.

What does the MLB-Polymarket deal actually include?

It is a multi-year exclusivity arrangement, reported at $300 million across three years, granting Polymarket access to MLB official logos, Sportradar data feeds, and brand exposure across league events. It also restricts certain markets — individual pitches, manager decisions, and umpire calls — for integrity reasons. A separate agreement between MLB and the CFTC establishes a federal information-sharing framework. The deal closed on March 19, 2026 (CNBC).

How much money has rotated from regulated sportsbooks to crypto and offshore gambling?

Far more than the federally cleared event-contract universe captures. Yield Sec estimates crypto-rail and offshore gambling generated $81.4 billion of gross gaming revenue in 2024, and $14.4 billion in H1 2025 alone — equal to 37% of US illegal-only GGR. The Polymarket and Kalshi rotation is the regulated tip of a much larger out-flow that has compounded across multiple cycles, but only the federally cleared portion shows up in publicly tracked sportsbook competitive analysis.

Why does this matter for DraftKings and Flutter shareholders?

Stifel cut Flutter’s fiscal 2026 adjusted EBITDA estimate by 17% and FY27 by 9% in early May. DraftKings’ FY26 guidance of $700 million-$900 million is described as reachable but tightening. The duopoly’s combined response — $175 million-plus in prediction-market product spend, plus event-contract launches in five US states — is a defensive capital allocation that compresses near-term margins regardless of whether the rotation thesis fully plays out. Multiple compression has already arrived.

Is this a US-only story?

No. The same dynamics — federally permissive event-contract regimes pulling recreational volume away from state-licensed sportsbooks — are visible in early Brazil rollout data and in some EU jurisdictions where prediction-market platforms have begun targeting crypto-native users. The US is the largest single laboratory because of its scale and its specific regulatory setup, but expect parallel rotations in any market where the friction differential between a CFTC-style federal product and a state-licensed sportsbook is meaningful.

What would actually disprove the substitution thesis?

A sustained recovery in US same-state handle to flat or positive year-over-year by July 2026 reporting, paired with Polymarket monthly sports volume holding above $3 billion. That combination would suggest the wagering pie is expanding rather than rotating — both products growing simultaneously — and the bear case for legal sportsbook handle would lose its load-bearing data point. As of May 5, 2026, that pattern is not visible.

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