Amidst a predicted surge in prediction market trading volume, Truist analysts suggest an unexpected driving force may be behind this trend.

Analyst Barry Jonas wrote this week that young adults aged 18 to 20 (who, in most US states, are below the legal age for gambling) may be contributing significantly to the expansion of prediction markets.

Specifically, data from HoldCrunch, a company founded by former FanDuel executives, shows that trading volume for college football events on the prediction platform Kalshi has surpassed that of the NFL and NBA. While non-college students can also bet on college sports results, this trend provides important clues about the user base of prediction platforms.

Notably, HoldCrunch's analysis is not based solely on trading volume data, but on "OSB equivalent handle" data.

According to Kalshi, for the week ending January 4th, betting on college football accounted for a record-high 32% of the platform's total betting volume. During the same period, NFL betting accounted for 24%, and the NBA for 22%. Kalshi stated that betting trends have been shifting towards college football and NBA events since October of last year.

Prediction markets, which allow users to bet on the outcomes of various events such as politics, world news, pop culture, and sports, are rapidly gaining popularity, driven by platforms like Kalshi and Polymarket.

In states where online sports betting is not yet legalized, prediction markets are quickly filling the market gap; in states where online sports betting is legal, participants are typically restricted to those 21 years of age and older. Kalshi and Polymarket set the participation age at 18 and older, although individual states have exceptions for sports betting and certain specific types of transactions. Jonas wrote, "It's clear that these newly launched products and services are having an impact on the behavior of sports bettors."

This week, NCAA President Charlie Baker wrote to the Commodity Futures Trading Commission (CFTC), which regulates prediction markets, requesting that the agency remove college sports from the options trading category until adequate safeguards are in place.

Juice Reel, an app designed for sports bettors that tracks betting history and provides analysis of betting and trading activity, found that prediction markets are generally more popular in states where sports betting is illegal.

According to Juice Reel, 9% of its California users have linked prediction accounts, the highest percentage in the US; Texas users had a slightly higher than 6% linkage rate. Notably, neither California nor Texas has legalized licensed sports betting.

Interestingly, despite New York having legalized online sports betting, 6.8% of Juice Reel users there still have linked prediction accounts, ranking second. This phenomenon may be related to the large number of financial professionals in New York who are familiar with trading futures, options, and other highly volatile financial derivatives. Truist analysts speculate that 18-20 year olds may also be a major driving force behind prediction market activity in the state.

Both New York and California residents show a strong propensity for gambling and are keen to participate in betting activities outside of regulated sports betting platforms. New York levies a high 51% tax on regulated sports betting, but does not tax lottery games, daily fantasy sports, offshore sports betting platforms, or betting company accounts. These unregulated platforms account for 40% of the total betting volume among Juice Reel users.

Part of the reason is that experienced gamblers with professional betting skills are unable to place large bets on mainstream platforms like DraftKings and FanDuel. Juice Reel founder Ricky Gold told the media, "Some of the largest and most sophisticated bettors are turning to prediction markets because sports betting companies are limiting their betting limits."

Juice Reel's tracking data shows that 70% of betting activity occurs at regulated sports betting companies, but this only accounts for 38% of the total betting volume; in contrast, prediction markets, while only accounting for 1% of the total betting volume, represent 13% of the total betting amount.

Truist analyst Jonas summarized, "Prediction markets amplify both the skill and volatility for bettors," adding that prediction markets "show greater downside risk for low-stakes users and higher upside risk for high-stakes users."