Polymarket and other prediction markets are gaining momentum as investors begin to sell off online gambling giants DraftKings (DKNG.US) and Flutter (FLUT.US).

After the Wall Street financial giant Bank of America Corp unexpectedly downgraded the stock ratings of online sports betting operators, DraftKings Inc. (DKNG.US) and Flutter Entertainment Plc (FLUT.US), the two major American online gambling giants, both saw a significant decline in their stock prices. The core reason Bank of America Corp cited for the downgrade was the multiple risks facing the gambling market, including the increasing prevalence of prediction markets like Polymarket globally, and the possibility that DraftKings and Flutter may pale in comparison in the new round of developments in the "gambling" trend. It is understood that the Bank of America analyst team led by Shaun Kelley downgraded the stock ratings of DraftKings and Flutter from "buy" to "neutral," expressing concerns about the so-called "structural hold returns" and significant pressure from long-term headwinds such as taxation. Regarding the threat posed by paid prediction markets, Bank of America stated that as business models continue to evolve, resistance may emerge, which could be the biggest constraint. "The recent path of events surrounding the prediction market is very challenging, with competitive marketing and the possibility of full-scale price wars on the rise, and online sports betting operators' decisions being heavily restricted by regulation and legal actions," said senior analyst Kelley of Bank of America. Prediction markets are becoming increasingly popular among bettors, with platforms like Kalshi Inc. and Polymarket requiring real money for paid bets on the outcomes of various significant events such as sports games, New York City mayoral elections, and the Nobel Peace Prize. In late September, the most popular brokerage platform among retail investors in the United States, Robinhood Markets, and the well-known prediction platform Kalshi both reported that the size of bets in prediction markets was skyrocketing. Even former U.S. President Donald Trump's social media company has begun to participate. The capital markets have been highly sensitive to this new paid prediction track in recent years, ultimately putting traditional gambling industry valuations and business models under long-term pressure. The rise of prediction markets has led to DraftKings and Flutter's stock prices underperforming the S&P 500 index. DraftKings stock price fell by 6.4% on Tuesday, hitting its lowest level in over two years at one point. Meanwhile, Flutter's stock price dropped by 3.9%. The significant threats posed by platforms like Kalshi Inc. and Polymarket from prediction markets have led investors to sell off these gambling operator stocks, with both companies experiencing a continuous downward trend in their stock prices for several months. Kelley, the Bank of America analyst, said: "Unfortunately but not surprisingly, the value of online sports betting operator stocks is now beginning to react negatively to major announcements related to prediction markets." He added that he believed there were substantial higher risks ahead, including the launch of some blockbuster features by Polymarket in the United States, new rounds of massive fundraising by Kalshi, and new entrants from traditional finance and cryptocurrency fields joining the online gambling competition. Kelley believes that although DraftKings and Flutter's FanDuel have not yet seen any "cannibalization," he expects the next stage of prediction markets to bring headwinds in terms of news dynamics and business models. "In the absence of a clear legal resolution, the path of events and unit economics of the prediction market may become a significant mystery in our field over the next 6 to 9 months, or even years," wrote Kelley and other Bank of America analysts in a report released on Tuesday. "We believe there will be more negative news in announcements and competition, and with the U.S. regulatory and legal landscape remaining volatile, there may also be some mixed news." DraftKings and FanDuel have been striving to enter the prediction market - the former acquired the exchange Railbird Technologies Inc., which has obtained a license from the U.S. Commodity Futures Trading Commission (CFTC), while the latter has partnered with the Chicago Mercantile Exchange Group Inc. (CME Group Inc.). However, Kelley warned that the current legal environment makes it difficult to assess specific risk-return calculations. Kelley said: "As federal and state-level cases continue through the courts, state regulators, including those in Nevada, Illinois, Ohio, Michigan, and Arizona, seem to be 'boxing in' traditional gambling operators, handing over the advantage to disruptors and newcomers. We believe this is also a response to recent announcements." DraftKings is set to release third-quarter results after the U.S. market closes on Thursday. Flutter plans to release third-quarter financial reports on November 12th.