What Are Prediction Markets? A Beginner’s Guide to How They Work

Key Takeaways

• Prediction markets allow traders to buy and sell contracts on real-world events, with prices reflecting crowd-probability estimates in real time.
• Traders buy Yes-or-No shares priced between $0 and $1, with winning shares settling at $1 once the event is confirmed.
• Platforms like Kalshi, Polymarket and Robinhood processed billions in trading volume, with the 2024 US election driving $3.7 billion on Polymarket alone.
• The CFTC regulates prediction markets federally, but Nevada, New Jersey and other states continue to challenge platform access through state law.
• Risks include thin liquidity, manipulation, insider trading and regulatory uncertainty, and most retail accounts lose money to better-informed traders.

Over $3.7 billion traded on a single platform during the 2024 US presidential election. A man named Nicolás Maduro was reportedly so unsettled by what prediction markets said about Venezuela’s election that his government moved to block access to them. These platforms had moved from a niche corner of finance into front-page news. Read on to understand exactly how prediction markets work, who runs them, and what the real trade-offs look like before you consider joining in.

What Are Prediction Markets?

A prediction market is a platform where people trade on the outcomes of real-world events using real money. Traders buy or sell contracts tied to a specific question – “Will the Federal Reserve cut rates before December?” or “Will Team A win the championship?” – and the price of each contract reflects the collective view of all the traders on the platform about how likely that outcome is.

In prediction markets, prices act as live probability readings. A contract trading at $0.72 means the market thinks there is a 72% chance the event happens. A contract at $0.28 means traders give it a 28% shot. These prices update in real time as new information comes in, making them a live, crowd-sourced forecast rather than a static poll.

The crowd doing the trading typically includes researchers, analysts, traders, and informed observers who back their views with money being right. That financial incentive tends to produce more accurate probability estimates than surveys, because traders pay a direct cost for being wrong.

How Do Prediction Markets Work?

Every market starts with a yes/no question tied to a verifiable real-world event. Traders can buy a “Yes” share or a “No” share. Shares are priced between $0 and $1. If the event happens and you hold a Yes share, that share settles at $1. If the event does not happen, that share settles at $0. The same logic applies in reverse for No shares.

Take a concrete example. A prediction market contract asks, “Will Candidate X win the election?” You believe the odds favor Candidate X, and the current Yes share trades at $0.60. You buy 100 Yes shares for $60. On election night, Candidate X wins. Your 100 shares each settle at $1, returning $100. Your gross profit on the trade comes to $40.

Prediction market contracts work through this basic price-as-probability model. The $0.60 price means traders collectively place the probability of a Candidate X win at 60%. You disagreed with that pricing, or agreed and wanted exposure, and traded accordingly.

Platforms facilitate these trades by matching buyers and sellers in an open order book, much like a stock exchange. Your counterparty on any trade is another human trader, not a house book.

What Are Prediction Markets in Sports Betting?

In sports betting, a prediction market lets you trade contracts on event outcomes at prices set by what other traders collectively believe. A contract priced at $0.70 means the market assigns a 70% probability to that outcome. Contracts stay live and tradeable until the final result, so you can exit your position before the event resolves.

Price Movement and Market Resolution in Prediction Markets

Fluctuating prices and final resolution mechanisms dictate the efficiency of prediction markets, determining how participants capitalize on evolving data and reach definitive contract settlement.

How Prices Move

Several factors lead to price movements in prediction markets. They include: 

• Traders changing their minds
• Breaking news affecting the market, such as an injury to an athlete
• Shifting polling data
• A candidate dropping out of a major race
• Court rulings influencing the market

Each new piece of information prompts some traders to buy and others to sell, and the price adjusts to reflect the updated collective view.

Trading volume also moves prices. A large buy order on a thinly traded market can push the price up fast, just as a big sell order can push it down. 

The 2024 US election provided a real-time case study. On the night of the debate, when President Biden’s performance drew widespread concern, Yes contracts on his winning the election dropped sharply within hours. Prices reflected a crowd reassessing a probability in real time, faster than any poll could track.

How Markets Resolve

After the event occurs, the platform confirms the outcome using a pre-specified resolution source, usually a credible third party, such as an official government body, a major news organization, or an on-chain oracle in the case of crypto-native platforms.

Once the platform confirms the outcome, shares on the winning side settle at $1 and shares on the losing side settle at $0. Funds move to the appropriate accounts automatically.

On Kalshi, for instance, the platform’s resolution process relies on official data sources spelled out in each contract’s terms before trading opens. Traders know upfront how a market will resolve, removing ambiguity after the fact.

Prediction Markets vs. Traditional Betting: Major Differences

The most important structural difference between prediction markets and a traditional sportsbook is who sits on the other side of your trade. At a sportsbook, the house takes your bet and profits when you lose. On a prediction market, you trade against other users in a peer-to-peer model. The platform charges a small fee on trades but takes no position on outcomes.

Prediction market prices aggregate the views of many traders simultaneously, producing a live probability reading that researchers and analysts treat as a useful signal. A sportsbook’s odds reflect what the house decides to offer, heavily shaped by its own bookmaking rather than pure probability.

The financial framing also differs. Prediction markets present contracts as financial instruments. Traders can exit positions before resolution, take partial profits, or cut losses mid-market, the way an investor might sell a stock. Traditional bets lock in at the moment you place them.

The table below shows the key differences.

Examples of Prediction Markets in Action

The best way to understand what prediction markets look like in practice is to look at the events that generated the most activity. Two stand out above the rest for scale and cultural impact.

The 2024 US Presidential Election

The 2024 presidential race became the breakthrough moment for prediction markets with mainstream audiences. Polymarket saw over $3.7 billion in trading volume on the election alone. Kalshi drew hundreds of millions more. For the first time, a broad public audience — well beyond traders and researchers — paid attention to prediction market prices the way they had previously watched poll averages.

US election prediction markets called the outcome before most major polls or forecasters. On Polymarket, Donald Trump’s win probability climbed above 60% weeks before the result, while many polling aggregators showed a near-even race. The divergence drew widespread media attention and put both Polymarket and Kalshi squarely on the map for mainstream readers. Media companies began integrating prediction market data into their coverage as a direct result of this election cycle. 

Iran Prediction Markets

In early 2026, prediction markets saw a single event generate $529 million in trading volume — contracts tied to a potential US military strike on Iran. The volume broke records previously set by the presidential election and drew serious scrutiny from regulators, academics, and journalists.

The concern went beyond the numbers. Some traders appeared to take large positions shortly before major news breaks, raising the question of whether insiders with advance knowledge used the markets to profit. Polymarket’s exposure to potential insider trading became a live editorial story as the Iran contracts traded.

The table below summarizes the most notable prediction market events by volume and cultural impact.

The Biggest Prediction Market Platforms

The category has a handful of major platforms, each with a different legal structure, user base, and trading model. Here is a factual rundown of the three you are most likely to encounter.

What is Kalshi?

Kalshi launched in 2018 and operates as a federally regulated exchange under the Commodity Futures Trading Commission. That CFTC registration makes Kalshi the broadest legal option for US traders, covering a wide range of markets including elections, economics, weather, and entertainment. 

Kalshi has grown fast. The platform hit a trading record in early 2025 and a subsequent partnership with Coinbase extended its reach into the crypto user base. Access to Kalshi requires a US account and identity verification.

What is Polymarket?

Polymarket operates on the Polygon blockchain, operates globally and built its reputation on political and geopolitical markets. The 2024 election put the platform in front of millions of new users. Polymarket previously blocked US users following regulatory pressure, but Polymarket is accessible in the US through its acquisition of QCEX, a CFTC-registered entity.

Polymarket uses USDC as its trading currency, meaning traders need a crypto wallet to participate. Several countries have moved to regulate access to Polymarket amid the broader regulatory conversation, so availability varies depending on your location.

Robinhood Prediction Markets

Robinhood launched its prediction markets product in March 2025, routing trades through Kalshi’s regulated infrastructure. The product reached over 1 million traders and surpassed 12 billion contracts in 2025. For users already on Robinhood, prediction market contracts sit alongside stocks and ETFs in the existing app. Access follows identity verification requirements.

Are Prediction Markets Legal in the US?

The US legal picture for prediction markets is ongoing, with Congress on the path to defining Prediction Markets. Federal oversight exists, several states have challenged it, and the status of specific contract types has moved through the courts. Here is the honest picture.

CFTC Regulation as the Federal Framework

The Commodity Futures Trading Commission regulates event contracts as derivatives under the Commodity Exchange Act. Platforms that want to offer prediction market contracts to US users legally need to register as designated contract markets with the CFTC. Kalshi and Polymarket hold that registration. Most offshore or crypto-only platforms do not.

Kalshi’s Court Win on Election Contracts

Kalshi’s path to offering election contracts in the US ran through the courts. The CFTC initially moved to block election-related markets, citing concerns about gaming and manipulation. Kalshi sued and won. A federal appeals court sided with the platform in 2024, clearing the way for regulated election betting in the US for the first time.

State-by-State Battles

Federal regulation and state law do not always align. Nevada, New Jersey, Washington, and Massachusetts have each raised objections to prediction markets operating within their borders, arguing that event contracts constitute gambling under state law regardless of federal classification.

As of April 2026, these tensions remain active. Some states have issued cease-and-desist orders. Others are monitoring the category without formal action. The outcome of these state-level challenges will shape how and where prediction markets can legally operate for US traders over the next few years.

Risks of Prediction Markets

Prediction markets carry real financial risk, and a few specific risks deserve your attention before you put money in.

• Liquidity risk. Thinly traded markets can move sharply on small orders. You may find it difficult to exit a position at a fair price, particularly on lower-volume contracts or in the days immediately before resolution. A price that looks attractive at entry can become hard to sell.
• Manipulation risk. Large traders can move prices on smaller markets, sometimes in ways that mislead other participants. The open, peer-to-peer model that makes prediction markets useful also makes them accessible to actors looking to distort prices for profit or information purposes.
• Insider trading. The Iran war contract episode directly raised the question of insider trading. Unlike regulated securities markets, prediction markets currently operate in a regulatory environment where the rules on information-based trading are less defined. Traders with genuine advance knowledge of an event can, in many cases, profit from it legally. That creates an uneven playing field for retail participants.
• Regulatory uncertainty. The legal framework for prediction markets in the US is still being worked out in courts and statehouses. A platform that operates legally today could face restrictions tomorrow, and your ability to access or withdraw funds could be affected.
• Most accounts lose money. Like traditional financial markets, prediction markets have a familiar hierarchy: a select group of sophisticated, well-informed participants captures the lion’s share of the profits.

Are Prediction Markets Haram?

Prediction markets are haram for Muslim users. Trading contracts on uncertain outcomes for financial gain falls under maysir, the Quranic prohibition on gambling. Islam bars any transaction where wealth transfers based purely on chance, with no productive activity or legitimate trade behind the outcome. Islamic scholars classify prediction market contracts as a form of maysir, making participation forbidden under Sharia law.

Should You Use a Prediction Market?

It depends on your lifestyle. Prediction markets suit a specific type of person. If you follow a topic closely, a particular election, an industry, or a policy area, and you hold a well-reasoned view that differs from the current market price, you have an edge to apply. Researchers, analysts, and people with deep domain knowledge in a given area tend to find the most use from these platforms.

The honest trade-off is this. Prediction markets offer something no sportsbook does, namely a live, tradeable forecast on almost any major world event. The cost of that access is taking on a financial instrument with real price risk, limited consumer protections compared to traditional financial products, and a competitive environment where your counterparty may know more than you do.

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