Table of Contents
A prediction market is where traders buy and sell contracts based on the possible outcome of future events. Events can range from elections and economic data releases to sports, court rulings, or even whether a company will hit a specific earnings target.
Typically, a prediction contract is based on a binary question about a given event — e.g., will X team win or lose their championship game? Will interest rates hit a certain threshold? The price of each contract reflects the market’s collective estimate of how likely the outcome is to occur.
Although prediction markets (sometimes called information markets or event derivatives) are speculative and high risk, these platforms have seen rapid growth in recent years, thanks to the rise of new digital trading platforms and some favorable signs from regulators.
Key Points
• Prediction markets allow traders to buy and sell event contracts, priced between $0 and $1, where the price represents the collective implied probability of a future binary (yes/no) outcome.
• These markets are based on the concept of “crowd wisdom,” where the aggregated beliefs of many participants may produce forecasting signals.
• Prediction markets are regulated by the Commodity Futures Trading Commission, but face pushback from states’ gaming regulators.
• Prediction markets are gaining traction due to easier-to-use platforms, erosion of trust in traditional forecasting, and growing institutional use.
• The primary risks include the potential for complete financial loss due to the binary, all-or-nothing structure, as well as risks from low volume and liquidity.
What Is a Prediction Market?
Prediction markets operate similarly to financial exchanges, but instead of buying stocks or bonds, traders buy and sell outcome-based event contracts — essentially event derivatives — priced between $0 and $1. Each contract is tied to a specific event, usually with a binary result. For example: “Will Candidate X win the Senate race?” or “Will the Federal Reserve cut interest rates at its next meeting?”
Unlike a sports betting market, traders don’t bet against the “house”; event contract prices fluctuate based on collective opinion. A $0.75 contract indicates a collective opinion that the odds of a certain outcome might be 75%, although that doesn’t guarantee the outcome itself.
If new information makes an outcome seem more likely, traders are more likely to buy that contract, pushing its price up. If confidence wanes, sellers dominate and prices fall. The market remains open until the event is resolved, usually by a verifiable public source, at which point contracts are settled.
The Concept of Crowd Wisdom
Essentially, a prediction market turns individual forecasts into tradable assets by asking participants to put money behind their beliefs. The resulting “crowdsourced” prices send a signal of probability that’s updated in real time — incorporating new information as it becomes available.
The notion that the “wisdom of the crowd” may be more accurate in some cases than the opinion of individual experts has a long history. Similar to the concept of crowdsourcing, prediction markets aggregate opinions from many people that sometimes outperform expert forecasts.
Even though each participant brings different information and perspectives, when those collective views are distilled into prices, the argument goes, the results can be surprisingly accurate.
Still, predictive market contracts are typically short-term, and they rely on an all-or-nothing model, which puts them in the category of high-risk speculative investments. Participants with accurate forecasts may realize gains, while those with incorrect forecasts may incur losses. In theory, however, this self-adjusting mechanism may make prediction markets a powerful forecasting tool.
The Oldest Prediction Market
For example, the Iowa Electronic Market (IEM) is a long-running prediction market for political and economic events. It’s considered an academic experiment, run by the University of Iowa Henry B. Tippie College of Business, even though individuals use real money to place trades.
In the last few decades, the IEM has been viewed to be more accurate than some traditional polls when it comes to predicting some U.S. election outcomes.
Because it’s run by an academic institution, and traders are limited in the amount of money they can trade (no more than $500), the IEM is not regulated by the U.S. Commodity Futures Trading Commission (CFTC).
How Do Prediction Markets Work?
Prediction markets allow traders to buy and sell financial instruments, known as event contracts, that reflect the possible outcome of a certain event in politics, economics, sports, or pop culture.
Prediction market contracts are a type of derivatives product, similar to options or futures contracts. Options and futures contracts allow investors to speculate on the future price movements of underlying assets, such as stocks, within a defined timeframe. In the case of prediction markets, however, the contract’s underlying asset is essentially the anticipated outcome of an event.
Buying “Shares” of an Outcome
Most prediction markets frame contracts as shares of an outcome. A typical structure allows traders to buy a ‘yes’ share or a ‘no’ share regarding a certain outcome. These shares usually trade between $0 and $1, where the price represents the market’s implied probability.
For instance, if a ‘yes’ share trades at $0.65, the market is effectively saying there’s a 65% chance the event will occur. If a trader purchases a $0.65 ‘yes’ position and the outcome resolves in their favor, the share will pay out $1, and the trader will profit by $0.35 for that share. If it doesn’t, it will pay $0, and the trader will lose $0.65, not accounting for any fees. (Note that prediction markets commonly trade in blocks of 100 contracts.)
Traders can enter and exit positions before settlement, just as they would with stocks. Experienced traders can use a range of forecasting techniques to help them decide which side of an issue to take, with some people deciding how to invest in part by using AI, for example.
Importantly, however, the CFTC notes that traders should only trade with risk capital, meaning money they can afford to lose.
Payouts and Settlements
Once the outcome of an event is officially determined, contracts that correctly predicted the result pay out at their full value, while losing contracts expire worthless. Settlement relies on predefined, public, verifiable sources — such as official election results, government data releases, or court decisions — to avoid ambiguity.
Most platforms handle payouts automatically, crediting user accounts shortly after resolution. The clarity of settlement rules is critical; disputes over what “counts” as an outcome can undermine trust in the entire market.
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Are Prediction Markets Legal in the US?
Yes, prediction markets are legal in the U.S. Largely they’re regulated as financial derivatives by the Commodity Futures Trading Commission. But as new digital platforms have proliferated, the regulatory framework continues to evolve and availability may vary by platform and jurisdiction. There is an ongoing debate about how prediction markets should be governed, and by whom.
Federal vs State Oversight Debate
Because many platforms offer sports-based contracts, and sports betting markets are regulated by state gaming authorities (or are illegal in some states), national sports organizations are arguing that prediction markets should be regulated by states.
In addition, some regulators like the American Gaming Association say that prediction markets are little more than unlicensed gambling operations, and should be regulated as such.
In short: Some states view political or sports-related prediction markets as gambling, subject to state gaming laws. Federal regulators like the CFTC, meanwhile, see them as derivatives markets that require uniform national oversight.
This tension has produced legal challenges and policy debates, particularly as prediction markets expand beyond niche use cases. The outcome will shape how widely accessible — and how tightly constrained — these markets become in the U.S. going forward.
The Rise of Regulated Platforms
In the last few years, though, a number of predictive market platforms have gained enough legal ground to continue operating. These include Kalshi, PredictIt, and Polymarket, the largest freestanding global prediction market. In October 2025, the Intercontinental Exchange, which owns the New York Stock Exchange, announced a $2 billion investment in Polymarket.
Are Prediction Markets Accurate?
Some studies suggest that prediction markets often perform well, sometimes outperforming traditional forecasts, such as national opinion polls, or pundits with a specific expertise.
That said, accuracy varies by topic. Prediction markets tend to be especially strong at incorporating last-minute information and adjusting quickly to breaking news — which can impact accuracy.
Markets tend to work best when outcomes are clearly defined and participants are diverse and informed. Thinly traded markets, or those dominated by ideological traders, can be more volatile.
Prediction Markets vs Opinion Polls
Prediction markets and opinion polls aim to answer similar questions but use different methods. Polls measure preferences or beliefs at a moment in time, often based on small samples and limited survey design choices. Financial gain is not involved. Prediction markets measure beliefs: i.e., what people predict will be the outcome.
Prediction markets update continuously, while polls are static snapshots of public opinion at a point in time. Polls can capture sentiment; prediction markets capture expectation or belief about a certain outcome, because the aim is to take a position that proves accurate in order to profit. In practice, many analysts use both, treating prediction markets as a complement rather than a replacement mechanism for traditional forecasting.
Why Prediction Markets Are Gaining Traction in 2026
Several forces have been driving interest in prediction markets in the last couple of years. Advances in technology have made platforms easier to use and cheaper to operate, making event derivatives (event contracts) easier to trade. Thus, platforms like Kalshi and Polymarket are able to capitalize on a vast range of event outcomes, tapping investor opinion while momentum is strong.
At the same time, public trust in traditional forecasting — whether political punditry or economic projections — has eroded, thanks to debates about “fake news.” This has increased interest in predictive market analytics.
There’s also growing institutional interest. Corporations use internal prediction markets for project forecasting. Media outlets increasingly cite market odds alongside polls. And regulators, while cautious, appear more open to experimentation than in the past.
Types of Events Prediction Markets Cover
Prediction markets allow traders to buy and sell event contracts on almost any event you can think of, as long as the outcome can be structured as a binary one: Will X happen or not?
• Election results
• Interest rates
• Stock index performance
• Court rulings and other legal outcomes
• Corporate announcements (e.g., quarterly results)
• Pop culture events (e.g., Academy Award winners/losers)
• Weather events (e.g., inches of precipitation)
These are just a few categories where investors might want to speculate on the outcome of a certain event. Topics that are trending in the news may gather more interest. But it’s important for investors to consider the clarity of an outcome before taking a position and buying an event contract.
Winning or losing a game, award, or an election is usually clearcut. Forecasting whether the Fed will raise or lower interest rates, or leave them unchanged, should be clearly defined for traders in terms of the exact amount involved: e.g., an increase/decrease of 25 basis points, or 0 bps change.
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The Risks of Participating in Prediction Markets
Despite their appeal to some, prediction markets carry real risks. Financial loss is the most obvious, and traders can lose their entire stake if they back the wrong outcome. Volatility, low liquidity, and sudden information shocks can turn a possible gain into a sudden loss. Prediction markets may not be appropriate for everyone, based on their risk tolerance, and some may consider other lower-risk investments.
In addition to investing risk, the CFTC also warns participants about the risk of trading with unregistered entities. Trading with unregistered businesses or individuals outside of the U.S. may expose traders to fraud attempts and leave them with little or no protection.
High Speculation and Binary Risk
There are also structural risks. Prediction markets offer binary outcomes: you either win or lose. This all-or-nothing structure tends to encourage speculation, and sometimes bubbles can occur.
Liquidity and Manipulation
Because prediction markets tend to have low volume, liquidity tends to be low, and that’s one reason why these contracts can be subject to manipulation. Even a small increase in trading volume can move the needle on price. Also, poorly defined contracts can lead to settlement disputes.
Behavioral Considerations of Prediction Markets
Finally, there are psychological risks. Even in ordinary markets, investors are prone to make emotional decisions. Prediction markets can encourage overconfidence or impulsive decisions based on investor biases.
For individual participants, the line between informed forecasting and guesswork can be thin, which underscores the importance of understanding the investment risk involved before participating in prediction markets. Some, additionally, question the ethics of potentially profiting from highly impactful events such as election results or legal outcomes.
The Takeaway
Prediction markets allow people to trade event derivative contracts based on the possible outcome of future events, from election results to interest rates.
Typically, a prediction contract is based on a binary outcome (e.g., a win vs. a loss), and the price of each contract reflects the market’s collective estimate of how likely the outcome is to occur.
Although prediction markets are speculative and high risk, they have been gaining more traction in the last few years, although availability and regulatory treatment continue to evolve.
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FAQ
What is the difference between a prediction market and sports betting?
There are several differences. Chiefly, prediction markets cover a range of events, while sports betting is focused on athletic events and players. More importantly, prediction markets allow users to trade derivative contracts based on binary outcomes. In sports betting, people gamble on outcomes based on odds set by the “house.”
Do you pay taxes on prediction market winnings?
Tax treatment can vary depending on the type of contract and an individual’s circumstances. Investors should consult a qualified tax advisor regarding their specific situation.
Can prediction markets be manipulated by wealthy traders?
Yes, one of the hazards of prediction markets is that these contracts tend to have low volume, so if a wealthy trader takes a bigger position, that could theoretically skew public opinion on a given outcome. This could shift the pricing — which nefarious traders could take advantage of.
What happens to my money if a prediction market outcome is disputed?
Because event contracts are binary — i.e., they’re based on a yes or no outcome — most contracts are settled according to accepted channels (like official announcements) and disputes are rare.
Are prediction markets considered gambling or investing?
By and large prediction markets behave as a form of speculation. There is an ongoing debate about whether prediction markets may be viewed as a form of gambling. However, prediction markets are regulated in the U.S. as a type of derivative investment by the Commodity Futures Trading Commission.
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