Trading Strategy

You’ve probably seen headlines about prediction markets during elections or big news events, with odds flickering on screens as probabilities continuously fluctuate.

But what are they, how do they actually work, and why should you care?

Whether you’re curious about how to participate, or just want to understand what those percentages mean when quoted in the news, you’re in the right place.

This beginner’s guide to prediction markets breaks it all down from the very beginning, with no financial background required.

❓ What Exactly Is a Prediction Market?

The formal definition of a prediction market: An online platform where people buy and sell contracts based on whether a specific event will happen. The price of each contract reflects how likely the crowd thinks that event is.

Imagine your friends are debating who will win the Super Bowl. One friend is confident enough in their team to put $10 on it, while another friend takes that team’s opponent to win. The moment real money is on the line, people stop casually guessing and start carefully thinking.

A prediction market lets users trade on questions such as these on a much larger scale, with multiple outcomes spanning thousands of different questions being traded at any given moment.

📜 Prediction Markets: A Simple Example

Suppose a prediction market creates a contract asking “Will the US unemployment rate fall below 4% by December 2026?”

The two outcomes are “Yes” or “No”, meaning you can buy a “Yes” contract or a “No” contract. Each contract is worth $1 if you’re right, but nothing if you’re wrong.

For example, if the “Yes” contract is trading at 65 cents, that means the collective crowd believes there is a 65% chance unemployment falls below 4% by December 1st. Alternatively, a “No” contract would trade at 35 cents in this scenario.

These percentages can rise or drop based on factors like the release of new data, as the price updates in real time as new information flows in.

Remember, in a prediction market, the price of the contract IS the forecast, meaning a contract priced at 72 cents means the crowd believes there’s a 72% chance of that outcome happening.

🎪 What Types of Events Can You Trade On?

Prediction markets cover a surprisingly wide range of topics. See the table below for a quick glance at the types of events you can trade on at prediction markets:

🎆 Event	📊 Sample Prediction Market
🌦️ Climate	Highest Temperature In NYC Today?
🪙 Crypto	Bitcoin Price Today At 11 a.m. ET?
👥 Culture	Who Will Win American Idol?
🏢 Companies	Best AI at the End Of 2026?
💵 Economics	US Gas Price This Week?
🏛️ Elections	2028 U.S. Presidential Election Winner?
💰 Financials	Oil Price (WTI) Today?
🗣️ Mentions	What Will Trump Say This Week?
🤵 Politics	Who Will Be Trump’s Next Attorney General?
🏈 Sports	Who Will Win the Super Bowl?
🔬 Tech & Science	Will the U.S. Confirm Aliens Exist Before 2027?

🤔 How Do Prediction Markets Actually Work?

Every prediction market is built around a specific, verifiable question with a well-defined criteria and resolution date. Once the outcome is known, the market “resolves” and contracts pay out accordingly.

To understand exactly how a trade works from start to finish, here’s a step-by-step breakdown of the prediction market life cycle.

1️⃣ Step 1: A Market (Question) Is Created

A prediction markets platform (like Kalshi) creates a specific, verifiable question with both a clear deadline and resolution criteria.

For example: “Will the Ohio Senate winner be a member of the Democratic part?” If a representative of the Democratic party is sworn in as a Senator of Ohio for the term beginning in 2027, then the market resolves to Yes. Outcome verified from United States Congress.

The resolution criteria matter a lot. Before you trade, always read exactly what triggers a “Yes” or “No” payout.

2️⃣ Step 2: A Trader (You) Buys a Position

If you think the event will happen, you buy a “Yes” contract. If you think it won’t, you buy a “No” contract.

Essentially, you’re buying a ticket. If you’re right, your ticket pays out $1.00. If you’re wrong, it’s worth nothing. The price you paid for the ticket is what you risk.

Note: Some questions are phrased as Yes/No, while others may list multiple possible outcomes. But even if an event lists multiple possible outcomes, you’re still trading Yes/No on whether that specific outcome will happen.

3️⃣ Step 3: Market Prices Move Depending On What People Are Trading

As more people buy “Yes” contracts, the “Yes” price goes up to reflect growing confidence.

As more people buy “No” contracts or sell their “Yes” contracts, the price drops.

Extraneous factors like news events, polling data, and new information all shift prices in real time.

You don’t have to hold a contract until the event happens. If you bought a “Yes” contract at 40 cents and new information pushes the price to 65 cents, you can sell your 40-cent contract to secure a 25-cent profit without waiting for the outcome.

4️⃣ Step 4: The Event Occurs & the Market Resolves

Once the event occurs (or the deadline passes) and the outcome is verified, the market resolves. Winning contracts pay out $1 each, whereas losing contracts pay nothing.

For example, if you buy 100 “Yes” contracts at 40 cents each ($40 total spend) and your trade proves successful, you would receive $100 (100 “Yes” contracts paid out at $1 each). Your profit would be $60, barring any fees that the prediction market may charge.

Note: You may see prediction market contracts called “event contracts” or “binary options.” These just mean contracts pay either $1 (if the event happens) or $0 (if it doesn’t), with “binary” meaning there are only two possibilities.

⚔️ Centralized Markets vs. Decentralized Markets

A prediction market can either be centralized or decentralized. Refer to the table below to learn more about each prediction market type.

Feature	🏦 Centralized (CEX)	🪙 Decentralized (DEX)
Main Example	Kalshi	Polymarket
Custody	Platform holds your funds	You control your funds (Self-custody)
Regulation	Fully CFTC-regulated (US-based)	Mix of offshore & regulated arms
Primary Currency	US Dollars (USD)	Stablecoins (USDC/USDT)
Onboarding	Bank link/Debit card (No crypto)	Crypto wallet
KYC / Identity	Strict (Full ID verification)	Minimal (Wallet-based or “Light” KYC)
Settlement	Centralized authority	On-chain Smart Contracts / Oracles
Pros	High security; Legal clarity in US	Global access; Censorship resistant
Cons	Limited market variety (Rules)	Requires crypto knowledge; Gas fees

📖 Order Books & Liquidity

Most prediction markets use an order book model, meaning the best “ask” price (what sellers want) and the best “bid” price (what buyers will pay) are shown alongside each other.

The gap between them is called “the spread”. A narrow spread indicates high liquidity, allowing trades to be executed quickly without moving the price like traditional stock markets.

Overall, liquidity is one of the most important factors when evaluating a platform or an individual market.

🤩 Why Are Prediction Markets Often Accurate?

The accuracy of prediction markets is consistent enough to capture the attention of economists and researchers alike. Read on to learn why this is the case.

🧑‍🤝‍🧑 The Wisdom of Crowds

The theoretical foundation for prediction market accuracy stems from the “wisdom of crowds” hypothesis, formalized by statistician Francis Galton in the early 20th century.

Galton went to a county fair where hundreds of people were guessing the weight of an ox. Individually, most guesses were off. But when Galton averaged all the guesses, the result was almost exactly right, not to mention closer than almost any individual expert.

Prediction markets harness that same phenomenon. When a diverse group of independently-informed participants make decisions using their own money, their collective judgment tends to aggregate dispersed information more effectively than any single expert or centralized poll.

💵 Money Makes People Honest

There’s a crucial difference between a poll and a prediction market. Polls come with no cost to being wrong, whereas being wrong about a prediction market will cost you money.

Thus, there’s strong incentive to think carefully, do research, and update your beliefs when new information arrives. This financial accountability is why prediction markets often outperform polls and pundits, especially for well-defined, verifiable questions.

The only caveat is that some users might occasionally buy a contract that contradicts their actual beliefs, either as a hedge or to find value in a market that may be mispriced.

🧑‍🔬 Research Supports Accuracy of Prediction Markets

A body of academic research — including work from economists at the University of Iowa’s Tippie College of Business (which has run the Iowa Electronic Markets since 1988) — finds that prediction markets often outperform polls in forecasting election outcomes.

For example, during the 2024 US presidential election, Kalshi reportedly signaled Donald Trump as the likely winner ahead of traditional polling aggregators.

Still, prediction markets are prone to losing accuracy for various reasons. They can be manipulated by large players and can even develop herding behavior when traders anchor on each other’s trades.

As such, prediction markets are only as accurate as the information available to participants. This is especially true of thin markets. When only a few people are actively trading, the data becomes vulnerable to noise and bad actors.

🎾 How Are Prediction Markets Different From Gambling?

People often conflate prediction markets with traditional forms of online gambling such as sports betting. Critics argue that sports-focused event contracts on platforms like Kalshi are essentially the same as the sports betting markets offered by online sportsbooks, even though there are several key differences.

🔎 Key Differences: Prediction Markets vs. Sports Betting

Check out the table below for a synopsis of the key differences between prediction markets and traditional gambling markets such as sports betting.

💡 Key Info	📊 Prediction Markets	🏈 Sports Betting
🔢 How Odds Are Set	Players (“Peer-To-Peer”)	Oddsmakers (“The House”)
🪙 House Edge	Small Fee (“Spread”)	Small Fee (“Juice or “Vig”)
📈 Markets Offered	Sports, Politics, Pop Culture, Weather, Global Events, etc.	Sports Only
✅ Accuracy	High	Moderate
🧑‍⚖️ Legal Regulation	Federal Law (National)	State Law (Local)

Despite prediction markets falling under the purview of federal law, some states are fighting for control as they feel they have the right to regulate event contracts, especially those related to sports.

At least seven US states have sent cease-and-desist letters to Kalshi regarding its sports contracts. The state of Massachusetts even sued Kalshi in 2025, alleging it offers sports wagering under the guise of “event contracts.”

U.S. Congress has also taken an interest, as senators introduced a bill to ban sports betting on prediction markets as recently as March 2026. Presently, the legal debate is ongoing.

The practical takeaway: prediction markets aren’t casinos, but they’re not risk-free investments either. Treat them accordingly.

⭐ What Are the Most Popular Prediction Market Platforms?

The prediction market landscape expanded dramatically in 2025. Driven by the landmark court victory by Kalshi against the CFTC, there’s now an ever-growing institutional interest, meaning billions of dollars in potential new investments.

In fact, the trading volume across multiple prediction market platforms in 2025 has been estimated as high as $28 billion. Kalshi alone was valued at $11 billion after its 2025 Series E funding, and Polymarket received a $2 billion investment in October 2025.

Look below for a breakdown of the most popular platforms for prediction markets in 2026.

🔎 Who Uses Prediction Markets & Why?

You might picture prediction markets as something only for financial traders or political junkies.

In reality, prediction markets attract a wide range of participants for various reasons. Look below for a breakdown of each.

💡 Researchers & Informed Traders

Naturally, some traders treat prediction markets like the stock market. If they believe the crowd has mispriced a contract, they aim to profit based on this.

For example, if a contract for a political candidate is trading at 40% but they believe the candidate has a 65% chance of winning, they would buy “Yes” contracts in hopes of profiting.

🧑‍💼 Hedgers

A hedger is a trader that may use prediction markets to protect against business risk. For example, a company that’s heavily exposed to interest rate changes might buy contracts that pay out if rates rise, which would offset losses to its bottom line if rates were to increase.

📰 Organizations, Journalists & Policy Researchers

Organizations, journalists, and policy researchers will analyze market prices as real-time probability signals for planning and decision-making. This is an effective practice since prediction markets have proven to be just as accurate as polls (if not more).

🪙 Crypto Traders

Crypto traders will take advantage of information presented by prediction markets for a variety of reasons. Examples include hedging positions against Federal decisions (and other associated events) as well as price fluctuations of popular crypto like Bitcoin.

👥 Casual Participants

A large percentage of people trading using prediction markets are simply consumers that do so recreationally. Akin to sports betting and stock market trading, casual participants will buy contracts based on markets they’re generally interested in, but usually won’t trade large amounts of money.

Overall, the financial stakes make the outcome of any event a trader is excited about more meaningful than voicing an opinion elsewhere like social media.

🗣️ Final Thoughts on Who Uses Prediction Markets

Remember, you don’t have to trade to benefit from prediction markets. Even passively monitoring prices (how they shift in response to news, speeches, data releases, etc.) provides a real-time, incentivized signal about what well-informed people collectively believe.

This is why many journalists, strategists, and policymakers now track prediction market odds alongside traditional polling data.

⚖️ Are Prediction Markets Legal in the United States?

At the moment, prediction markets are predominantly legal in the United States. Many other countries with traditional online gambling currently don’t allow prediction markets, but the landscape surrounding them is evolving rapidly at a global scale.

👩‍⚖️ The Big Legal Turning Point: Kalshi vs. CFTC

The US regulatory framework surrounding prediction markets shifted dramatically in both 2024 and 2025. In October 2024, a federal appeals court ruled in favor of Kalshi in its lawsuit against the CFTC, thus allowing the company to offer election-related event contracts.

The CFTC subsequently dropped its appeal under the Trump administration in May 2025. CFTC Chairman Michael Selig asserted the agency’s exclusive federal jurisdiction over prediction markets, even though state-level regulators and attorneys general have continued to challenge platforms offering sports-related contracts.

The Trump administration also abandoned enforcement actions against Polymarket in 2025 without filing charges.

🗽 Prediction Markets at the State Level

Even though the CFTC (a federal agency) has given prediction markets its blessing, individual states aren’t so sure. Especially around sports contracts. As of 2026, at least seven U.S. states have sent legal warnings to Kalshi about its sports contracts.

Further to this, Massachusetts sued Kalshi in 2025, arguing sports event contracts are just regulated gambling. U.S. senators even introduced a bill in March 2026 to ban sports betting on prediction markets.

The CFTC has argued it has exclusive federal authority and that state laws don’t apply, but the courts haven’t fully settled on this yet.

🌍 Prediction Markets Outside the United States

Prediction markets are treated very differently around the world:

• 🍁 Canada: Legal in most provinces but restricted in Ontario.
• 👑 United Kingdom: Fully legal and regulated by the Gambling Commission.
• 🏰 Europe: No unified framework. To this point, Belgium, France, Italy, Poland, and Romania have banned Polymarket as an unlicensed gambling platform.
• 🐲 Asia: Singapore and Thailand classified it as illegal online gambling in late 2024.
• 🦘 Australia & New Zealand: Australia’s communications regulator blocked Polymarket in August 2025, and New Zealand prohibited prediction markets like Polymarket and Kalshi under new gambling legislation in February 2026.

Note: Regulatory status changes frequently. Before participating on any platform, verify the current legal status in your specific jurisdiction. This article is informational and does not constitute legal advice.

💰 How Are Profits From Prediction Markets Taxed?

Any profit made while trading on U.S. prediction markets will be taxed. Look below for a breakdown of the specifics, and be sure to consult a tax professional for any outstanding questions.

🪙 Winnings Are Taxable Income

In the United States, winnings from CFTC-regulated event contracts are generally treated as ordinary income or capital gains, depending on how the contracts are classified. Unlike sports betting, prediction market contracts may not qualify as “wagers” under federal excise tax rules, although authoritative IRS guidance specific to CFTC event contracts does remains unsettled.

📉 Losses Can Offset Winnings

Traders can generally deduct up to $3,000 in net losses per year, with excess losses carried forward to offset future winnings. The “One Big Beautiful Bill Act,” signed in July 2025, made changes to the tax treatment of sports betting winnings starting in 2026 by limiting deductions of losing sports bets to 90%.

Note: How the bill applies to non-sports prediction market contracts remains to be seen. State tax treatment varies widely; remember to consult a tax professional for advice tailored to your situation.

📈 Are Prediction Markets Risky?

Yes, prediction markets carry real risks that all participants should understand. Read on to learn about each risk and what you should watch out for while using prediction markets.

📝 How Do I Sign Up for Prediction Markets?

Creating an account on a prediction market platform is fairly straightforward. Simply follow our beginner-friendly steps below to sign up.

1️⃣ Step 1: Choose Platform

Most U.S.-based traders opt for the most popular prediction market platforms such as Kalshi (fiat-based, CFTC-regulated). PredictionPro has a list of the best prediction market apps (along with their bonuses), ensuring you only register for reputable exchanges.

2️⃣ Step 2: Create Account

Go to the website of the prediction market you wish to sign up for (or download their app if available). To create an account, you’ll need to enter some required KYC (Know Your Customer) information, including your full name, date of birth, and email address.

Note: CFTC-regulated platforms like Kalshi require ID verification (and your Social Security Number) due to federal regulations. Confirm you meet the legal age requirement as well, which is either 18+ or 21+ in most U.S. states.

3️⃣ Step 3: Deposit Funds

To execute trades, you’ll first need to make a deposit into your account balance. For centralized platforms like Kalshi, you can deposit US dollars via bank transfer, whereas decentralized platforms like Polymarket will require you to purchase stablecoins (with USDC being among the most popular options).

4️⃣ Step 4: Browse Available Prediction Markets

The best way to start choosing which prediction markets you’d like to trade is by observing how things work. Look at prices across multiple markets and days, note how they shift when news breaks, and read the market resolution criteria carefully before trading.

5️⃣ Step 5: Make Your First Trade (Start Small)

Before buying expensive contracts, start by trading small amounts to gain an understanding of how prediction markets fluctuate. Note how the order book functions, how quickly prices move, and what the spreads will cost you. It also helps to pick a market surrounding a topic you know well from personal interest.

❓ Prediction Markets FAQs

Look below for answers to our most commonly-asked questions concerning prediction markets and how to sign up!