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 guide 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 is 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 bet $10, 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 works the same way 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 will be “Yes” or “No”, meaning you can buy a “Yes” contract or a “No” contract. Each contract is worth $1.00 if you’re right, and $0.00 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.

🤔 How Prediction Markets 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.

Each market will also list the party responsible for verifying the outcome. For example, the outcome of each prediction market pertaining to the 2026 Academy Awards was verified using data from the Academy of Motion Picture Arts and Sciences.

Look below for a step-by-step breakdown of the prediction market life cycle:

1. 💻 Market Created By Platform: Once a new prediction market is created, it either centers around a binary question (ex. “Yes” or “No”) or a multi-outcome question (ex. “Who will be the next President of the United States?”).
2. 🪙 Traders Buy Positions: If you think an event will happen, buy “Yes” shares. If you think it won’t, buy “No” shares. Shares you already hold can be sold prior to resolution as well.
3. 📈 Market Prices Fluctuate: As buyers and sellers interact, the data continuously aggregates the overall market consensus into a single probability estimate.
4. 🎉 Event Occurs: Once the event has finished, the outcome of the market resolves based on a verified data source.
5. ✅ Market Settled & Closed: Winning shares pay out $1.00 each. Losing shares pay $0. For example, a trader who correctly bought 200 “Yes” shares at 40¢ each would earn $200, which is a $120 profit on an $80 investment.

⚔️ 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.

📊 Type of Prediction Market	📝 Details
🏦 Centralized	Centralized markets (like Kalshi or ForecastEx) are operated and regulated by a central financial authority, holding user funds thus resulting in higher liquidity. Users typically complete transactions using US dollars, meaning they can trade without owning cryptocurrency.
🪙 Decentralized	Decentralized markets (like Polymarket) use peer-to-peer technology run through a “blockchain” (aka a “decentralized digital ledger. For example, Polymarket runs through Polygon. Smart contracts handle settlement automatically, eliminating the need for a central operator to hold and redistribute funds. Trades are conducted using stablecoins (typically USDC), meaning decentralized markets tend to have both more international reach and lower fees. That said, it does require users to manage a crypto wallet.

📖 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.

🎾 Prediction Markets vs. Sports Betting Markets

People often conflate prediction markets with more 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.

In fact, 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”. Presently, the legal debate is unresolved.

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

💡 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	Wide Range of Topics Including Sports, Politics & Pop Culture	Sports Only
✅ Accuracy	High	Moderate
🧑‍⚖️ Legal Regulation	Federal Law (National)	State Law (Local)

🤩 Why Prediction Markets Can Be Accurate

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

Essentially, 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.

The idea is that prediction markets add one crucial ingredient that traditional surveys lack: a direct financial cost for being wrong. For example, a respondent who says “70% chance of X” in a poll pays nothing if they’re mistaken, whereas a trader who buys contracts at 70¢ loses money if wrong.

Overall, this asymmetry filters out noise and encourages players to genuinely revise their beliefs whenever new information emerges. 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 Supporting 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 a variety of reasons. They can be manipulated by large players and can even develop herding behavior when traders anchor on each other’s bets.

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

⭐ 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.

🔎 Who Uses Prediction Markets & Why

Prediction markets attract a wide range of participants for various reasons. Look below for a breakdown of each.

• 💡 Researchers & Informed Traders: Believe they have better information than the market consensus and aim to profit from mispriced contracts.
• 🧑‍💼 Hedgers: Utilize event contracts to offset business risk. For example, a company can hedge against the financial impact of a particular election outcome or regulatory change.
• 📖 Organizations & Policy Researchers: Analyze market prices as real-time probability signals for planning and decision-making.
• 📰 Journalists & Forecasters: Monitor market prices as a rapidly-updating gauge of public belief, distinct from periodic poll releases.
• 🪙 Crypto Traders: Take advantage of prediction markets to hedge positions against Federal decisions, regulatory events, and even price fluctuations of popular crypto like Bitcoin.
• 👥 Casual Participants: Anyone who buys contracts using prediction markets for entertainment purposes.

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.

As such, many journalists, strategists, and policymakers now track prediction market odds alongside traditional polling data.

⚖️ Where Are Prediction Markets Legal?

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 including

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?

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.

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%.

How the bill applies to non-sports prediction market contracts remains to be seen. State tax treatment varies widely, so be sure 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?

Like traditional online sportsbooks and casinos, creating an account on a prediction market platform is fairly straightforward. Simply follow our steps below to sign up:

1. 💻 Choose Platform: Most US-based traders opt to go with the most popular prediction market platforms such as Kalshi (fiat-based, CFTC-regulated) or ForecastEx (inside Interactive Brokers). International users often prefer Polymarket for its liquidity and lower fees, but always verify the legal status of prediction markets in your jurisdiction prior to signing up.
2. 📝 Create Account: 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. Make sure you’re of legal age in your area as well (or age of majority).
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).
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, note how they shift when news breaks, and read the market resolution criteria carefully before trading.
5. 🤏 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.

❓ Prediction Markets FAQs

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