What are prediction markets and how do they work?

Prediction markets have evolved from a niche forecasting experiment to one of the fastest-growing segments in the betting and fintech world. Monthly trading volumes of the major prediction markets have increased from under $100 million in early 2024 to over $13 billion in late 2025, with the number of active users rising from around 4,000 to over 600,000 participants worldwide. Read our in-depth guide to learn more about the rise of event-based trading.

What are prediction markets?

A prediction market (also called an event market or information market) is an exchange where participants buy and sell contracts whose payoff depends on the outcome of real-world events. In other words, people are placing trades on what they think will happen in the future — like an election result or a sports outcome — and earn money if they’re right.

Unlike in traditional gambling, no dealers are setting the odds. Instead, users buy and sell contracts directly to each other, and the platform just enables the process, without a stake in the result. Prices move as opinions shift, and traders profit when their predictions are correct — or lose if they’re wrong.

For example, a contract might pay $1 if a candidate wins an election (and $0 if not). Traders take “yes” or “no” positions, and the market price of a contract represents the community’s collective estimate of the event's probability. In effect, these platforms aggregate crowd wisdom: participants are financially rewarded for correct forecasts and penalized for wrong ones.

The first prediction markets date back to the early 16th century, essentially, the earliest form of political betting. For example, people would bet on papal elections. Election betting on Wall Street goes back to the end of the 19th century. Prediction markets existed as a niche interest for a long time. But in 2024, public interest surged as high-profile elections, mainstream media coverage, and easy-to-use trading platforms brought real-time event speculation into the spotlight.

How do prediction markets work?

Prediction markets usually use binary event contracts. Each contract has a nominal value (often $1) and resolves as either worth $1 (if the event happens) or $0 (if it does not) at a pre-specified date.

Unlike traditional futures, which track prices of commodities or stocks, event futures let you trade on the perceived likelihood of particular events winning or losing. For instance, if a “Candidate A wins” contract is trading at $0.80, the market implies an 80% probability of that outcome. Traders acquire contracts by paying the current price and later collect the payoff if they predicted correctly.

For example, buying 1,000 “yes” contracts at $0.25 each would cost $250; if the event occurs, the contracts pay $1 each for a $1,000 payout (a 4x return). If the prediction fails, the contracts expire worthless.

The most popular events in prediction markets are typically those that attract the most public attention and spark debate. Elections, from local to presidential, are the most dominant, while cultural and sports events like the Super Bowl or the Oscars are also popular. Politics, geopolitics, and economic developments, such as crypto milestones and celebrity news, provide participants with countless opportunities to speculate on outcomes.

The price dynamics are crowd-driven: every buy or sell shifts the implied probability. In effect, the trading price is the bet, reflecting the aggregate confidence in each outcome. Once the outcome is known, a trusted oracle or official source resolves the market and pays out winners.

Platforms differ in design (some use order books, others use AMM pools, and some even allow multi-outcome or numeric markets), but all follow this core mechanism: traders speculate on events, and market prices encode probabilities. This structure aligns traders’ incentives with market information, distinguishing it from games where a house sets fixed odds.

Why are prediction markets popular and growing so quickly?

Multiple factors explain the phenomenon’s rapid growth in recent years.

Booming institutional and retail interest

Big names are jumping in. After the 2024 U.S. election, financial heavyweights such as ICE and CME, retail brokers like Robinhood and Coinbase, and sportsbook operators like DraftKings and FanDuel, as well as media and technology firms like CNN and Google, have entered prediction markets. ICE, the parent company of the NYSE, invested up to $2 billion in Polymarket in late 2025, signaling serious confidence. This wave of high-profile involvement is not only validating the business model, but also attracting a flood of new users.

High engagement with low acquisition costs

Prediction markets are fundamentally tied to real-time news and events, providing constant fresh content. Traders return again and again to see how probabilities change after each development. As a result, these highly engaging, game-like platforms draw in casual users without deep financial expertise, all while keeping marketing costs much lower than traditional brokerages.

Profitable fee model

Events occur continuously, trading volumes are enormous, and even small fees add up. By late 2025, Polymarket had already reached a weekly volume of $2 billion. Even small per-trade fees generate a steady, low-risk revenue stream. For example, Kalshi charges only a few cents per contract. High-frequency trading means commissions on each event contract quickly accumulate into substantial income.

Data and product expansion

Every trade generates valuable real-time sentiment data. Platforms can sell this insight to hedge funds, insurers, and other institutions — or use it internally to improve markets. Traders benefit too, gaining advanced features like live probability charts. Meanwhile, blockchain-based decentralized platforms like Polymarket and Hedgehog are pushing innovation, offering markets on on-chain metrics, NFT launches, and DeFi events, expanding what users can bet on.

The wisdom of crowds

Research and historical results show they often outperform traditional polls and expert forecasts. The Iowa Electronic Market, for example, has consistently predicted U.S. presidential elections more accurately than most major polls. In 2024, platforms like Polymarket even gave Donald Trump roughly 60% odds of winning when many polls indicated a close race — and the results validated those predictions. Such successes, widely reported in the media, have boosted public trust, and experts now view prediction markets as a fundamental shift in forecasting, aggregating diverse insights into a single probability.

Are prediction markets legal?

These platforms are a novel technology, and their legal classification differs. In the U.S., platforms like Kalshi classify their contracts as federally regulated futures, which puts them under the oversight of the CFTC (Commodity Futures Trading Commission). A court decision in 2024 even made it possible for fully regulated election markets. This means that prediction markets should be able to operate freely in all 50 states, but many states disagree and say that some bets, especially on sports, are illegal gambling without a state licence.

Lawsuits and cease-and-desist orders have targeted platforms like Kalshi and Polymarket, and the debate over whether these markets are true futures or unlicensed betting continues. For now, federal oversight allows operations across all 50 states, though providers are still fighting state-level restrictions.

Regulations vary around the globe. Some states treat these contracts as financial instruments, while others — especially those in the EU — classify them as forms of gambling. The UK, Germany, Singapore, the Netherlands, and New Zealand have all imposed restrictions on unlicensed platforms. Denmark has adopted a more hands-off approach to these platforms unless they specifically target local users.

Today, operators navigate an evolving patchwork of regulations. Kalshi is currently in over 30 federal preemption battles with state regulators (like Arizona and Nevada) who want to reclassify its contracts as gambling. PredictIt is transitioning away from its educational exemption following years of litigation with the CFTC, and Polymarket re-entered the U.S. market in late 2025 as a fully regulated entity after a three-year hiatus. In March 2026, the CFTC sent out an Advance Notice of Proposed Rulemaking. This was the first official step toward the clearer, more unified rules that experts expect to emerge around the world as the market grows.

How are prediction markets taxed?

Taxation usually works the same way for platforms as it does for other businesses. Kalshi and other federally regulated exchanges may not have to pay state gambling taxes because their contracts are seen as financial instruments. That's not the same as regular sportsbooks, which are heavily taxed. Regulators are keeping a close eye on things, and the rules may change as the industry grows.

For traders, it’s more complicated. In the U.S., depending on how the IRS categorizes the contracts, your winnings may be taxed as investment gains or as gambling income. If considered gambling, profits are taxed as ordinary income, and losses can only offset winnings. If treated as investments or derivatives, they may follow capital gains rules, which can allow losses to offset gains and reduce your tax bill. Maintaining thorough records of each transaction is essential because the IRS has not yet provided a definitive response.

For the world at large, some countries treat prediction markets like gambling, while others treat them like financial trading, with standard capital gains or income tax laws being applied. Most platforms don’t automatically issue tax forms, so users need to report earnings and losses themselves. Because this area is still developing, operators and traders should always check local tax laws or consult a professional to avoid problems with authorities.

How do prediction markets make money?

Prediction market platforms earn revenue mainly through fees and commissions. Each time a user places a trade, the platform typically takes a small cut. For instance, Kalshi charges a small fee per contract traded. According to Kalshi’s fee schedule, trading 100 contracts at $0.50 each incurs about $1.75 total in fees. Polymarket charges virtually no fees on most markets (most are fee-free; a few special markets have tiny taker fees to reward liquidity providers). In practice, even these smallest fees in extremely high volumes bring significant turnover.

Platforms may also take fees on operations such as deposits or withdrawals (e.g., Kalshi charges 2% on card deposits), and the interest generated on user funds. Moreover, owning a prediction market opens more revenue streams: the aggregated market data and sentiment can be sold or used internally by institutional owners (exchanges, hedge funds, media).

Overall, prediction markets capitalize on their trading volume. For example, for Polymarket, even a 0.1% fee on their current volume would yield approximately $2 million per week. In short, the business model is similar to a futures exchange: facilitate continuous trading of event contracts and earn a small commission on each transaction.

Prediction market platforms

The most prominent prediction markets today include:

1. Polymarket

Polymarket is the undisputed heavyweight of decentralized prediction markets. Built on the Polygon and Solana blockchains, it lets you bet — technically "trade" — on everything from high-stakes elections to the latest crypto swings and celebrity news using stablecoins. Its real magic is its flexibility: if people are talking about it, there’s probably a market for it. The platform has drawn in a massive, crypto-savvy crowd from all over the world. After years as an offshore platform blocked for U.S. users, Polymarket finally went "legit" in late 2025 by launching a regulated U.S. arm. Today, its massive scale and deep liquidity have turned it into one of the most influential — and closely watched — platforms in finance.

2. Kalshi

Kalshi is the federally regulated "Wall Street" for real-world events. It supports crypto but allows trading strictly in USD, allowing users to buy "Yes/No" contracts on everything from how many people Donald Trump will pardon this year to Sunday Night Football and Oscar winners. The first event exchange to earn a CFTC license, its "legal in all 50 states" status has been shattered by a series of legal criminal charges and allegations in some states. Despite this, Kalshi remains the most "official" way to trade the news in the US.

3. PredictIt

PredictIt is a non-profit, U.S. political market run by Victoria University (NZ). Originally designed as a research tool, it focuses almost entirely on U.S. politics and allows users to trade small positions on election outcomes. It survived a 2022 shutdown attempt by the CFTC and emerged as a more powerful player in late 2025 as a strong rival to heavy-hitting commercial platforms.

4. Robinhood

Robinhood is a mainstream brokerage app that recently added an event contracts feature via a partnership with Kalshi. Essentially, Robinhood users can trade Kalshi-based YES/NO markets (currently on sports and elections) directly in the Robinhood app. Robinhood handles account/KYC and payment, while Kalshi handles clearing. This service is available nationwide in the U.S. under Kalshi’s CFTC framework. It targets Robinhood’s broad retail user base, offering an entry-level, commission-priced way to access event contracts.

How to invest in prediction markets

• Choose a platform: Pick a platform that is available and legal in your region.
• Create an account: Sign up and complete verification or connect a crypto wallet.
• Fund your account: Deposit funds using fiat or cryptocurrency, depending on the platform.
• Explore markets: Browse available events and choose ones you understand.
• Place a trade: Buy “yes” or “no” contracts based on your prediction.
• Monitor your position: Track price movements as new information impacts the market.
• Close or settle: Sell early or hold until the event resolves.
• Withdraw funds: Cash out your profits or remaining balance when ready.

The future of prediction markets

While prediction markets have evolved from small-scale experiments and academic tools to large-volume sites, the vertical remains in its early stages.

Technologies and regulations are changing together. Blockchain, better liquidity models, and data oracles are making prediction markets faster and more scalable. At the same time, regulators, especially in the U.S., are beginning to provide clarity on the place of event contracts in existing financial or gambling sectors.

At their core, prediction markets are a reversal of traditional finance. They don’t price assets, but expectations, creating a new way to forecast and navigate an uncertain world.