What are prediction markets? How event contracts work

A prediction market is a marketplace where people buy and sell contracts on whether something will happen: an election result, a central bank decision, a sports score or bitcoin's price at a set time. Each contract asks a yes-or-no question and pays out a fixed amount if the answer turns out to be "yes". Because thousands of traders put money behind their views, the contract price becomes a running estimate of how likely the event is.

Prediction markets have grown from a niche academic tool into a mainstream product. Kalshi alone has handled more than $291 billion in trading volume this year, according to The Block, and brokers and crypto wallets are now plugging them into their apps, as Phantom did this week.

How a prediction market works

Most markets use binary event contracts. Take the question "Will the Fed cut rates at its next meeting?":

1. Two sides. A "yes" share pays $1 if the Fed cuts and $0 if it doesn't. A "no" share pays the reverse.
2. Prices between 1 and 99 cents. If "yes" trades at $0.62, "no" trades at roughly $0.38; together they add up to about $1, minus the spread.
3. Trading before the event. You can buy, sell or exit at any time before the market closes. Prices move as news arrives.
4. Resolution. After the event, the operator (or an oracle) declares the outcome. Winning shares are paid $1, losing shares expire worthless.

On most regulated venues you are not betting against the house. The exchange matches buyers and sellers, and makes money from fees or the spread.

Reading prices as probabilities

The neat trick of a prediction market is that price equals implied probability. A "yes" share at 62 cents implies the crowd sees about a 62% chance of the event. If you think the true chance is higher, buying "yes" is a positive bet in your eyes; if lower, you buy "no".

A worked example: you buy 100 "yes" shares at $0.62 for $62.

• If the event happens, you receive $100, a profit of $38 before fees.
• If it doesn't, you lose the full $62.

Two caveats. First, prices include fees and the bid-ask spread, so thinly traded markets can show misleading "probabilities". Second, a market price reflects what traders with money at stake believe, not certainty: a 62% outcome still fails nearly four times in ten.

Types of prediction markets

• Politics and elections: the original use case; also the most controversial, as polls show many voters dislike betting on elections.
• Economics: interest-rate decisions, inflation prints, jobs data. At Robinhood, the Fed's rate decision was the largest single event contract in September.
• Sports: the biggest category by volume on several US platforms, and the one facing the most legal pushback.
• Prices of assets: "Will bitcoin be above $X at 4 p.m.?" Some crypto contracts now settle in as little as 15 minutes, as Robinhood told a conference this week.
• Culture, science and tech: award shows, product launches, weather.

Regulated exchanges vs crypto-native markets

The oldest regulated example is the Iowa Electronic Markets, a small University of Iowa research market that has run since 1988 under a CFTC no-action letter. Kalshi became a fully regulated US exchange and, after a 2024 court victory over the CFTC, began listing election contracts. Polymarket grew as a crypto platform settling in USDC; it paid a CFTC penalty in 2022 and blocked US users, then built a separate US-regulated platform after buying a licensed exchange.

Crypto rails matter because stablecoins move around the clock and can fund trades in seconds. That is why wallets like Phantom and operators like Underdog are adding crypto funding, but it also means wallet security becomes part of the risk.

The legal fight in the United States

Federally, event contracts on a regulated exchange fall under the Commodity Futures Trading Commission. Many states argue that sports and some other contracts are simply gambling and must follow state betting laws, licences and taxes. Federal appeals courts have split on the question, and companies including Crypto.com and Novig are suing Missouri over orders to stop offering sports contracts. Until the courts settle it, platforms may hide some markets in certain states. Outside the US, rules vary widely; in many countries these products are treated as gambling or are unavailable.

Risks to understand before trading

• Fees and spreads: small per-contract fees add up, and wide spreads in quiet markets eat into any edge.
• Liquidity: you may not be able to exit at a fair price before the event.
• Resolution risk: vague wording or disputed outcomes can resolve against you, especially where an oracle decides.
• Platform and custody risk: on crypto venues, a hacked wallet or buggy contract can mean lost funds; read how to store crypto safely.
• Insider trading: people with private information can trade; regulated exchanges ban this and some have punished it, but it is hard to police.
• Taxes: treatment differs by country and is often unclear; keep records.

Prediction markets can be a useful source of crowd forecasts even if you never trade. If you do trade, treat it as speculation with money you can afford to lose. This guide is information, not financial advice.