The 2024 US general elections brought prediction markets into the spotlight. However, they were already a mainstay before then, especially among crypto enthusiasts on Polymarket. Going mainstream, prediction markets are gaining prevalence as a more empirical betting strategy and a better representation of possible outcomes. This growing relevance is evidenced by usage activity data across popular prediction markets. In Q1 2026 alone, prediction markets recorded over $59 billion in trading volume, a 34% increase from the $44 billion in gross volume in 2025, as US-based investment firm Bernstein projects the sector will reach $1 trillion by 2030.
While interest in prediction markets continues to grow, the general understanding of how they work and their legitimacy remains limited. Most people are unable to differentiate them from regular betting platforms. This article explains what prediction markets are, how they work, and how they differ from traditional betting platforms.
What Are Prediction Markets?
Prediction markets are open platforms for trading on future outcomes of events in sports, politics, finance, and more. They are contract-based trading platforms, like derivatives trading platforms, where the contracts are shares representing participants’ positions on whether a future event will occur. Prediction markets operate in a peer-to-peer manner, with event odds and settlements determined by participants.
Prediction markets use a binary outcome and settlement system. That is, there are only two possible outcomes: YES and NO. Each outcome is a tradable share on the open market, and the price of each share represents the market’s sentiment on the outcome. During settlement, the winning outcome is resolved at $1 per share, while the losing outcome is reset to $0.
Contemporary prediction market architecture is like that introduced by the Iowa Electronic Markets (IEM) in 1988, which enabled traders to buy contracts on outcomes across diverse sectors, including politics and global economic trends.
How Prediction Markets Work - The Mechanics
Prediction markets are open markets for outcomes. Imagine a group of friends arguing over which team will win the 2026 FIFA World Cup and deciding to wager on the event. This is the same scenario on prediction markets. The prediction market provides the group with an avenue to independently manage their bets on the event.
If the argument is whether the French team wins the World Cup or not, the two sides in the prediction will be;
- Yes: The French team will win the World Cup
- No: The French team will not win the World Cup
The group proceeds to create an event pool on a prediction market…
How prediction market events are created
The event creation process depends on the platform used;
- In centralized prediction markets, users are required to submit a proposal containing details of the event, the two possible outcomes, and the official source of data for event resolution.
- In decentralized prediction markets, the users create new markets by directly setting up an event smart contract on the protocol. The contract will define the possible event outcomes (Yes/No scenarios) and the source of the resolution data.
Prediction market share pricing
When the event market is created, each participant purchases a share with their own money. Prediction markets predominantly use Limit order books (Kalshi, for Example) or Automated Market Makers (Polymarket, for example).
The starting prices for shares differ across systems.
- In Automated Market makers, the creator usually funds the pool with equal amounts for both outcomes, automatically setting the starting price to $0.50 for YES and $0.50 for NO.
- In limit order books, the initial price is set by the first buyer and seller who agree on a price. For instance, if the first buyer offers $0.40 for YES and a seller accepts, $0.40 becomes the starting price for YES, and $0.60 for NO.
As the market progresses, participants take positions according to their personal projections. The shares get automatically priced based on the money pooled on both sides; that is, they fluctuate as participants take sides. If the price for NO on an event is $0.75, it means the active market believes there is a 75% chance it doesn’t occur.
When a new participant joins the market, they purchase a share at the prevailing price. If an event is priced at $0.25 for YES and $0.75 for NO, a participant who believes the event will happen buys a full share at $0.25, while a participant who believes the event will NOT happen buys a full share at $0.75
Trading event shares
As an open market, prediction market shares are tradable commodities. You can sell your shares at the prevailing price even before the event ends. This offers participants an opportunity to take profit or cut their losses, like on spot or regular derivatives trading platforms.
Event settlement and payout
At the end of the event, the shares for the winning outcome are paid out at $1 each, while losing shares are settled at $0. Therefore, if a participant bought YES at $0.25 per share and the event happens, they make a $0.75 profit per share.
Prediction markets use Oracles to automatically detect the outcome of an event. For instance, Polymarket will determine the outcomes of World Cup markets based on official FIFA announcements. The oracle feeds the protocol with live data as it resolves the event.
The final payout is made to current event shareholders. Participants who sold their shares before the event ended will not receive a payout from the platform.
What Can You Trade?
Prediction markets cover a wide range of major and minor categories. Depending on the platform, the coverage can be unlimited or limited to selected categories. Availability of some markets may also be limited by national laws;
The most popular event categories on prediction markets include
- Politics: Prediction Markets are iconic for their ability to pool accurate estimates for the outcome of political events. You can trade the outcome of elections, legislative programs, the approval rating of political leaders, and more.
- Economics and Finance: On prediction markets, you can create a pool for economic trends and projections or trade existing related events. Popular economics and finance events on prediction markets include US CPI projections, unemployment rate, GDP projections, and S&P 500 trends.
- Weather: You can also trade short and long-term weather and climate change outcomes on prediction markets.
- Sports: Sports are one of the most popular categories on prediction markets. You can trade the outcomes of sporting events, individual awards, and performances.
- Crypto: Like the finance category, you can trade outcomes of crypto-related events like asset prices, whether Strategy will sell their Bitcoin, and other miscellaneous events.
- Culture, Entertainment, and Pop Culture: You can trade outcomes of reality shows, music awards, movie and actor awards, and more on prediction markets.
- Science, Technology, and AI: Outcomes of scientific research, AI development, tech releases, and more can also be traded on prediction markets.
Are Prediction Markets Accurate?
The Iowa Electronic Market (IEM) and newer prediction markets are renowned for accurately reflecting public sentiment and predicting future outcomes, while Polymarket data outperformed polling in predicting the 2024 US Presidential Election, according to a ResearchGate publication. These and many other similar events since then highlight the close correspondence between prediction odds and final outcomes. As a result, prediction markets are widely regarded as a source of truth and have outperformed expert surveys in 164 of 200 comparable and reported forecasts, according to the Good Judgement Project, a study on the accuracy of expert prediction methods.
This, in fact, is according to design. Prediction markets let users put skin in their sentiments. As a result, participants are more likely to wager without prejudice than they would on traditional betting platforms. This way, it represents unbiased, calculated predictions from a large group. The computed average, reflected in the price of the shares, may therefore tend to be closer to the outcome compared to other prediction methods.
However, the accuracy of prediction market shares is not absolute, and final outcomes may swing toward the minority. Prediction market events can also be manipulated by insider traders, and corrupting the source of resolution, as seen in the WSJ investigation into Polymarket temperature market manipulation.
Also, some outcomes are easier to predict mathematically than others. Prediction markets may fail to capture genuinely unpredictable events, such as natural phenomena that operate entirely outside human intent or historical patterns. In a prediction market share prices are a live probability signal, not a guarantee.
Where to Trade Prediction Markets
As prediction markets grow rampant, options for where to trade widen for users. However, your choice of prediction market platform should be primarily guided by factors such as legitimacy, regulation, and liquidity. It is recommended that you use licensed prediction platforms operating in your region, as licensing laws are meant to protect users from fraudulent prediction markets and manipulation.
For instance, in the US, CFTC-licensed prediction markets like Kalshi and licensed brokerages offer the clearest legal framework. Brokerages that support prediction contract trading offer user-friendly, regulated trading environments and are a solid alternative, as they also provide access to traditional markets.
Due to evolving regulatory frameworks for prediction markets in other regions, some platforms may operate without licenses and may not be subject to consumer protection laws. Careful evaluation is therefore highly recommended for users in these regions. Be sure to research the platform, evaluate public opinion, and review the event resolution and settlement structure. Also, use platforms with sufficient liquidity and a high user count. Low liquidity may increase the risks of manipulation.
Where possible, use regulated brokerages that offer prediction market contracts. DailyForex has reviewed regulated brokers in several regions, including the US, for 15+ years. Browse our broker reviews to find a regulated platform available in your country. For US-resident traders, check out our review of Plus500 Futures.
Prediction Markets vs Sports Betting vs Traditional Trading Vs Polls
Prediction markets are often compared to polls, regular sports betting, and traditional trading because of their remarkable similarities. While prediction markets take a leaf from both, they share obvious differences;
Prediction markets: Prediction markets are peer-based and use binary outcomes. Outcomes shares are regarded as a financial instrument. Users back their sentiments financially, reducing bias. The participant decides how the events are resolved, and odds are determined empirically by the market itself. The prediction platform serves as a supervisor and not a custodian.
Sports betting: The betting platform is the custodian. They decide the odds and how the event is resolved. Betting odds are not classified as financial instruments, and sports betting is regulated differently across regions, with some classifying it as gambling.
Polls: Polls are like prediction markets. However, they can be non-binary. Users are also not required to back the sentiments financially; therefore, they may be biased in their voting or predictions.
Traditional trading: Price development depends on many volatile variables. Outcomes are more straightforward to predict in prediction markets, and events have defined end dates.
Are Prediction Markets Regulated?
Whether prediction markets are legal depends entirely on where you are and which platform you use. The regulatory framework for prediction markets varies significantly across regions, depending on how each regulatory body interprets it. The September 2024 US district court ruling in favour of Kalshi in the lawsuit involving the CFTC (Commodities Futures Trading Commission) marked a significant moment in the regulatory landscape of prediction markets. As a result, prediction market event contracts are classified as financial instruments by the CFTC in the United States. As such, regulated prediction markets are expected to operate like proper futures trading platforms. Licensed prediction markets in the US are required to hold a Designated Contract Market license and must provide clarity on how they manage client funds.
There are also traditional brokers that offer trading with prediction markets as part of their regualted services, for example Plus500 Futures.
However, outside the US, prediction markets may be classified as gambling platforms and treated similarly to sports betting platforms. Several EU countries (including France and Spain) consider platforms like Polymarket and Kalshi to be gambling platforms, leading to ongoing disputes over their operations in these regions. This is the same in the UK and most regions in Asia.
In Africa, at the time of writing, regulatory frameworks for prediction markets are mostly nonexistent or in the earliest stages of development. Prediction market legality in these regions is mostly contested or unenforced
Ensure to verify the regulations that apply to prediction markets in your region and use licensed platforms or protocols where available.
