What Is a Prediction Market? Plain-English Guide
A prediction market is an exchange where people trade contracts tied to the outcome of a future event, such as an election, a data release or a game. Each contract is usually a simple yes or no question that pays $1 if it comes true and nothing if it does not, so the trading price works as the crowd’s estimate of the odds. In the US, as of October 2026, whether these markets count as financial trading or gambling is still being fought in court.
Key takeaways
- A prediction market lists yes/no event contracts. A winning contract pays $1 and a losing one pays $0.
- A price of $0.72 for “Yes” is read as a 72% implied chance. It is a market price, not a guarantee.
- Traders buy from and sell to each other through an order book, not against a bookmaker.
- Kalshi is a CFTC-registered exchange. Polymarket’s main exchange is on-chain and closed to US users.
- As of October 2026, courts disagree on whether states can regulate sports event contracts, and the Supreme Court may have to decide.
- You can lose your whole stake. Laws differ by state and country, so check local law.
How do prediction markets work?
Prediction markets explained in one line: they turn a question into something you can trade. Each event has “Yes” and “No” contracts priced between $0.01 and $1. A Yes contract at $0.93 implies a 93% chance the event happens, and the matching No contract sits near $0.07 (Wikipedia).
Most markets use an order book. Traders post limit orders and match with each other, so a trade needs a willing counterparty. The exchange does not set the odds. Traders do, by buying and selling. You can usually sell before the event ends, and the price you get depends on what other traders will pay.
How do event contracts settle?
When the event is decided, the market settles. On Kalshi, a winning contract pays one dollar and losing contracts expire worthless. On the decentralized Polymarket, an oracle reports the result and settles the contract (Wikipedia). Our guide on how Polymarket works covers that process step by step.
The rules for each market spell out what counts as the outcome. Read them before you trade, because a contract settles on the written rules, not on what you assumed.
How are prediction markets different from sports betting?
The big difference is who is on the other side. With a sportsbook, you usually bet against the book, which sets the odds and takes a margin. In a prediction market, you trade against other traders, and the exchange earns fees. Regulators also treat them differently. Kalshi is a CFTC-registered exchange, while sportsbooks are licensed by state gaming regulators. Whether sports contracts on a CFTC exchange are really gambling is the core of the legal fight below.
| Feature | Prediction market | Sportsbook | Betting exchange |
|---|---|---|---|
| Who sets the price | Traders, through an order book | The bookmaker | Bettors, who back and lay each other |
| Your counterparty | Another trader | Usually the house | Another bettor |
| Typical product | Yes/no contract paying $1 or $0 | Bet at fixed odds | Back or lay bet at agreed odds |
| Topics | Politics, economics, sports and more | Mostly sports | Mostly sports |
| Main regulator (US) | CFTC for registered exchanges; states dispute this for sports | State gaming regulators | Varies by country |
The sportsbook and exchange columns describe the usual model. Individual operators differ, so read each platform’s own rules.
What is the difference between regulated and on-chain prediction markets?
Kalshi received a CFTC license as a designated contract market in November 2020 and launched publicly in July 2021 (Wikipedia). Its help center says it is “subject to U.S. regulatory oversight by the CFTC” (Kalshi Help Center).
Polymarket is the best-known on-chain market. Participants deposit cryptocurrency through the Polygon network (Wikipedia). In January 2022 the CFTC fined it $1.4 million for offering unregistered event-based binary options (CFTC). It has since bought a CFTC-licensed exchange, and we explain that history in our Polymarket guide. On-chain markets add smart contract risk and wallet custody risk. For the wider picture, see our DeFi sports betting hub and the guide to peer-to-peer betting.
Are prediction markets legal in the US?
There is no single answer, and it is changing. This summary is current as of October 9, 2026. It is not legal advice.
- CFTC rulemaking. On June 10, 2026, the CFTC proposed changes to Regulation 40.11 and a new Appendix F. They set criteria for when a contract “involves” gaming, unlawful conduct, terrorism, assassination or war. Comments closed July 27, 2026 (WilmerHale). We did not find a final rule.
- Third Circuit, April 6, 2026. A divided panel held that sports event contracts are “swaps” and that federal law preempts New Jersey’s gambling laws as applied to Kalshi. One judge dissented (Paul, Weiss).
- Sixth Circuit, September 25, 2026. A three-judge panel held that Kalshi’s sports contracts are not swaps and fall under state gaming rules, in cases from Ohio and Tennessee. CoinDesk reports the Eighth Circuit also ruled they are not swaps, and that New Jersey has asked the Supreme Court to review the Third Circuit ruling (CoinDesk).
- State suits. On September 24, 2026, New York’s attorney general sued Polymarket US, claiming it runs an unlicensed gambling business. Polymarket says the CFTC has exclusive authority (Al Jazeera).
The result is a patchwork. What is allowed can depend on your state, the contract type and the platform. Check your local law before you trade.
Risks
- Loss of stake. A contract that resolves against you pays $0.
- Thin liquidity. In quiet markets you may not be able to sell at a fair price.
- Rule risk. Settlement follows the written rules, which can surprise you.
- Smart contract and custody risk. On-chain markets depend on code and your wallet.
- Regulatory risk. Courts or states can restrict a product, as the cases above show.
- Fewer protections. Rules differ from licensed sportsbooks, so do not assume the same consumer safeguards.
- Addiction risk. Fast, always-on trading can be habit forming.
FAQ
What is a prediction market in simple terms?
It is an exchange where you trade yes/no contracts on future events. A winning contract pays $1 and a losing one pays $0, so the price shows what traders think the odds are.
Is a prediction market the same as sports betting?
Not exactly. You trade against other people instead of a bookmaker, and some are regulated federally. But sports contracts look a lot like bets, and several courts and states treat them as gambling.
Are prediction markets legal in the US?
It depends. As of October 2026, appeals courts disagree on whether states can regulate sports event contracts, and the CFTC has a rule proposal open. Check your state’s rules.
How do prediction markets make money?
Platforms charge fees. On the Kalshi data one study reviewed, takers paid a fee based on price and makers paid none (Wikipedia). Check each platform’s current fee page.
Can I lose more than I put in?
On a simple yes/no contract bought outright, the most you lose is what you paid, including fees. Kalshi’s help center says members “risk losing their cost to enter any transaction, including fees.”
Gambling involves risk, and you should only use money you can afford to lose. If it stops being fun, help is available. In the US, call or text the National Problem Gambling Helpline at 1-800-MY-RESET (1-800-697-3738), run by the National Council on Problem Gambling. See our responsible gambling page. Many products are for ages 21 and over.
Sources
- Wikipedia: Prediction market
- Wikipedia: Kalshi
- Kalshi Help Center
- CFTC order against Polymarket, January 3, 2022
- WilmerHale: CFTC event contracts proposed rulemaking, June 2026
- Paul, Weiss: Third Circuit ruling
- CoinDesk: Sixth Circuit ruling, September 25, 2026
- Al Jazeera: New York sues Polymarket, September 24, 2026
- National Council on Problem Gambling: help and treatment
