How do prediction markets work?

Prediction markets are exploding in popularity. This is thanks in no small part to Kalshi’s judicial win against regulators from the Commodity Futures Trading Commission (CFTC) in October 2024. This case represented a monumental milestone, as it legalized election trading in the US.

2025 was arguably an even more important year for the industry, as prediction market platforms quickly moved from the financial fringe into the mainstream. Kalshi was even featured in an episode of South Park.

Yet despite the soaring popularity of these platforms, many people are still left wondering: what exactly is a prediction market? The following article provides a detailed explanation of this burgeoning asset class, and how you can legally trade on anything from sports predictions to culture to weather, just like you would on the stock market.

Prediction markets, sometimes referred to as event contracts, derivatives, idea futures, information markets and more, have actually been around for centuries. They offer the public an opportunity to buy shares to trade on real-world outcomes, from presidential elections to polls to Trump speeches, to crypto prices and sports outcomes. 

Although they are sometimes referred to as "political betting," and compared to gambling platforms and sportsbooks, there are important differences. In reality, they have much more in common with futures trading or trading in the stock market than they do with traditional sportsbooks.

Unlike sports betting platforms like Fanduel and Draftkings, where users are gambling against the house, prediction markets have no vested interest in the outcome. They simply act as a middleman to facilitate trades, and make their money off transaction fees. As a result, a prediction market trader will never be throttled or banned for being too profitable.

Prediction markets are arranged as binary, multiple-selection, continuous and conditional markets, and the operating mechanics are quite simple.

Here’s an example of a standard binary prediction market, which can be applied to presidential elections, sports, politics, weather forecasts, cultural events and many other outcomes:

Will the United States experience another government shutdown on January 31, 2026?

Kalshi’s traders, where total contract volume exceeds $500,000, currently predict a 30% likelihood for “Yes.” This means that a trader could buy a “Yes” share for 30 cents and get paid out $1 if the event occurs. Conversely, if the government does not shut down (with “No” displaying a 70% probability), a trader would need to buy a 70-cent contract on “No” to earn that same $1 payout.  

Rhode and Strumpf concluded that prediction markets would have continued surging in popularity through the 20th century if not for the advent and influx of other legal trading forms. Of course, culture can be cyclical.

As mentioned earlier, prediction markets have a lengthy and dynamic history. There is 16th-century evidence from Italy of insurance arrangements, similar to prediction markets, related to papal succession. From there, early prediction markets existed in 18th-century Britain and the 19th-century United States, especially relating to presidential elections and elections for other heads of state.

Researchers Paul W. Rhode and Koleman S. Strumpf effectively highlight political prediction markets’ origins in “Historical Presidential Betting Markets” (Journal of Economic Perspectives, 2004). Beginning with General Ulysses S. Grant’s 1868 victory over Governor Horatio Seymour, these presidential election markets consistently produced reliable forecasts in an incredibly efficient manner, characteristics that were still visible in 2024.

Fast forward to today, and several firms, including Kalshi, offer a fully CFTC regulated experience.

For example, what countries will Pope Leo visit before 2027? According to Kalshi's odds, Peru (44%), Portugal (44%), Argentina (43%) and Uruguay (40%) are currently the most probable candidates. Several other countries are listed in this multiple selection market as well.

As these prediction markets take in financial action, that activity is reflected in the odds, which corresponds to the trading price. Tracking any option’s value over time is an indication of its support or demand, essentially serving as a public poll. When a specific side (i.e., “Will XYZ occur this year? Yes : No”) receives more or fewer bids for contracts at a given price, its anticipated probability rises or drops. This odds movement also corresponds to the contract’s future trading price.

Keep in mind, the more probable an outcome is, the higher its trading price (0–99¢) will be, leading to a lower payout ratio. And vice versa: if an event is viewed as very unlikely, it will be tagged with a lower trading price, and a higher potential payout. In other words, the higher the odds, the more you will pay for the contract. It's a simple matter of risk-reward.

Major political events and public addresses can and do influence a contract’s trading price. For example, President Trump's Secretary of Health and Human Services Robert F. Kennedy Jr. mistakenly told Fox News back on March 11 that the measles vaccine “wanes about 4.5% per year,” and further claimed the vaccine “does not appear to provide maternal immunity.”

In early April, Kalshi’s market on U.S. measles cases this year skyrocketed from a forecast of 2,050 to a high of 4,770, a 132% surge, in just four days as more and more cases were reported to the CDC.

The Kalshi market has since stabilized, and 2,012 measles diagnoses have been officially reported as of December 23. For reference, there were 285 registered cases in 2024, a year-over-year increase greater than 600%.

Just as in any form of financial exchange, there are a wide variety of operating mechanics.

Many common outcomes have only two possible results, as is often the case in sports. With Alabama taking on top-ranked Indiana at the Rose Bowl on January 1, will there be more than 48.5 combined points scored, yes or no?

Still, other events are not so straightforward. Here are the main categories:

As noted, traders choose between two outcomes. Contract prices reflect the probability of each outcome.

These are prediction markets with more than two possible results, such as certain political election contracts, championship outcomes, media ratings (like the top Netflix show this week) and more.

Instead of predicting a winner, continuous forecasting markets price expectations for numerical results.. As exemplified with the market on U.S. measles cases in 2025, it is essentially gauging how high or low an outcome may go. 500? 1,000? 2,000 and counting?

Continuous forecasting is also used in the finance industry quite regularly, especially in crypto: how high (or low) will Bitcoin get this year?

The odds in these prediction markets forecast outcomes under specific scenarios or conditions, often linking more than one outcome together. Think of it as, “If XYZ occurs, will ABC also happen?” They provide direct insight into cause-and-effect relationships.

Last but not least is Kalshi, a platform that has been instrumental in the dramatic rise in popularity for prediction markets. Its monumental victory over the CFTC regulators in October 2024 helped shape the current trading landscape by offering legal, CFTC regulated trading on the Trump-Harris presidential election for the first time in over 100 years. 

Featuring one of the largest USD trading catalogs in the digital space, Kalshi showcases contracts in politics, sports prediction, climate, finance and much more. It emphasizes transparency through easy-to-read market graphs and historical data.

The inclusion of many combo markets elevates Kalshi’s overall experience, and socially, the “Leaderboard” adds an engaging element for users who want to compare performance.

Kalshi is a founding member of the Coalition of Prediction Markets, which includes Crypto.com, Coinbase, Robinhood, and Underdog.

Launched in 2020, Polymarket is a cryptocurrency-based prediction platform that uses the Polygon blockchain, and has its headquarters in New York, NY. It offers contracts on politics, elections, sports and other topics.

Polymarket operates in USD Coin, a federally regulated stablecoin backed by the U.S. dollar. Accessible in more than 180 countries, Polymarket is restricted in jurisdictions such as the United Kingdom, France, Belgium, Australia and Singapore. However, the company has announced plans for a separate, CFTC-regulated platform for U.S. users.

The platform offers various tools to keep users informed, such as Polymarket Analytics, AI-powered Polysights and Hashdive. There are approaches for traders of all levels.

Founded and run in New Zealand, the PredictIt prediction market has existed since 2014. It is owned and operated by Victoria University of Wellington, where it originated as a not-for-profit school project focusing mainly on politics and election contracts.

PredictIt received full regulatory compliance from the Commodity Futures Trading Commission (CFTC) in September 2025. It is legally operable in the United States and uses USD. According to PredictIt's website, it acts as “a project of Prediction Market Research Consortium ... for educational purposes.”

Unlike others in the space, PredictIt limits individual contract volume to a maximum of $3,500. The platform also provides analysis, insights and videos to help keep traders informed.

As in any trading environment, there is some degree of risk, financial or informational. And prediction markets like Kalshi are no different.

Whether using Kalshi, Polymarket, PredictIt, or another prediction market, users should regularly reference the platform's terms of service and read their market rules carefully.

When trading in prediction markets, it is advisable for users to avoid emotional decision-making and cognitive bias (or trading on what you want to occur). It is essential to accurately understand one’s own level of expertise. If torn between a gut feeling and market analysis, defer to the data (reliable news sources, reputable polls, etc). In other words, politics, sports, election outcomes, and other charged topics must be viewed with as neutral a lens as possible.

With prediction markets, the best traders begin with a defined plan. That includes diligent performance tracking across all channels. As an industry standard, beware the mispricing of low-probability events. Diversify; committing too much capital to any one market can lead to overexposure. 

Kalshi and other prediction markets are required by the CFTC to outline a summary of rules for each market, which provides all stipulations users will need for a successful contract (including any volume limits).

When ready to withdraw funds, Kalshi’s interface provides users with several easy cash-out options. Traders can receive accrued funds via debit card, crypto or bank transfer.

Prediction markets have evolved and strengthened since their first traces in 16th-century Europe. Thanks to Kalshi and other trailblazers, markets have expanded to a huge array of topics, offering a legal and CFTC-regulated way to trade on real-world events.

There are many strategies to becoming a successful event-contract trader, and all market forms can be utilized. Whether you enjoy the simplicity of a binary outcome or prefer the precision of a conditional market, there are multiple approaches and angles.

With a variety of operators in action, potential users should browse the industry to see which platform best fits their preferences and goals. Compare prices and data across platforms, an informed decision is always stronger than a gut feeling or preconceived bias, especially when dealing with charged topics such as politics, elections, sports, etc.

Always trade responsibly. Only trade in amounts you can afford to lose. Be sure to read any attached contract rules and stipulations. Remember: all listed conditions must be met to ensure successful contracts.

The prediction-market industry is heading for a marquee year in 2026. Technological advances and further legislation will continue to shape this ever-dynamic space. For the optimal experience on Kalshi, Polymarket, PredictIt, other prediction markets, users should conduct continual research on event-contract developments.