Prediction Markets Explained
Prediction Markets and How They Work
Prediction markets let people trade event contracts based on measurable future outcomes. Prices change as traders respond to breaking news, polling, economic data, sports results, weather forecasts and other information. This guide explains the market mechanics and compares leading platforms.
What Prediction Markets Are
Prediction markets are exchanges or trading systems where event contracts are bought and sold based on whether a defined outcome will occur.
Most prediction markets use contracts tied to a clear question, such as whether a candidate will win an election, whether inflation will exceed a stated level, whether a team will win a championship or whether a city will record a certain temperature. Each market includes rules that identify the deadline, settlement source and conditions required for the outcome to resolve.
Binary contracts commonly trade between $0.01 and $0.99. Higher prices generally indicate that traders consider the outcome more likely. Lower prices generally indicate that traders consider it less likely. Prices are market-implied estimates rather than guaranteed probabilities, and fees, spreads, liquidity and market structure can affect the relationship between price and probability.
Event contracts can serve several purposes. Traders may use them to express a view, hedge exposure, follow public expectations or measure how collective expectations change. Journalists, businesses and researchers may also watch prediction markets as a real-time information signal.
How Prediction Markets Work
Market design differs by company, but the basic process usually moves from a defined event to trading, resolution and settlement.
Read the Event
Review the exact question, deadline, eligible outcomes and source used to determine the result.
Choose an Outcome
Select Yes, No or another listed outcome based on what you believe will happen.
Set the Trade
Enter the number of contracts or amount to commit, then review the price, payout and fees.
Hold or Sell
Keep the position until settlement or close it early when the platform and market allow.
Receive the Result
Correct contracts settle at the stated payout. Incorrect contracts generally settle at zero.
Event Contract Example
Suppose a Yes contract costs $0.35 and settles at $1 when the event occurs. Buying 10 contracts costs $3.50 before fees. Correct settlement returns $10, creating a $6.50 gross profit before fees. Incorrect settlement returns $0, creating a $3.50 loss before any other costs. The contract price can change before settlement as new information enters the market. A trader who buys at $0.35 may be able to sell earlier at a higher or lower price instead of waiting for the final result. Selling at $0.60 would produce $6 before fees, while selling at $0.20 would return only $2. Available liquidity, bid-and-ask spreads and platform fees affect the actual result. Market rules also determine exactly what counts as a winning outcome, so the resolution source and deadline must be reviewed before the order is placed. The displayed payout represents the contract settlement amount, not a guaranteed profit.
Example Calculation
How Prediction Markets Make Money
Platform revenue can come from trading commissions, exchange fees, contract fees, spreads, subscriptions or commercial partnerships. Traders make or lose money based on the difference between their cost and the amount received when they sell or when the contract settles. Fee schedules vary, so the order review screen and current platform disclosures should be checked before every trade.
Liquidity, Volume and Market Quality
Liquidity describes how easily contracts can be bought or sold without causing a large price change. Higher trading volume can create tighter price gaps and easier execution, while thin markets can produce wider spreads, partial fills or limited opportunities to exit. High volume doesn't guarantee an accurate outcome, but it can improve the trading process.
Breaking News and Prediction Market Price Changes
Breaking news prediction markets impact can appear within seconds when traders update orders after receiving new information.
Prices move because buyers and sellers continually reassess the event. Polling can move election prediction markets. Injuries and lineup changes can move sports prediction markets. Inflation reports and central-bank decisions can move economy and finance contracts. Hurricane forecasts can move weather markets, while court decisions and agency announcements can move government contracts.
News quality matters. Official reports, primary sources and confirmed results generally carry more weight than rumors or incomplete social posts. Price movement can also reflect low liquidity, a large order or temporary uncertainty rather than a lasting change in the underlying probability.
List of Prediction Markets and How Each Platform Works
The leading platforms use different account structures, exchanges, interfaces, settlement systems and market categories.
Kalshi Prediction Markets
Kalshi operates KalshiEX, a Commodity Futures Trading Commission regulated Designated Contract Market. Users trade event contracts directly through Kalshi's exchange interface.
- Yes and No contracts commonly trade in cents.
- Market rules identify the settlement source and conditions.
- Positions can generally be held to settlement or sold earlier when liquidity is available.
- Categories can include politics, economics, sports, weather, entertainment and other events.
Polymarket Prediction Markets
Polymarket operates through separate legal structures. Polymarket US is operated by QCX LLC as a CFTC-regulated Designated Contract Market. The international Polymarket platform operates separately and uses blockchain-based market infrastructure.
- Outcome shares generally reflect the market's implied probability.
- Correct shares settle at $1 and incorrect shares settle at $0.
- Resolution rules identify the evidence used to determine the outcome.
- U.S. and international eligibility, funding and regulatory treatment differ.
Coinbase Prediction Markets
Coinbase provides prediction market access through Coinbase Financial Markets. Eligible users open a separate regulated predictions account and buy or sell event contracts through the Coinbase interface.
- Contracts can be purchased with eligible USD or USDC balances.
- Prices show the market's current estimate for each outcome.
- Users can hold contracts through settlement or sell before closing when available.
- Coinbase states that U.S. access excludes Nevada as of the review date.
DraftKings Prediction Markets
DraftKings Predictions is a separate app and web product for federally regulated event contracts. Market pages identify the contract rules, exchange rules, resolution source and payout terms.
- Binary contracts commonly settle at $1 or $0.
- Markets can cover sports, economics, commodities, politics and other events.
- Orders can be exposed to low liquidity and temporary trading pauses.
- Availability and eligible contracts depend on current platform and regulatory rules.
FanDuel Prediction Markets
FanDuel Predicts is operated through FanDuel Prediction Markets, a joint venture between FanDuel Group and CME Group. Accounts are carried by a registered futures commission merchant, and contracts are listed by CME Group derivatives exchanges.
- Users choose Yes or No and review the potential payout.
- Price displays can be viewed as cents, percentages, odds or multipliers.
- Positions may be held or sold early when cash-out is available.
- FanDuel states that Predicts is available in all 50 states and Washington, D.C., subject to eligibility.
Robinhood Prediction Markets
Robinhood offers event contracts through its derivatives infrastructure and routes eligible orders to the exchange connected to each market. The contract page identifies the event, rules, pricing, fees and settlement process.
- Yes and No contracts generally trade between $0.01 and $0.99.
- The amount paid for a contract is generally the maximum contract loss before fees.
- Robinhood commissions and exchange fees are shown before an order is submitted.
- Available exchanges, market categories and fees can vary by contract.
Comparing the Best Prediction Markets
The best prediction markets depend on the contracts a user wants, legal eligibility, fees, liquidity, account structure and preferred interface.
No single platform is automatically best for every participant. Kalshi offers direct access to its regulated exchange. Polymarket is known for broad international market activity while maintaining a separate U.S. regulated operation. Coinbase integrates event contracts into an existing financial and crypto account experience. DraftKings and FanDuel bring familiar sports-focused interfaces to event contracts. Robinhood places prediction markets beside other financial products.
| Platform | Primary Structure | Trading Experience | Notable Market Areas | Review Before Trading |
|---|---|---|---|---|
| Kalshi | Direct CFTC-regulated Designated Contract Market | Exchange order book with Yes and No event contracts | Politics, economics, sports, weather, culture and current events | Fees, liquidity, rules and settlement source |
| Polymarket | Separate U.S. regulated and international operations | Outcome-share trading with broad real-time market coverage | Politics, global affairs, crypto, sports and entertainment | Which legal entity serves the user, funding method and resolution rules |
| Coinbase | Access through Coinbase Financial Markets | Prediction contracts inside the Coinbase account experience | Crypto, sports, economics, politics and culture | Eligibility, fee breakdown, account balance and settlement timing |
| DraftKings | Standalone regulated predictions product | Event contract interface connected to identified exchange rules | Sports, economics, commodities and political events | Exchange, liquidity, fees, market pauses and contract source |
| FanDuel | FanDuel and CME Group joint venture with registered FCM | Yes and No predictions with multiple price display options | Sports, culture, finance and crypto | Fees, cash-out availability, eligibility and account terms |
| Robinhood | Broker interface routing contracts to participating exchanges | Event contracts within the Robinhood app | Sports, economics, politics, crypto and current events | Commission, exchange fee, routing venue and settlement rules |
Prediction Markets News by Category
Prediction markets news connects market prices with the events, official reports and breaking developments influencing each contract.
Voting
Elections, primaries, ballot measures, polling and electoral outcomes.
Government
Legislation, executive actions, agencies, courts and public policy.
Sports
Games, championships, players, injuries and tournament markets.
Entertainment
Awards, movies, television, music, streaming and cultural events.
Crypto
Bitcoin, Ethereum, digital asset prices, regulation and adoption.
Commodities
Oil, natural gas, gold, metals, agriculture and measurable prices.
Weather
Temperatures, rainfall, snowfall, hurricanes and official measurements.
Economy
Inflation, jobs, GDP, interest rates and recession indicators.
Finance
Stocks, earnings, indexes, corporate events and financial markets.
Political Prediction Markets
Political prediction markets can cover elections, nominations, legislation, government appointments and other public outcomes with measurable settlement conditions.
Political contracts often move after polling releases, endorsements, debates, campaign events, court rulings, ballot decisions and official election results. Prices can provide a continuously updated view of trader expectations, but they aren't votes and shouldn't be treated as a replacement for polling or official election information.
Market rules matter because political events can involve recounts, certification deadlines, party procedures and legal disputes. Traders should confirm whether settlement depends on projected results, certified results, inauguration, nomination or another defined event.
Bonus Predictions separates voting prediction market news from government prediction market news so election contracts and broader public-policy contracts can be followed independently.
Trading and Investing in Prediction Markets
People often search for how to invest in prediction markets, but the more precise activity is trading event contracts.
Starting the Process
Select a platform that legally serves your location, complete the required identity and eligibility checks, fund the appropriate account and review the available contracts. Begin with the market rules rather than the headline, then confirm the exact outcome, closing time, settlement source, fees and maximum possible loss before submitting an order.
Managing a Position
Decide in advance whether the position will be held through settlement or sold when the price changes. Available liquidity can determine whether an early exit is practical, while position size should reflect the possibility of losing the entire contract cost. Bonus credits and referral rewards don't remove that risk.
Practical Research Checklist
- Read the complete contract and settlement rules.
- Verify the source that will determine the final outcome.
- Compare the current price with your own evidence-based estimate.
- Review trading fees, commissions and any exchange charges.
- Check volume, spread and available contracts before entering.
- Set a maximum amount that can be lost without affecting essential expenses.
- Save confirmations, statements, fees and settlement records for taxes.
Coverage on Bonus Predictions is general information rather than individualized financial advice. Review the complete Risk Disclosure before trading.
Prediction Market Legality in the United States
Prediction markets can operate legally in the United States through federally regulated derivatives exchanges and registered intermediaries, but legality and availability depend on the specific platform, contract and jurisdiction.
The Commodity Futures Trading Commission regulates U.S. derivatives markets. Designated Contract Markets list event contracts, define the rules, operate the matching system and settle contracts. Futures commission merchants and other registered intermediaries can provide customer access to contracts listed by those exchanges.
Federal regulation doesn't mean every prediction market website is regulated in the same way. Polymarket, for example, separates its CFTC-regulated U.S. operation from its international platform. Platform names alone aren't enough to determine which legal entity, regulator or customer protections apply.
State agencies and federally regulated prediction market companies have also disputed the treatment of sports event contracts. The CFTC filed lawsuits against Arizona, Connecticut and Illinois in April 2026 to assert federal jurisdiction over contracts listed by CFTC-registered exchanges. Those disputes show why current platform availability and legal notices should be checked rather than assumed.
Participants must meet age, identity, residency and account requirements. Contract availability can change after regulatory action, court decisions, exchange rule changes or platform updates.
Prediction Market Taxes and Recordkeeping
Prediction market gains can be taxable, but tax treatment isn't identical across every platform, contract or taxpayer.
U.S. taxpayers generally must report taxable income, gains and losses even when no tax document is received. Event contract reporting can depend on the legal structure of the contract, the exchange, the taxpayer's activity and the type of gain or loss involved.
IRS Form 6781 is used for gains and losses from qualifying Section 1256 contracts. Form 8949 and Schedule D are used for certain capital asset dispositions. Other income, rewards or interest can appear on different forms. Receiving a document doesn't by itself determine the complete tax treatment of every trade.
Platform documentation also differs. Kalshi states that it may provide Form 1099-INT for interest, Form 1099-MISC for credits or rewards and other forms for certain broker or digital asset transactions. Coinbase states that prediction market gains may be taxable and that Form 1099-B can apply to futures, securities or other financial instruments. Other companies provide annual statements or tax documents based on their account and reporting systems.
Records to Save
- Opening and closing dates for each position.
- Contract names, quantities and prices.
- Trading commissions and exchange fees.
- Settlement proceeds and realized gains or losses.
- Interest, bonuses, credits and referral rewards.
- Deposits, withdrawals and transfers between accounts.
- Annual statements and every tax document received.
Prediction Markets Compared With Sportsbooks
Sports event contracts and sportsbook wagers can cover similar games, but their legal structure, pricing and transaction process differ.
| Feature | Prediction Markets | Sportsbooks |
|---|---|---|
| Product | Event contracts traded through an exchange or intermediary | Wagers accepted by a licensed betting operator |
| Pricing | Contract prices can move with orders, liquidity and market expectations | Odds are posted and adjusted by the sportsbook |
| Counterparty Structure | Orders are commonly matched between market participants | The sportsbook commonly serves as the counterparty |
| Early Exit | Positions may be sold when a buyer, price and platform feature are available | Cash-out may be offered at the operator's discretion |
| Regulation | Federally regulated derivatives framework for U.S. exchange-listed contracts | State sports wagering laws and gaming regulators |
| Market Categories | Politics, economics, weather, culture, crypto, sports and other measurable events | Primarily sports games, player outcomes and related wagering markets |
Prediction Market Risks and Responsible Use
Event contracts involve financial risk, and a correct-looking market price can still lead to a complete loss.
Trading Risks
Prices can move quickly, liquidity can disappear and contract wording can produce a different settlement than a trader expected. Technical outages, market pauses, account restrictions and withdrawal delays can also affect access.
Information Risks
Rumors, delayed reports, incorrect data and manipulated information can affect market prices. Official sources and complete contract rules should receive priority over social-media claims.
The CFTC issued a 2026 advisory after enforcement cases involving fraud and misuse of nonpublic information in prediction markets. Trading based on unlawfully obtained information, manipulating markets or misrepresenting identity can violate law and platform rules.
Never trade money needed for housing, food, healthcare, debt, taxes or emergencies. Read the complete Prediction Market Risk Disclosure and the current platform documents before opening a position.