What Are Prediction Markets?
In November 2024, professional pollsters called the US presidential election a coin flip. Prediction market traders disagreed. For weeks, the leading platforms had been pricing a clear Trump advantage, and over $3.7 billion in real-money bets had quietly produced a more accurate forecast than the entire polling industry combined.
That result, combined with an October 2024 court decision allowing non-financial futures, landed prediction markets on the front page of every major financial publication in the world. What followed was extraordinary growth. By the end of 2025, Polymarket and Kalshi, together processed over $44 billion in combined trading volume, up from virtually nothing a few years earlier. The parent company of the New York Stock Exchange, Intercontinental Exchange (ICE), committed $2 billion to Polymarket, the largest regulated player in the space. Major retail brokerages, sports betting operators, and crypto exchanges all entered the market. Research firm Eilers and Krejcik now projects the industry could reach $1 trillion in annual volume by 2030.
So what exactly are prediction markets, how do they work, and why is institutional money suddenly pouring in? Here is a full breakdown.
The Simple Definition
A prediction market is a place where people trade non-financial futures contracts based on the outcome of a future event. Rather than buying shares in a company or a currency pair, you are taking a position on whether something specific will happen or not.
The most common format is binary: a yes or no question with a defined resolution date. Will the Federal Reserve cut interest rates at its next meeting? Will Bitcoin close above a certain price by year end? Will a particular team win the championship? You take a position, and the contract trades live until the event resolves. If you are right at resolution, you collect a payout. If you are wrong, you lose what you staked. But you are not locked in either way. You can buy or sell your position at any point before resolution, taking a profit if the odds have moved in your favor or cutting a loss if they have moved against you.
Contract prices move between zero and one dollar. A contract priced at $0.65 implies the market believes there is a 65% chance that the event will occur. As more traders enter positions and new information flows in, prices shift in real time. The result is a live, crowd-sourced probability gauge for any question the market is tracking.
How Event Contracts Actually Work
The mechanics are fairly simple. You open an account on a prediction market platform, fund it, and browse available markets. Each market is built around a specific, objectively verifiable question with a clear resolution date and defined outcome criteria.
Say you buy a YES contract at $0.40. You are paying 40 cents for the right to receive $1 if the event happens. It does happen: you collect $1 and profit 60 cents. It does not: you lose your 40 cents. You can also sell your position before resolution, locking in gains or cutting losses as new information changes the price. This is what gives prediction markets their depth. They are not static bets locked in until an event concludes. They are live, tradeable markets where positions can be entered, adjusted, and exited throughout the life of a contract.
Three main contract types are in use across the major platforms:
- Binary contracts: yes or no, the most common format, pays $1 for a correct outcome and $0 for incorrect
- Continuous contracts: payout varies along a range of outcomes rather than a single binary result, used for price levels or vote share percentages
- Conditional contracts: outcome is linked to another event occurring first, adding a cause-and-effect layer to the market structure
The Wisdom of the Crowd: Why Prediction Markets Work
The theory behind prediction markets has been around for a long time. When people have real money on the line, they tend to reveal what they actually believe rather than what sounds smart in conversation. This incentive structure drives honest information aggregation. Economists call it the “wisdom of crowds”.
Even traders who are not individually well-informed contribute to a meaningful collective signal. The financial cost of being wrong acts as a filter. It pushes participants toward accurate beliefs rather than performative ones. Academic research going back to the 1800s has consistently found that prediction markets outperform polls and expert forecasts, a gap that tends to narrow as the resolution date approaches and information becomes more complete.
The 2024 election gave that research its highest-profile proof yet. Political campaign teams now monitor prediction market odds the way they once tracked internal polls. Media outlets check these markets before framing their coverage. Something has shifted in how society prices uncertainty, and prediction markets sit at the center of that shift.
The Platforms Driving the Industry
Two platforms currently at the top of the prediction market landscape: Polymarket and Kalshi. Together, they account for roughly 85 to 90% of total trading volume in 2025.
Polymarket operates as a decentralised, blockchain-based market settled in stablecoin. Kalshi has built a strong position in sports markets, including the first-ever prediction market licensing deal with a major professional sports league.
Beyond those two, a wave of institutional entrants arrived in 2025. Robinhood launched a prediction markets hub inside its retail trading app. Sports betting operators DraftKings and FanDuel acquired or partnered with federally licensed event contract exchanges, with DraftKings purchasing CFTC-licensed Railbird and FanDuel partnering with CME Group to launch their own prediction platforms. Crypto platforms and sports commerce companies entered through joint ventures.
Polymarket processed over $9 billion in cumulative trading volume during 2024 alone, peaking at $2.63 billion in a single month during the US election. Kalshi processed around $23 billion in trading volume in 2025, up from just $300 million the year before.
What Can You Actually Trade On?
Early platforms focused almost entirely on US politics. Today the major platforms cover a wide range of categories:
- Politics and elections: approval ratings, legislative outcomes, appointment decisions, international elections
- Economics and finance: Federal Reserve rate decisions, inflation data, GDP figures, major index levels, crypto price targets
- Sports: game outcomes, championship winners, individual player performance milestones, season statistics
- Science and technology: AI capability milestones, drug approval decisions, climate and weather records
- Culture and entertainment: award show winners, box office performance, social media milestones
Risks and Considerations for Participants
Prediction markets carry genuine financial risk. Contracts can go to zero. Niche event markets are often illiquid, making it difficult to exit a position without moving the price against yourself. Resolution disputes arise when outcomes are ambiguous or contested. And participants with better information and faster execution consistently extract value from those without.
For example, Polymarket has faced restrictions in multiple countries. In addition, Kalshi and others have encountered state-level legal challenges, with attorneys general from more than 30 states taking formal action — through cease-and-desist letters, lawsuits, or amicus briefs — over sports contracts in 2025. Anyone trading should verify the legal status of their chosen platform before putting money in.
The Trillion-Dollar Projection and What Comes Next
Sports contracts are expected to account for 44% of that long-run volume. At early 2026, combined monthly run rates across Polymarket and Kalshi, the industry is already tracking toward $200 billion or more in annual volume.
Institutional adoption is picking up speed. ICE (Intercontinental Exchange), the NYSE’s parent company, has committed to distributing prediction market data as sentiment indicators to its institutional client base globally. As Finance Magnates has reported, prediction markets are now being discussed not just as a new asset class but as a structural pivot point for parts of the broader retail trading industry, with real event contracts replacing simulated trading environments.
The convergence of financial markets and information markets is not going to reverse. Prediction markets have moved from a regulatory grey area to a space where some of the world’s largest financial institutions, derivatives exchanges, and sports leagues are all involved. The asset class is real, it is growing fast, and it is becoming a standard part of how both individuals and institutions price uncertainty about the future.
FAQs: Prediction Markets
Q: What is a prediction market?
A marketplace where traders buy and sell contracts on real-world event outcomes. Prices reflect collective probability. Correct prediction pays $1 per contract. Wrong prediction pays $0.
Q: Are prediction markets legal?
Varies by jurisdiction. Some platforms are federally regulated and fully legal across the US. Always check the rules where you are before trading.
Q: Who trades prediction markets?
Mostly retail, but that’s changing. Acuiti’s Q4 2025 report found 10% of prop trading firms globally are already active, and 75% of US firms are trading or evaluating them.