What are prediction markets?
Prediction markets are sites where you can trade contracts based on the outcome of specific future events. Each contract is a simple Yes/No agreement that represents a specific result, such as whether an event will happen or not. Prediction markets span several categories, from politics and economics to sports, culture, and weather. The events you can trade on have been made very simple and straightforward, so they’re easy to get to grips with.
For instance, in economics you’ll find contracts such as whether crude oil will hit $110 by the end of April, while sports markets may ask who will win the UEFA Champions League. The range of events is extensive too. If it’s something important happening in the real world, there’s a good chance a prediction market exists for it.
If you’ve been curious and asking: what are event predictions? I hope this clears it up.
Are prediction markets legal in the US?
So, are prediction markets legal in the United States? Before buying or selling event contracts, it’s important to first check the legal status of these sites. That’s exactly what I did, and here’s what I found out.
Prediction markets are indeed legit when regulated by the Commodity Futures Trading Commission (CFTC). The CFTC is an independent agency that regulates the United States derivatives markets, which includes futures, swaps, and certain kinds of trading options.
Prediction markets authorized by the CFTC are called Designated Contract Markets (DCM), such as those featured on the banners on this page.
You can sign up at any of these sites if you’re at least 18 years old, or the minimum age required by the exchange. You simply need to complete the required Know Your Customer (KYC) verification checks by submitting a valid ID and start trading on any event contract you prefer.
How do prediction markets work?
Now that we’ve covered what is a prediction market, the next question is how it works. Each prediction market is based on two possibilities: if an event will occur or not. There are no in-betweens. You’ll find that each prediction market offers Yes/No event contracts, and you’ll decide which option you think will happen.
The price of an event contract is between $0.01 and $0.99, and it’s a good indicator of traders’ expectations. Contract prices that are close to $0.01 mean other traders on the platform think the event has a low chance of occurring, while prices close to $0.99 usually mean it’s more likely to happen. For example, if a Yes contract for “Will X wins the 2028 presidential election?” is trading at $0.21, the market is suggesting there’s a 21% chance of that outcome.
Correct predictions settle at $1, while incorrect choices settle as $0. So if you bought a Yes contract for $0.21 and it actually happens, you’ll receive $1 per contract. This means a $0.79 profit per contract you hold. If it doesn’t happen, you lose only what you spent on purchasing the contract. I’ve covered more on this in my Kalshi vs Robinhood guide.
The contract prices aren’t fixed and constantly change to reflect what traders think will happen. One reason event prices change is that traders adjust their positions based on news, data, and demand for certain contracts. If more traders start buying Yes contracts, the price will go up. But if more traders choose to sell their positions, the contract price usually drops. Remember that you don’t have to wait for an event to settle. You can choose to sell your position early and lock in profits or mitigate losses if preferred.
What future events can be traded in prediction markets?
One of the interesting things about prediction markets is that there’s an extensive range of events you can trade on. These markets aren’t limited to a single topic, so you have the flexibility to choose what suits you best.
Here are some common categories you’ll find at prediction markets:
| Categories | Event contract details |
|---|---|
| Politics | Focused on government decisions, elections, party races and even international developments as long as it garners public interests. |
| Sports | You can trade on event contracts on major tournaments and leagues like the NFL, MLB, and NBA. You can also trade on live sporting events. |
| Crypto | You’ll find contracts on whether the price of Bitcoin or other altcoins will trade above a certain number by a set date or if it will stay within a set range for the month. |
| Economy | These are contracts often on economic indicators and policy decisions, such as whether interest rates will be increased or cut during the next Fed meeting. |
| Weather/Science | Event contracts often span both international and regional weather conditions. For example, what will the highest temperature be on June 12? |
| Culture | You can take positions on pop culture and entertainment such as major award events, such as which film will win Best Picture at the Oscars or whether an artist will reach the top of the Billboard charts. |
How to join prediction market sites and make your first trade
Joining a prediction market and making your first trade is quite easy, and you’ll have access to all the available markets and event contracts within minutes. Bear in mind that ID verification is required to stay compliant with the CFTC’s rules, so you might want to have it within reach.
Here’s how to start trading on event contracts:
- Choose a legit prediction market site like those listed on the banners on this page.
- Visit your chosen site and sign up entering your personal details including your name and email address.
- Verify your identity KYC by uploading a government-issued ID and a selfie.
- Add funds to your account using any of the supported payment methods.
- Browse through the available markets to find event contracts that interest you.
- Decide whether you want to buy a Yes or No contract based on what you think will happen in future.
- Place your first trade by entering the number of contracts you want to purchase and confirming your transaction.
Still undecided on which prediction market platform to use? You may find my review on Kalshi vs Polymarket useful. These are two of the top prediction sites in the US.
How accurate are prediction markets?
Fairly accurate. Prediction markets are considered to be more reliable than regular forecasting methods because event prices, which signal the probability of something happening or not, reflect the views of thousands of traders instead of just one expert opinion. When users on these sites buy or sell their positions, the event price adjusts to show what the market believes is most likely to happen.
But then, even prediction markets aren’t without a few flaws. Traders can overreact to rumors and highly unexpected developments can happen at the last minute. So while useful, prediction markets aren’t guaranteed forecasts.
Pros and cons of trading on prediction markets
Aside from answering the question of what is a prediction market, it’s also important to highlight the major pros and cons of trading on these markets.
Pros
- Access to markets on many real-world events
- You can sell your position before settlement
- KYC verification is required
Cons
- Small trading fees may be charged at some sites
Conclusion: Only trade on legit prediction markets
Not only do you now have an answer to the question: what is a prediction market, but you also know the legal status of these markets, the types of events you can trade on, and how to get started. These markets let you trade on the outcome of actual events through simple Yes or No contracts based on what you feel may happen in the future.
Prediction markets cover an extensive range of topics. You’ll find contracts on everything from politics and sports to culture, weather, crypto, and any other trending topic that catches the interest of the public. Remember to only use legit sites that are regulated by the Commodity Futures Trading Commission (CFTC).
Interested in trying prediction markets yourself? The brands featured in the banners on this page highlight some of the top options currently available in the US.
