Prediction Markets Explained

Prediction markets are the fastest-growing product in American gambling and the subject of the industry's largest legal fight, and the two facts are connected. A prediction market lets people trade contracts on whether an event will happen, at prices that move with the market's estimate of the probability, and it has grown from a niche for election forecasters into a venue that trades billions of dollars on football weekends. Whether it is gambling at all is being decided in a dozen courts. This guide explains what a prediction market is, how it works, how it makes money, why it is legally contested, how it compares with a sportsbook, and what has happened so far.

What a prediction market is

A prediction market sells contracts on the outcome of events. The standard contract pays $1 if the event happens and $0 if it does not, and trades at a price between the two. If a contract on "Team A wins on Sunday" trades at 63 cents, the market is saying there is a 63 per cent chance Team A wins. A buyer who pays 63 cents wins 37 cents if the team wins and loses 63 cents if it does not; the seller takes the opposite position. The venue matches the two and charges a fee. It is not a party to the bet.

That structure is the whole subject. A sportsbook sets a price and takes the other side of every bet; a prediction market is an exchange on which customers bet with each other. Every property of the product follows from the difference.

Price is probability. Because the contract settles at $1 or $0, its price is the market's estimate of the probability of the event. Prices move as information arrives and as money flows, and a liquid market's price is often a better forecast than any single expert.

Yes and no are one book. Buying "no" at 37 cents is the same position as selling "yes" at 63. The venue holds the combined dollar as collateral until the event resolves, so it carries no credit risk and no liability on the outcome.

Resolution rules decide everything. Each contract specifies what source will be consulted and what counts as "yes". Sport is easy (the official score); economic data is manageable (the published statistic, with rules for revisions); political and world events are hard, and contested resolutions are where prediction markets have lost trust.

The venues

Three kinds of venue exist, and the distinction is legal before it is technical.

Regulated exchanges are designated contract markets registered with the US Commodity Futures Trading Commission (CFTC) under the Commodity Exchange Act. Their contracts are federally regulated derivatives, their customers are identified, their funds are in dollars, and they are subject to exchange rules on manipulation and surveillance. This is the model that won the fight over election contracts and carried sports contracts into every American state.

Crypto-native venues trade contracts in stablecoins on public blockchains, hold positions in customers' wallets, and resolve outcomes through an oracle in which token holders vote. They historically excluded American customers under a settlement with the CFTC, served the rest of the world without a licence from anyone, and have been blocked by gambling regulators in a growing list of countries. The largest has bought a designated exchange to re-enter America on the regulated model.

Licensed betting exchanges, which have offered peer-to-peer betting on sport under gambling licences in Britain and elsewhere for two decades. Structurally the same product, regulated and taxed as betting.

How the venues make money

An exchange charges a fee per trade rather than building a margin into a price. The fee is usually a small percentage that varies with the contract price, highest around 50 cents and near zero at the extremes, and is often charged to the "taker" who hits a resting order rather than the "maker" who posted it, because resting orders are the liquidity everyone else trades against. A round trip on a liquid contract costs a customer well under 2 per cent, against a sportsbook margin of 4 to 5 per cent on a mainstream market and far more on parlays.

The consequence is that an exchange earns much less per dollar wagered than a bookmaker and needs far more volume. Liquidity, the ability to trade size near the current price, is the quality that matters, and it comes from professional market makers, from informed traders (the sharp bettors a sportsbook would limit) and from hedging flow, including from bookmakers laying off their own risk. Sport is the category that supplies daily, repeatable volume, which is why the venues moved into it and why the fight followed.

The legal fight

The question is which body of law governs a contract on a game.

Gambling law in the United States is state law: each state decides whether betting is legal, on what and through whom. Derivatives law is federal: the Commodity Exchange Act gives the CFTC authority over futures, options and swaps, and contains a clause stating that its jurisdiction over contracts traded on a designated exchange is exclusive. A 2010 amendment allows the CFTC to prohibit event contracts that involve "gaming", terrorism, war or activity unlawful under state or federal law if it finds them contrary to the public interest.

Elections first. In 2023 the CFTC refused to allow an exchange to list contracts on control of Congress, calling them gaming. The exchange sued, a federal court in Washington held in 2024 that election betting was not "gaming" in the statute's sense and that the commission had not shown a public-interest case, an appeals court declined to block the ruling, contracts traded through the 2024 presidential election, and in 2025 the commission dropped its appeal.

Then sport. In early 2025 the largest exchanges listed contracts on sporting events. Within weeks, gaming regulators in Nevada, New Jersey, Ohio, Maryland, Illinois and others issued cease-and-desist orders asserting the contracts were unlicensed sports wagering. The exchanges sued for injunctions, arguing federal preemption. Several district courts granted them; at least one refused. Massachusetts, Connecticut, New York and others sued the exchanges or the distributors of their contracts. Tribal governments, whose compacts give them exclusivity, sued too.

The first appellate rulings. In September 2026 the Ninth Circuit ruled against the leading exchange twice in three weeks: reversing an injunction that had protected it from Nevada's enforcement, and holding, in a case brought by California tribes, that sports contracts offered on tribal land are class III gaming under the Indian Gaming Regulatory Act, a statute that gives tribes and states control regardless of the CFTC. The exchange has petitioned the Supreme Court, whose conference on the petition is scheduled for late September 2026. The CFTC itself, under a new chair, has filed briefs supporting the exchanges and sued at least one state to block its enforcement.

Where it stands. A split, with the states and tribes winning the first appellate rounds, the exchanges holding injunctions in some districts, the Supreme Court being asked to resolve it, and state attorneys general continuing to issue letters and file suits. The likeliest outcome, on most lawyers' reading, is a line drawn between contracts with an economic purpose and contracts that are wagers on games, and years of argument about where it falls.

Outside the United States, the answer has been quick and uniform: a contract on an uncertain event offered to the public for money is a bet and needs a gambling licence. Regulators in Britain, France, Belgium, Singapore, Denmark, Lithuania and South Korea, among others, have said so, and several have ordered the crypto-native venues blocked. South Korea has gone further and referred users to prosecutors.

Prediction markets versus sportsbooks

Put the two products side by side for one customer backing one team.

Price. The exchange is cheaper on a liquid mainstream market, often by half. On niche markets and for parlays, the sportsbook is deeper and the exchange may not have a market at all.

Limits. A sportsbook limits winners because it is the counterparty. An exchange welcomes them because it is not. The professional money moved to exchanges within weeks.

Age and geography. A regulated sportsbook customer must be 21 and in a legal state; a designated exchange's customer must be 18 and anywhere in the United States. The population in states without legal sports betting is larger than the population of every legal state combined, which is why the exchanges grew as they did.

Tax and obligations. A sportsbook pays state gaming tax, funds harm prevention and answers to a state regulator. An exchange pays none of that. The states' fiscal interest is the reason attorneys general, not gaming commissions, have led the litigation.

Consumer protection. Sportsbooks are required to offer deposit limits, self-exclusion, affordability checks in some markets and trained staff. Exchanges have adopted some tools voluntarily. This is the states' strongest argument with the public.

Product. Sportsbooks offer thousands of markets, parlays and promotions. Exchanges offer the main markets plus the events no gambling regulator would license: elections, economic data, court rulings, awards.

The industry's response

Through the first half of 2025 the licensed industry argued that sports contracts were illegal gambling. By the end of the year its largest operators had applied for exchange designation, bought exchanges or signed partnerships to distribute contracts through their apps, usually in the states where they hold no sports betting licence. Nothing about the legal argument changed; the arithmetic of an untaxed national product at 18 did. Brokerages distribute contracts to tens of millions of verified customers in the same screen as stocks; leagues and data companies have signed with the venues; and the exchanges' volumes on football weekends now rival the handle of the largest licensed states.

Integrity

Prediction markets share sports betting's integrity risks and add their own. Insider trading on contracts about corporate actions, rulings and appointments has produced public cases and CFTC investigations. Motivated manipulation, moving a price because the price itself is reported, was the story of the 2024 election. Contested resolutions on crypto-native venues have been gamed by large token holders. And markets on events that participants can influence are the boundary the academic literature always drew and the venues have not always respected. The Prediction Markets and Event Contracts course gives integrity a full lesson.

Frequently asked questions

Are prediction markets legal? In the United States, regulated exchanges are legal under federal derivatives law; whether their sports contracts are legal under state gambling law is being litigated, with the states winning the first appellate rounds. Outside the United States, most regulators treat them as betting requiring a gambling licence.

Are prediction markets gambling? The exchanges say no and hold a federal designation; the states say yes and hold the definition of gambling. The courts are split and the Supreme Court has been asked.

How do prediction markets make money? A fee per trade, usually a small percentage charged to the taker, rather than a margin in the price. They earn less per dollar than a bookmaker and need more volume.

What is the difference between Kalshi and Polymarket? One is a CFTC-designated exchange trading in dollars with identified customers; the other began as a crypto-native venue trading in stablecoins on a blockchain, excluded from the United States, and has since acquired a designated exchange to re-enter.

Can I bet on sport on a prediction market? In the United States, on the regulated exchanges, in every state, at 18, at the time of writing; state enforcement and court rulings may change that state by state.

Related on iGaming Times

Prediction Markets and Event Contracts is the full course for industry professionals. How Bookmakers Set Odds and Make Money explains the model the exchanges compete with. The Prediction Markets news category carries the litigation as it happens.

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Regulation, tax and market figures move quickly, sometimes mid-year. Where this guide gives a number, treat it as a starting point and confirm the current position with the named primary source before you rely on it.