What is a prediction market? Many have asked that question as prediction markets become more popular. A prediction market is a real-money trading platform for anyone who wants to predict the outcome of sports events or global affairs.
Offered in a “Yes/No” format, contracts traded on prediction market platforms are priced between 1 cent and 99 cents and pay out at $1 each if the prediction turns out to be correct.
This InGame page on prediction markets will cover these differences, along with other pertinent information that prediction market newcomers need to know when signing up for and participating in a prediction market community.
How prediction markets work
Prediction market contracts are futures contracts, which are regulated under the authority of the Commodity Futures Trading Commission (CFTC).
Futures are a derivative contract that are tied to a future event. Buyers and sellers agree on the price of a contract, and the price moves based on demand. Once the event occurs, the “winner” gets paid out $1 per contract while contracts tied to the other side of the event expire worthless. We will go over a few examples later in the page.
Types of events traded on prediction markets
Theoretically, prediction markets can offer every single type of event (and wager type) that an online sportsbook does, plus much more.
The types of events traded on prediction markets can range from political elections and awards ceremony outcomes to commodity prices and even digital currency performance.
Sports
Predictions typically revolve around game outcomes, but often expand into other trade types if player liquidity is large enough.
Politics
Make a trade on who will win a particular election or whether a referendum will pass. Coverage spans from national to international outcomes.
Awards and entertainment
Predict who will win the Nobel Peace Prize, who will win the Oscars, and much more.
Economics and finance
How will a country’s GDP perform over a monthly or yearly basis? Will Bitcoin be priced at more than $100,000 at the beginning of the upcoming month? You can trade on a wide variety of events tied to economics and finance.
Weather forecasting
Larger apps may offer contracts on events such as the average monthly temperature or daily high/low measurements.
Biggest prediction market operators
The biggest operators are those who got into the space “early” and built an enormous amount of player liquidity before state regulators started paying attention to the industry.
Kalshi has become the most popular prediction market platform in the US. Technically, Kalshi is legal in all 50 states, but some states have alleged in lawsuits that Kalshi and other prediction market platforms are operating unregulated sportsbooks in their states.
Online brokerages, including Robinhood Prediction Markets, which allow customers to access and trade contracts from other platforms (like Kalshi) are also gaining popularity, but still don’t offer as many “pro-friendly” tools as Kalshi.
For more, check out our InGame prediction market content.
- Prediction market responsible gambling
- PredictIt review
- DraftKings Predictions Promo Code
- Prediction market glossary
- Polymarket vs. PredictIt
- Are prediction markets legal in the US?
How prediction markets differ from sportsbooks
Instead of the traditional -110 or -115 lines that you might see in an online sportsbook app, a comparable prediction market selection might appear as a 50¢ per-contract offer.
This is due to:
- The “Yes/No” format of contracts listed on prediction market apps, and
- The per-contract or percentage-based commission fees that these apps charge
A $115 online sportsbook bet at -115 will pay out $100 when successful.
A $115 prediction market trade at 50¢ includes 230 individual contracts, which would be worth $115 in profit (before fees) if the selection is successful.
Prediction market fees
While fees vary by operator, most fees are calculated on a per-contract basis, or as a percentage of the total amount of each trade.
Fees (even if they are as low as $0.01) can quickly eat into a player’s winning amount when selecting huge underdogs or participating in prediction parlays.
If you’re buying a contract for $0.02 in hopes of a 49-to-1 payout if successful, a per-contract fee will increase the total cost of each contract to $0.03.
As a general rule, players will benefit more from percentage-based fees when selecting underdogs and per-contract fees when selecting favorites.
Keep in mind that these fees will also trigger each time you make a subsequent purchase or sale of existing contracts.
This peer-to-peer trade feature also means that you can trade contracts even while an event is currently in progress, as long as there is another party willing to accept your price.
Pros and cons of prediction markets
Pros
- Wide range of non-sports events to predict
- Easy-to-understand Yes/No prediction contracts with $1 payout on all successful contracts
- Lots of available resources to review before making your selection
- The ability to trade before and during events
- Federal regulatory oversight means some apps operate in all 50 states
- In-house proprietary trading tools on the apps
- Minimum age of 18 for some prediction market apps
Cons
- Fee structures can differ from sportsbooks
- Limited number of contract types
- Market availability is dependent on player liquidity
- State legal challenges may impact the legality of apps in the future
Regulation and state legal status
State regulators across the country are taking a very close look at the legal status of operators such as Kalshi, Polymarket, Crypto.com, Robinhood, and others.
In some extreme cases, apps have been forced to cease operations, refund existing customers, and/or pay state-based fines for operating “illegally” in select jurisdictions.
The scrutiny is exceptionally strict in terms of sports-related events, as many states already have formal regulatory infrastructure set up to collect taxes and oversee legal online sportsbooks.
Other apps could see their player liquidity implode if they continue to face challenges along with the prospect of hefty fines for operating in markets that already have state-regulated officials and tax collection mechanisms in place.
Conclusion
Prediction markets are a very attractive option for traditional sports bettors who want to expand their online activities into making real-time trades on other events.
As long as an app’s player liquidity is stable or increasing, the number of markets available on a prediction market app or site is sometimes greater than what you might find with a sports-only service. Player liquidity begets more player liquidity; and the flip side of that token is also true – a decrease in player liquidity can immediately make markets and contract types disappear.
Not only that, but you can trade with other players at relatively low prices before an event occurs or even during it in some cases.
Still, the specter of state-based crackdowns makes the regulatory environment for sports prediction apps far more “unfriendly” than it has been in previous years. If states with large populations (like New York, Florida, Illinois, Texas, and/or California are successful with legal efforts to curtail prediction markets, the apps that are affected will suffer an instant decrease in their own player liquidity, and thus, market availability.
