What Is a Prediction Market? Everything to Know

Prediction markets let people speculate on the outcomes of real-world events. Whether it’s inflation, elections, interest rates, or pop culture, these markets allow users to buy and sell contracts that reflect what they think may happen.

In this guide, you’ll learn what prediction markets are, how they work, and how they compare to regulated products like event contracts. You’ll also see where they are legal, how people use them, and what to expect from this growing space in 2025 and beyond.

Key Takeaways

• Prediction markets let people trade on real-world outcomes. Users buy Yes or No contracts tied to specific events, with payouts based on whether the event happens.

• Contract prices reflect the crowd’s belief in the outcome. If more people think an event will happen, the price of a Yes contract rises closer to $1.

• Some prediction markets are regulated, while others are not. Platforms like Kalshi and PredictIt operate under CFTC oversight, but others like Polymarket are still navigating U.S. regulatory pathways.
  
• Event contracts are a regulated form of prediction market. They offer simplified, fixed-risk trades on market outcomes like interest rates, inflation, or equity indexes.

What Is a Prediction Market?

A prediction market is a financial platform that lets people trade contracts tied to the outcome of a specific event. The contracts are typically binary: they either settle at $1 if the event occurs, or $0 if it does not.

The price of the contract reflects the collective belief in the outcome. If a contract titled “Will inflation be over 3.5% this month?” is trading at $0.72, the market believes there’s roughly a 72 percent chance it will happen.

Prediction markets are often used for forecasting, speculation, and research. In some cases, they also serve as hedging tools.

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How Prediction Markets Work

Prediction markets operate like any other market. Buyers and sellers place orders, and contracts are priced based on supply and demand. Here’s a typical flow:

1. A contract is created with a clear Yes or No outcome.

2. Users choose to buy either the Yes or No side of the trade.

3. The price of each contract ranges from $0.01 to $0.99.

4. When the event resolves, the winning side receives $1 per contract.

5. Profit or loss is determined by the difference between the purchase price and the final settlement value.

If you buy a Yes contract at $0.40 and it resolves in your favor, you earn $1. Your profit is $1 minus the $0.40 you paid, or $0.60. If you’re wrong, you lose the $0.40 you spent.

Popular Prediction Markets in 2025

A growing number of platforms offer prediction markets, with different regulations, topics, and user bases. Some focus on U.S.-compliant event contracts. Others operate overseas or on decentralized networks.

Here are the most active prediction platforms in 2025:

Kalshi

Kalshi is a CFTC-regulated exchange that allows users to trade on the outcomes of real-world events. It started with contracts on financial and economic topics but has recently expanded into sports-related markets.

As of 2025, Kalshi offers contracts like:

• Will the Federal Reserve raise interest rates at the next meeting?

• Will CPI come in above 3.5% this month?

• Will [Player Name] score more than two touchdowns this week?

• Will the S&P 500 close above 6500 on Friday?

Kalshi argues that its sports-related contracts are legal under federal commodities law. However, multiple states have pushed back. Massachusetts filed a lawsuit in September 2025, accusing Kalshi of running an unlicensed sportsbook. Other states, including Arizona, Illinois, Montana, and Ohio, have issued cease-and-desist orders.

Despite this legal pressure, Kalshi has reported over $400 million in volume during major sports events, including the 2025 NFL kickoff and March Madness.

Kalshi’s contracts are regulated by the CFTC, not by individual state gambling commissions. This makes it a key test case for how event contracts and sports regulation will overlap in the future.

Polymarket

Polymarket is a blockchain-based prediction market where traders use USDC to buy Yes/No shares on global events. It has been a popular platform for political, tech, and cultural contracts.

Past contracts have included:

• Will Trump win the presidential election?

• Will a Bitcoin ETF be approved by the SEC this year?

• Will a hurricane hit Florida in 2025?

• Will Apple release a new product by December?

Until recently, Polymarket was geo-blocked in the United States due to regulatory issues. In 2022, it settled with the CFTC for operating without registration.

In 2025, Polymarket acquired QCEX, a CFTC-regulated exchange and clearinghouse. This move allows Polymarket to resume U.S. operations under a legal framework. The Department of Justice and the CFTC have both closed their previous investigations into the platform.

Polymarket has not officially relaunched in the U.S. yet, but it now has a legal pathway to do so. Once live under QCEX, it may compete directly with Kalshi for regulated market share.

PredictIt

PredictIt is a U.S.-based prediction market platform focused primarily on political events. It originally operated under a no-action letter from the CFTC, which allowed limited trading for academic research purposes.

In 2022, the CFTC revoked that letter, leading to legal challenges and a pause in most activity. For several years, PredictIt operated in a reduced capacity while court cases played out.

In mid-2025, a federal court ruled in PredictIt’s favor. Soon after, the CFTC approved two licenses for its operator, Aristotle Inc. These approvals allow PredictIt to relaunch as a fully regulated U.S. exchange. The new platform is expected to go live in October 2025.

Under its new structure, PredictIt plans to expand beyond politics and offer a broader set of event markets. It also expects to increase position limits, improve liquidity, and remove many of the previous academic-use restrictions. PredictIt’s return creates new competition for Kalshi in the regulated event contract space, especially around election-related markets.

What Are Event Contracts?

Event contracts are a regulated type of prediction market contract. They offer simple Yes or No outcomes and fixed payouts, but they are listed on CFTC-regulated exchanges like the CME Group.

Event contracts are designed to allow low-cost speculation on clearly defined financial or economic outcomes. The most common provider of event contracts today is Kalshi, though the CME Group has also experimented with similar products.

Examples of event contracts include:

• Will the 10-Year Treasury yield close above 4 percent this week?

• Will gold prices finish the month higher than last month?

These contracts are designed to resemble binary options or simplified futures but without leverage, margin, or complex settlement.

Why People Use Prediction Markets

Prediction markets serve several purposes depending on the user’s goals.

Profit through speculation

Many traders use prediction markets to profit by buying undervalued outcomes. If you believe the market is mispricing an event, you can buy at a lower price and profit when it resolves in your favor.

Hedging economic exposure

Some users hedge real-world risks. For example, a small business owner worried about inflation may buy contracts that pay out if inflation rises.

Crowd-sourced forecasting

Prediction markets use financial incentives to create crowd forecasts. These markets often outperform expert predictions and political polls because participants are putting money behind their beliefs.

Research and academic use

Colleges and think tanks use prediction markets to study decision-making, information flow, and event forecasting. Platforms like Metaculus are often used in research settings.

Are Prediction Markets Legal?

Legality depends on the platform and location. In the U.S., prediction markets must comply with CFTC rules, which are strict about what topics can be traded.

• Kalshi operates legally under full CFTC regulation.

• CME Group offers similar regulated contracts for institutional traders.

• Polymarket is currently restricted in the U.S. and blocks American users.

• PredictIt is expected to re-launch in October of 2025.

• Unregulated or offshore platforms may exist but carry legal risk.

Most regulated platforms are limited to market-based outcomes like interest rates, inflation, and asset prices. Certain political and health-related contracts are not currently allowed under CFTC rules.

Prediction Markets vs Futures Trading

While prediction markets and futures contracts both involve trading based on future outcomes, they serve different purposes and are structured in very different ways.

• Risk exposure: Prediction markets use fixed-risk contracts, meaning you can never lose more than your entry price. Futures contracts may involve leverage and margin, which can increase both potential gains and losses.

• Contract structure: Prediction markets use binary Yes/No contracts that settle at a fixed value, usually $1. Futures contracts use continuous pricing and can fluctuate throughout the day.

• Complexity: Prediction markets are simple to understand and easy to access. Futures trading requires a deeper understanding of margin requirements, position sizing, and price movement.

• Use case: Prediction markets are mainly used for forecasting and speculation. Futures are used for hedging, speculation, and managing price risk in underlying assets.

• Regulation: Futures are heavily regulated and standardized across major exchanges. Prediction markets vary in regulation depending on the platform, with some operating under full CFTC oversight and others remaining unregulated or offshore.

• Settlement: Futures contracts often use mark-to-market settlement and can be closed before expiration. Prediction markets typically resolve based on a single event outcome and settle at $1 or $0, depending on the result.

How Accurate Are Prediction Markets?

When liquidity is high and the contract is clearly defined, prediction markets can be highly accurate. Studies have shown that well-designed markets often outperform:

• Political polls

• Expert forecasts

• Financial analyst predictions

This is because markets aggregate information from many participants who have real incentives to be right. However, accuracy suffers when markets lack volume, transparency, or proper resolution rules.

Risks and Limitations of Prediction Markets

Prediction markets offer a unique way to speculate and forecast, but they are not without flaws. Before trading, it’s important to understand the key risks and limitations these platforms face.

• Low liquidity: Many prediction markets suffer from low trading volume, especially in less popular contracts. Thin order books can lead to wide bid-ask spreads, unreliable pricing, and difficulty entering or exiting positions without slippage.
• Manipulation risk: In low-volume markets, a single large trader can move prices significantly. This opens the door to market manipulation, where participants may buy or sell in size not to profit, but to influence public perception or media narratives.
• Legal uncertainty: Not all prediction markets operate under clear regulatory frameworks. While platforms like Kalshi are regulated by the CFTC, others like Polymarket have faced enforcement actions. U.S. traders may be restricted from using offshore or decentralized platforms, and regulatory changes can disrupt access.
• Over-simplified outcomes: Most prediction markets use binary contracts that pay out $1 if an event happens and $0 if it doesn’t. This structure can be too simplistic for complex events, especially when outcomes are subjective, disputed, or occur in multiple stages.
• Unclear resolution criteria: Some markets suffer from vague or poorly defined settlement rules. If the outcome of an event is unclear, delayed, or disputed, users may find themselves waiting for a decision or disagreeing with how the market resolves.
• Geographic restrictions: Certain platforms are geo-blocked for users in specific countries, including the United States. VPN use may violate terms of service, and violating platform rules can result in frozen funds or closed accounts.

The Future of Prediction Markets

The prediction market space is expanding. Several trends are shaping the future of this industry:

• More event contracts: Regulated platforms like Kalshi are lobbying for broader topic approval.

• Decentralized platforms: Crypto-based markets like Polymarket are growing rapidly overseas.

• Institutional use: Hedge funds and economists are using these markets to track sentiment and model outcomes.

• AI integration: Some platforms are combining human input with AI forecasts.

• Regulatory reform: Advocates are pushing for clearer rules to allow markets on politics, weather, and more.

Prediction markets may one day be as common as polling or analyst reports for understanding public belief.

Conclusion

Prediction markets give traders and analysts a new way to understand what people believe about the future. Whether you’re watching the Fed, inflation data, or elections, these markets offer real-time forecasts powered by financial incentives.

Regulated event contracts now offer a secure and legal way for U.S. traders to participate. Meanwhile, decentralized platforms continue to push boundaries overseas.

As the industry matures, prediction markets could play a larger role in forecasting, research, and even policymaking.

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The content provided is for informational and educational purposes only and should not be considered trading, investment, tax, or legal advice. Futures trading involves substantial risk and is not suitable for every investor. Past performance is not indicative of future results. You should carefully consider whether trading is appropriate for your financial situation. Always consult with a licensed financial professional before making any trading decisions. MetroTrade is not liable for any losses or damages arising from the use of this content.