By What Is a Prediction Market, and How Does It Work?
A prediction market lets you trade on whether something will actually happen, will the Fed cut rates, will a bill pass, will a team win, instead of just reading someone's opinion about it. The price of the contract moves as new information comes in, and that price is basically the crowd's best guess at the odds, updated in real time.
How the trading actually works
Most contracts are structured as a yes-or-no question with a contract that pays out $1 if the answer turns out to be yes, and nothing if it's no. If a contract is trading at 65 cents, that's the market saying it thinks there's roughly a 65% chance the event happens. You can buy in expecting yes, sell expecting no, and the price just floats based on who's willing to trade at what level, same basic supply and demand as any other market.
Where the idea actually came from
The concept isn't new. The Iowa Electronic Markets, run by the University of Iowa since 1988, let people trade small-dollar contracts on election outcomes for academic research purposes, and researchers found the resulting prices predicted results about as well or better then traditional polling. PredictIt, launched in 2014, brought a version of that idea to a wider audience, operating for years under a no-action letter from the CFTC before that relief got pulled in 2022, which set off a legal fight that shaped a lot of what came after.
The two names everyone actually means today
Kalshi got its CFTC designation as a contract market in 2020, the first federally regulated event contract exchange in the US, and opened to the public in 2021. It settles trades in regular dollars and has leaned heavily into sports contracts alongside politics and economic data. Polymarket, built on the Polygon blockchain and settling trades in USDC (a stablecoin, covered in what a stablecoin actually is), grew fast around political and world-event markets and became the platform most people associate with the 2024 US election. It's since expanded into the US directly through its acquisition of QCEX, a CFTC-regulated exchange, giving it a regulated domestic arm alongside its larger international platform.
Why the prices actually tend to be pretty good
- Real money on the line tends to discourage people from just saying what they wish were true.
- Anyone who thinks the price is wrong has a direct financial incentive to trade against it, which pulls the price back toward whatever the crowd actually believes.
- The price updates continuously as news breaks, rather than sitting still between the next poll or the next headline.
None of that makes prediction markets infallible, they can and do get things wrong, especially on thin, low-volume markets where a single large trade can move the price further than it should. But the underlying mechanism, real stakes plus continuous trading, is a different way of aggregating a crowd's belief than a poll or a pundit's take.
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Combined monthly volume across the major platforms has been running into the tens of billions of dollars through 2026, and the legal picture is still very much unsettled, several states have moved to restrict or ban these markets while the CFTC has pushed back arguing federal law preempts them. For the state-by-state and platform-by-platform detail, see Kalshi vs Polymarket.
For a full landscape view of who's actually winning share in this space right now, see the state of prediction markets in 2026.
This explains how prediction markets work generally. It isn't advice to trade on any platform, and the legal status of these markets varies by state and is actively changing. Check your local rules before participating in anything.