What Prediction Markets Are & How They Work

What Are Prediction Markets?

Prediction markets allow you to trade the outcomes of future events using real money, much like the stock market.

Each market is built around a single, clearly defined outcome, and prices move based on how likely people think that event will occur.

Every trade involves opposing views. People buy because the outcome looks more likely than the current price suggests. The other side sells because they see it as less likely. As information changes and sentiment shifts, prices move to reflect the new balance of opinion.

Prediction market platforms are where this trading takes place. They host the markets, match buyers and sellers, and handle settlement once the event is resolved.

In the United States, prediction markets are overseen by the Commodity Futures Trading Commission (CFTC). This is the same regulator responsible for futures contracts tied to commodities such as oil, corn, and interest rates.

Under United States federal law, certain prediction markets are classified as event-based derivatives rather than traditional gambling, allowing approved platforms to operate at the federal level rather than under state-by-state gambling laws.

Some of the most well-known names in the U.S. prediction market space today include Kalshi, Crypto.com (which also owns OG), Robinhood, and Polymarket.

How Prediction Markets Work

Prediction market apps work like open marketplaces where people trade opinions on future events using real money.

Every trade is peer-to-peer. When you buy a contract, you are not buying it directly from the app. Someone else is taking the opposite side of that same position.

For every “Yes” purchased, there is a corresponding “No” sold.

Each market comes down to a single decision point, framed as a single question.

• “Will Team A win the game?”
• “Will inflation be above 3% this quarter?”

For each question, there are only 2 choices.

• Yes means you think it happens.
• No means you think it doesn’t

That’s it.

There is no middle ground and no partial win. When the event is over, one side is right, and the other side is wrong.

Prices, Percentages, and Market Belief

Each market has a contract price between $0 and $1. Think of each contract as a ticket that turns into cash if the event breaks your way.

The contract price reflects market expectations of the outcome at any given moment. As traders buy and sell around their beliefs about the outcome, the price moves.

The easiest way to understand the price is to interpret it as the market’s probability, expressed as a percentage:

• A $0.30 price suggests the market assigns roughly a 30% probability to that outcome.
• A $0.50 price implies a true coin flip, about 50–50.
• A $0.80 price implies that the market assigns approximately an 80% probability to the outcome.

Bottom line: prices provide a quick snapshot of what the market believes.

• Lower prices mean fewer people believe in that outcome.
• Higher prices indicate that most traders expect the outcome.

The gap between the market prices of the two possible outcomes is called the spread. A larger spread signals uncertainty in the market, while a tighter spread signals an efficient market with a lot of liquidity.

How Trades Play Out From Start to Finish

When you click to buy, you’re really only making one of two calls.

“I think the chances are higher than this price suggests,” or “I think the chances are lower than the market believes.”

You can buy a single contract or multiple contracts. If you want to put more money behind your prediction, you simply buy more contracts at the same price. Each contract is counted separately, but they all follow the same rule.

After you buy, the price of your contract won’t remain fixed. As other traders buy and sell, and new information comes in, the value of the contract you are holding changes along with it.

Sometimes, prices move slowly. Other times, it is a sharp swing.

In any case, at any moment, you are in control.

You can ride it out until the event is settled.

Alternatively, you can exit early if you do not like where things are headed.

If the price rises while you hold “Yes,” you can sell and secure a profit before the event ends. If the price drops, you can sell sooner and limit your loss. No rule says you have to wait for the final result.

When the event concludes, the result is clear and settled.

• If the event occurs, the contract pays out $1.
• If it doesn’t happen, the contract settles at $0.

Because the contract can only settle in one of two ways—full payout at $1 per share or no payout at all—these are known as binary contracts.

How Orders Get Executed: Taker and Maker Explained

On some prediction market platforms, such as Kalshi, you have two ways to enter a trade. What you are buying stays the same. The difference is how you choose to buy it.

In simple terms:

• A taker wants in right away and is buying shares at prices that are currently available.
• A maker is willing to wait for a better price and sets limit orders to only buy if the price hits a certain point.

A market taker wants instant execution. You enter the price on the screen, click Buy or Sell, and your order goes through immediately.

This approach makes sense when:

• Getting the trade done quickly is the priority.
• You think the price is about to move.
• You don’t want to spend time thinking about the perfect entry price.

The downside is that takers usually:

• Pay a higher fee.
• Accept whatever price the market is offering at that moment.

Put simply, a taker is saying, “I want in now, at this price.” They buy at the lowest Ask price, such as 45c in the example below.

A market maker does the opposite. Instead of jumping in right away, you name your price and wait for the market to come to you.

For example, you decide, “I’ll buy ‘Yes’ if the price drops to $0.40.”

That order stays on the market as a Bid (see above screenshot). If someone is willing to trade at that price, the order goes through.

Makers are the ones who leave orders waiting and provide the market with liquidity.

On platforms like Kalshi, makers often:

• Pay smaller fees than takers.
• Get a better entry price.
• Accept the risk that the trade never fills.

An Example of How Trading on Prediction Market Apps Works

The easiest way to get a sense of prediction markets is to watch one trade play out.

In the final week of the NFL regular season, the Commanders played the Eagles, and I had a hunch Philly might rest starters.

When I checked the market on Monday, “No – Philadelphia” was around 22¢, so I took it. 

Once the Eagles made it official that starters were sitting, the market snapped into place fast, and that “No” price jumped into the mid-30s.

Instead of bailing right away, I posted a limit sell at 37¢ and let it sit.

The move I was waiting for showed up, and I sold the No position into that spike.

After that, I flipped sides and bought Philadelphia instead.

Live: Managing the Philly Side

Once the game kicked off, the price kept swinging with every shift in game flow. 

A few times, I thought about cashing out, but I stayed put. 

Late in the game, I added a little more on Philadelphia since I thought there was value based on the current situation in the game:

The Eagles ended up losing, and I never sold my position during the game, so I ended up losing for no return.

This is a great example of how easy it is to buy and sell positions on prediction markets. 

Unlike traditional sportsbooks, where a cashout may be unavailable, you can sell at any time with prediction markets (assuming there is liquidity, which there almost always is). 

Understanding Liquidity on Prediction Market Apps

Liquidity in prediction markets measures how much money is available in a market at any given time. It comes from traders actively buying and selling around the same outcome.

If you want to buy a contract, someone else has to sell it. If you want to sell, someone has to be willing to buy.

When that interest is not there, the price you see becomes more of a reference point than something you can actually trade at.

In high-liquidity markets:

• You can enter and exit quickly.
• Prices move less drastically.
• The spread between Yes and No asks is often small.

In low-liquidity markets:

• Orders can remain open for an extended period.
• You may have to take a worse price than the true fair value if you want to trade right away.
• Exiting before the event ends can be difficult or impossible.

This is why weak liquidity can erase a good edge. You can have the right read on a market, but if there is no one to trade with or the price moves against you when you try to exit, the advantage disappears.

Liquidity also varies widely across apps and markets. An NFL moneyline before kickoff might be very active, while a niche prop on the same platform can be virtually empty.

That is why using multiple prediction market apps can make sense. If one app does not have the depth you need to enter or exit cleanly, another one often will. Price matters, but without liquidity, price alone does not get you very far.

Fees and Pricing on Sports Prediction Market Apps

The platform does not set prices on prediction market apps.

Instead, they are formed by the interaction of supply and demand among users. The platform supplies the infrastructure, but the market participants determine the price.

Where platforms differ most is in how they charge for access to that market.

On trading-style prediction market apps like Kalshi and Crypto.com, fees are typically tied to entering and exiting positions.

You typically pay a small fee when you buy a contract and often another one when you sell.

Those fees usually depend on:

• The number of contracts you trade.
• The price of each contract.
• The type of order you place.

When maker and taker orders are available, fee levels depend on how you enter the trade.

For instance, maker fees on Kalshi are much lower than taker fees. The platform encourages users to post orders and help build liquidity. Takers, who trade at existing prices, usually pay higher costs because they use that liquidity.

You can get an idea of how maker and taker fees differ with our Kalshi fee calculator.

Common Categories in Prediction Markets

Prediction markets can cover almost any topic where there is a clear future outcome and a reliable way to verify it. In practice, markets cluster around a few major categories, ranging from sports and politics to economics and culture.

• Sports. Sports markets focus on specific outcomes tied to games, seasons, or player performance, with clearly defined settlement rules. A typical example looks like: “Will the Philadelphia Eagles win their game?”
• Mentions. Mentions markets are based on what people will say during events. Examples include what companies will say during earnings calls, what sports announcers will say during games, what Trump will say this week, and even what MrBeast will say in his next video.
• Politics. Political markets track elections, legislative outcomes, and other formal political decisions. These markets often run for more extended periods and settle based on official results. A typical example would be: “Will Candidate X win the 2028 presidential election?”
• Economy and finance. Markets in this category are tied to economic releases, central bank decisions, and key financial data points. Outcomes are settled using published figures. One common example is: “Will inflation be above 3% in the next CPI release?”
• Technology and business. Technology and business markets focus on measurable events such as product launches, regulatory rulings, or major price milestones. In practice, that often means questions like: “Will Bitcoin trade above $50,000 by the end of the year?”
• Climate and science. These markets rely on official datasets and scientific measurements to define outcomes. Settlement depends on published data rather than interpretation. An example would be: “Will a Category 4 hurricane make U.S. landfall this season?”
• Culture and entertainment. Cultural markets encompass film, music, and broader pop culture, while still focusing on outcomes that can be clearly verified. One example could be: “Will this film win Best Picture at the Oscars?”

How Prediction Markets Are Taxed

At the federal level in the U.S., profits from regulated prediction markets are generally taxable. Platforms like Kalshi, Polymarket, PredictIt, and similar services treat trading gains as reportable income.

Even if the platform never sends you a 1099 or W-2G, you are still responsible for reporting any net profit.

In most cases, the IRS treats gains from prediction markets as ordinary income. That means profits are taxed at your regular income tax rate.

You typically report the net amount after losses on your individual tax return, often on Schedule 1 of Form 1040.

There is still some gray area around classification. Some tax professionals argue that certain types of prediction market activity resemble investing and should be treated more like capital gains. Others see them as closer to gambling income. The IRS has not issued broad, clear guidance covering every prediction market use case, so interpretations can vary.

At the state level, rules can vary. Most states that tax income will include prediction market profits, but the way those profits are labeled can differ. Some states treat them as gambling income; others treat them as investment or miscellaneous income.

Because of that uncertainty, recordkeeping is important. Tracking every trade, entry, exit, profit, and loss makes it much easier to support your reporting if questions arise.

Bottom line, prediction market profits are not tax-free. If you make money, you are expected to report it and pay the appropriate taxes, even if no tax form ever shows up in your inbox.

Benefits of Prediction Markets

When used as intended, prediction markets provide advantages that you don’t get from sportsbooks or typical trading products.

• No built-in vig of juice. Because trades are peer-to-peer, there is no operator setting lines and charging juice/vig, making it much more likely that they generate a profit against users. While fees still exist, the core pricing is driven by other participants, not a house edge. In many cases, you profit more from wins, meaning you have to win less often compared to sportsbooks.
• Market-driven probabilities. Prices in prediction markets reflect what participants collectively believe will happen, not what a house or operator decides. Because money is on the line, these probabilities tend to incorporate information, sentiment, and expectations faster than polls or static odds.
• Ability to act on information quickly. When new information breaks, prices can move almost immediately. This allows informed users to react in real time, whether by entering a position early or adjusting exposure as conditions change.
• Ability to buy/sell at any time. On trading-style platforms, positions are not locked until the event ends. You can buy and sell contracts at any time, giving you more control over risk.
• Skill compounds over time. Prediction markets are not about calling winners once or twice. They repeatedly reward being right about probability. If you consistently read chances better than the market, even by a small margin, that edge starts to stack up over time.

Risks of Prediction Markets

Prediction markets offer flexibility and transparency, but they are not without risk. Like any system built around speculation, there are real downsides worth understanding before putting money in play.

• You can simply be wrong. Even with a strong read, outcomes do not always break your way. Binary contracts leave no room for “close enough.” If the event doesn’t happen, the contract settles at zero.
• Liquidity risk. A position can look profitable on paper and still be hard to exit. In thin or niche markets, there may not be enough interest on the other side. That can force you to accept worse pricing or hold the position until settlement.
• Price distortion in low-volume markets. When activity is light, prices can move sharply on very little information. That makes it harder to determine whether a price reflects real market sentiment or simply a lack of participation.
• Fees add up. Trading-style platforms charge fees when you enter and exit positions. If you trade often or target small moves, those fees can quietly eat into otherwise decent edges.
• Potential for insider trading. With no limits like sportsbooks have, a person with non-public information can buy as much of a side (Yes/No) as is available. There are cases, such as the U.S. capturing Venezuelan president Nicolas Maduro, that people suspect someone with insider information traded on just hours before the invasion. While prediction markets and the CFTC are responsible for regulating this, there hasn't been much enforcement yet.

Prediction Markets vs. Sportsbooks

At a glance, prediction markets and traditional sportsbooks can look similar. Under the hood, they work very differently. Here is where the real differences show up.