2026.09.24 2026.09.24
What Are Prediction Markets? A Guide to Event Contracts

Alan Tsagaraevhttps://www.litefinance.org/blog/authors/alan-tsagaraev/

In recent years, prediction markets have become an increasingly prominent part of the financial industry. On these platforms, users trade contracts whose value depends on the probability of specific events occurring. Understanding prediction markets is important for anyone who wants to better navigate modern financial instruments.

Unlike traditional exchanges, participants buy contracts based on the possible outcomes of future events. These may include presidential election outcomes, central bank decisions, or sporting events. 

Prediction markets rely on collective assessment: a contract’s price reflects the probability of an outcome that market participants consider most likely. This allows platforms to assess the probability of future events. However, behind this relatively simple concept lies a complex infrastructure. 

In this article, we will take a detailed look at what prediction markets are and how they work, how they differ from traditional investments, and what opportunities they offer investors. We will also examine the legal aspects and key risks.

Major Takeaways

• Prediction markets are platforms where participants buy and sell event contracts tied to the outcomes of real-world events. A contract’s price reflects the estimated probability of a particular outcome. If the prediction proves correct, the contract holder receives a predetermined payout. In this way, prediction markets express expectations about future outcomes in monetary terms.

• The legal status of prediction markets depends on the jurisdiction. In the US, trading in event derivatives is overseen by the Commodity Futures Trading Commission (CFTC). Requirements may differ significantly in other countries, and some platforms face legal restrictions. Therefore, before trading, it is important to check the legal status and availability of a particular platform in your country.

• Event contracts cover a wide range of topics, including economic indicators, central bank decisions, sporting events, elections, and other events. The growing number of available contracts contributes to the further development and popularity of these platforms.

• The main difference lies in the nature of these instruments. When investors buy shares, they acquire an ownership stake in a company, while prediction market participants trade contracts based on the outcome of a particular event.

• A position usually remains open only until the event occurs or concludes. A contract’s value can change rapidly as new information becomes available, so some contracts can be highly volatile.

• Despite their simple underlying principle, trading on these markets involves significant risks. Prices may be affected by the actions of large market participants, low liquidity, and errors in estimating the probability of an event. In addition, platforms may experience technical failures or face legal restrictions. Event contracts can result in the loss of invested funds, so they should be traded with caution.

Prediction Markets Explained: Trading on Future Events

In simple terms, prediction markets are online platforms where participants buy and sell contracts based on the possible outcomes of specific events. For example, suppose you want to know how much GDP will grow in the next quarter. Instead of studying analytical reports, you can go to a prediction market platform and check the market price of the relevant contract. If a contract on a particular outcome is trading at $0.60 with a maximum payout of $1, the market estimates the probability of that outcome at about 60%.

How do prediction markets operate? The basic principle is simple: if a participant believes that an event will occur, they buy the corresponding contract. On some platforms, participants can also take a position on the opposite outcome. When the contract settles and the outcome becomes known, the contract pays $1 if the predicted outcome occurs, or $0 if the prediction proves incorrect. Trading on events is somewhat similar to stock market speculation, but instead of shares, participants trade contracts based on the outcomes of specific events.

Prediction market prices constantly change as new information becomes available. This makes it possible to track the implied probability of a particular outcome almost in real time. Trading event contracts usually does not require a large initial investment. A single contract may cost relatively little, which lowers the barrier to entry.

Prediction markets can quickly reflect new information in prices, but they can still be manipulated. Insider trading may also affect prices, especially in markets with low liquidity. Market participants may seek to profit from accurate predictions or use contracts to hedge real-world risks. However, futures bets and event contracts are different instruments, and their legal status depends on the laws of the country in question.

Unlike traditional betting platforms, exchange-based prediction markets generally do not use fixed odds set by a bookmaker. Instead, participants determine prices through trading. The financial incentive is that participants can profit if their estimate of an outcome’s probability is more accurate than the current market estimate.

Information markets can serve as a forecasting tool and, in some cases, produce results comparable to other forecasting methods. Price movements reflect incoming information and changing expectations among market participants.

How Do Prediction Markets Work?

To understand how prediction markets work, you need to understand how prices are determined and how contracts are settled. Trading is based on event contracts whose value depends on the outcome of a specific event. Unlike traditional derivatives, such contracts may not have an underlying asset in the usual sense of the term.

For example, the US presidential election may be the subject of a contract. A "Candidate X will win" contract may trade between $0 and $1, with its market price reflecting the implied probability of that outcome. If you buy the contract for $0.40 and the candidate wins, the payout is $1, and your profit is $0.60. If the opposite outcome occurs, the contract settles at $0, and you lose the money you invested in it.

How does Polymarket work? It is one of the largest prediction market platforms, where users trade using a crypto wallet and stablecoins. Contracts are settled after the event occurs, according to predetermined rules and specified data sources.

These markets allow users to trade contracts on the future outcomes of both short-term events, such as sporting events, and longer-term events. Users can also trade economic data, including inflation and unemployment. However, futures contracts on economic indicators differ from event contracts, as they are different types of financial instruments.

Event contracts cover various categories of events, including elections, sports, and financial events such as central bank decisions. Online platforms allow users to track price movements in real time. Limited liquidity may affect the number of contracts you can buy or sell at a given price.

Unlike traditional betting platforms, many prediction markets let participants sell contracts before the event is settled and lock in a profit or loss. The current market price changes as participants trade, allowing prediction markets to react quickly to new information. Market participants use these financial instruments for both hedging and speculation.

Market manipulation is possible, so regulated markets use monitoring and enforcement mechanisms to prevent violations. Contracts are settled according to the terms set out in their specifications. Binary contracts have only two possible outcomes. Election markets allow users to see how the implied probability changes as polls and other information become available. The initial investment depends on the price and number of contracts purchased, while the potential loss from a standard contract purchase is limited to the amount invested.

Example of an Event Contract

Let’s look at an event contract on Polymarket based on the Fed’s October decision. Suppose an upcoming event is a Fed interest rate meeting. The platform offers a contract called “Fed decision in October: 50+ bp rate cut.” The current market price is $0.40, implying a 40% probability. You buy 100 contracts for $40. If the outcome occurs, the contracts settle at $100 in total, giving you a profit of $60. If it does not, you lose $40.

How does Polymarket work in this case? Users deposit funds using a crypto wallet and stablecoins. CFTC regulation depends on the jurisdiction, while fees are determined by the platform.

Source: polymarket.com

Now consider an event contract on Kalshi based on an American football game. Suppose the DET Lions are playing the BUF Bills, and a “Lions to win” contract is trading at a market price of $0.32. If the Lions win, the contracts settle at $1, giving you a profit of $0.68 per contract. If they lose, you lose $0.32. Kalshi offers event trading as a CFTC-regulated exchange (US Commodity Futures Trading Commission).

Source: kalshi.com

Sports event contracts differ from traditional sports betting as you can sell a contract before the game ends if the price changes. Election markets work similarly. For example, participants can trade contracts on the outcomes of US elections.

Market odds are constantly changing. The underlying asset is the event outcome. The financial incentive comes from the difference between the purchase price and the payout if the predicted outcome occurs. Withdrawals depend on the platform’s terms and contract settlement. Prediction market platforms may offer high liquidity for popular events.

Event Contracts Explained 

Event contracts are financial instruments whose value depends on the outcome of a specific event. A contract’s structure includes the event type, settlement date, possible outcomes, rules for determining the winning outcome, and the settlement mechanism. A contract usually trades between $0 and $1. If the specified outcome occurs, it pays $1.

How do event contracts work? After the event occurs, the platform checks the result against the specified source, such as data from the Fed, a sports league, or an election commission. If the outcome matches the contract terms, the contract settles, and the holder receives $1. Otherwise, the contract settles at $0.

Binary contracts have only two possible outcomes. Event contracts can be sold before settlement at the current market price. For example, if you buy a contract for $0.40 and its price rises to $0.65, you can sell it for a $0.25 profit without waiting for the event outcome.

Derivatives markets use similar mechanisms, but event contracts are generally easier to understand. Futures contracts in financial markets can have a more complex structure, while event contracts primarily focus on the probability of an event. In the US, the Commodity Futures Trading Commission regulates certain prediction markets and event derivatives.

Contracts are settled according to predetermined rules. Participants trade directly with each other, so there are usually no fixed odds. Specific outcomes are defined in advance. Such contracts can also be based on economic indicators. Event contracts provide a financial incentive to estimate an event’s probability accurately, while the market price reflects participants’ expectations.

Are Prediction Markets Legal?

The legal status of these markets depends on the country and the platform type. In the US, a regulated exchange may operate as a derivatives market under CFTC oversight. For example, Kalshi is a CFTC-regulated designated contract market (DCM) and offers event contracts.

The North American Derivatives Exchange (Nadex) is also subject to CFTC oversight. Such platforms may offer binary contracts and other derivatives based on financial markets and events. Federal law governs the trading of specific outcomes on registered exchanges. However, whether state or federal law applies to certain categories of contracts remains subject to legal disputes, including those involving election-related contracts.

How does Polymarket work? In the US, it operates through Polymarket US, a CFTC-registered designated contract market. Election markets and other event contracts attract significant public interest, while the regulatory framework continues to evolve. Market manipulation and improper use of nonpublic information on regulated markets may result in penalties.

The regulation of event contract trading on prediction market platforms depends on the jurisdiction. Betting platforms and regulated exchanges have different legal statuses: betting platforms are generally subject to gambling laws, while regulated exchanges may be regulated as financial markets. Therefore, prediction markets cannot automatically be classified as either gambling or financial products in every jurisdiction.

Presidential elections are one prominent example: Kalshi offers contracts on election outcomes. At the same time, the legal status of certain types of contracts remains debated at both the federal and state levels. Regulated exchanges must comply with applicable requirements and rules designed to protect market participants. Liquidity constraints, meanwhile, depend primarily on participant activity. Prediction markets may include contracts related to sports betting, although they may legally be classified as derivatives markets.

The Commodity Futures Trading Commission regulates certain event derivatives regardless of whether the underlying asset is a traditional commodity. Withdrawals depend on the rules of the individual platform. The opportunity to profit incentivizes participants to estimate probabilities accurately. Major events, such as elections or Fed decisions, provide clearly defined outcomes that can be verified for contract settlement.

A prediction exchange operating in the US must comply with applicable regulatory requirements. The division of authority between state and federal law remains subject to litigation, including in cases involving election- and sports-related contracts. Therefore, when choosing a platform, traders should consider the actual risk of legal restrictions. Accurate predictions do not eliminate these risks, and information markets must also comply with applicable legal requirements.

Why Prediction Markets Are Booming in 2026

In 2026, prediction markets continued to grow rapidly, driven by technological advances, a wider range of available contracts, and public interest.

1. Polymarket and Kalshi became more accessible to the general public as their platforms developed and their interfaces became easier to use. On Polymarket, transactions are handled using a crypto wallet and stablecoins, making it easier to deposit and withdraw funds.

2. Kalshi expanded its range of contracts, including contracts on election outcomes. This increased the popularity of election markets. At the same time, federal law treats such event contracts as derivatives, although their legal status remains disputed.

3. Economic data and indicators, including inflation, Fed interest rates, and GDP growth, offer a wide range of forecastable outcomes.

Financial markets do not always allow participants to trade directly on the outcomes of specific events, and prediction markets have filled this gap. Major events, including presidential elections, climate agreements, and technology announcements, have attracted market participants from the crypto and trading sectors. Prediction market trading has become a popular way to assess probabilities. Election betting has attracted significant public interest, while the media have increasingly used prediction market prices as an additional indicator of expectations.

Polymarket has attracted many users and provided high liquidity for popular contracts. A prediction exchange may also provide an API for algorithmic trading. Prediction markets make it possible to estimate the probability of an event outcome based on collective expectations. As the number of participants grows, liquidity constraints in popular markets decrease.

The Commodity Futures Trading Commission regulates event derivatives on registered US platforms. Event contracts are often structured as binary contracts, and their current market price indicates expectations. Such financial products expand the range of opportunities available in prediction markets. Sports event contracts have also become widespread.

Futures contracts and event contracts allow participants to trade on different future outcomes, but they have different structures. Market manipulation can occur even on regulated exchanges. Derivatives markets are expanding with the emergence of new prediction market platforms. Low initial investment requirements attract retail participants, while sharp price movements create opportunities for speculation. As a result, prediction markets have become a notable segment of the financial instruments market.

Prediction Markets vs. Traditional Investing: Key Differences 

A prediction exchange is part of the financial markets but differs from the stock market and traditional derivatives markets in several ways. The main difference is what you trade. In the stock market, you invest in public companies, expecting the company and its share price to grow. On prediction exchanges, you trade contracts on specific event outcomes.

The financial incentive comes from correctly estimating an outcome’s probability rather than earning dividends. Prediction markets can be affected by economic indicators: new economic data can influence contract prices, but event contracts are tied to a specific outcome.

Traditional investing often involves holding assets for a long time, while event contract trading is limited by the event’s timing. Futures contracts on commodity exchanges and event derivatives in the US may be overseen by the Commodity Futures Trading Commission. Trading fees depend on the platform.

Prediction markets do not require an initial investment equal to the value of a traditional underlying asset. For example, a contract may cost $0.40. The current market price on prediction exchanges reflects the implied probability, while stock prices reflect a company’s financial performance and investor expectations.

Prediction market participants seek to make accurate predictions, hedge risks, or profit from price movements. Regulated exchanges may impose position limits and other liquidity restrictions. Sports event contracts differ from traditional sports betting in how prices are determined: instead of fixed odds set by a bookmaker, prices may be determined by supply and demand.

Prediction exchanges allow participants to sell contracts they have already purchased and, in some cases, open short positions. Many betting platforms do not offer this option. Withdrawals through a crypto wallet are common on crypto-based platforms but not on all prediction exchanges. Election markets let participants trade contracts based on the outcome of a political event.

Event bets may take the form of binary contracts with a fixed payout if a specific outcome occurs. Price movements on prediction exchanges depend on changes in the estimated probability of future outcomes. Since markets may be manipulated, regulated markets have rules designed to prevent such practices.

Event contracts have a relatively simple structure, but there is still a real risk of losing the entire amount invested if the prediction is wrong. Event trading redistributes funds among market participants. Traditional derivatives markets and prediction exchanges may have different collateral requirements.

Unlike some regulated exchanges, Polymarket uses crypto infrastructure, which involves additional risks.

Risks and Limitations of Prediction Markets

Despite their accessibility, prediction markets involve real risks and several limitations:

• Loss of money. If your prediction is wrong, you can lose your entire initial investment in the contract.

• Liquidity constraints. In less popular markets, it may be difficult to sell a contract quickly at a desired price because liquidity is not guaranteed.

• Market manipulation. Large trades can significantly affect prices and distort the implied probability.

• Insider trading. Participants with access to nonpublic information, such as information about athletes’ injuries, may gain an advantage.

• Legal risks. Access to unregulated platforms may be restricted by federal or state laws.

• Settlement errors. Disputes over the winning outcome may delay or affect contract settlement.

• Volatility. Sharp price movements, including in election markets, increase the risk of emotional decisions.

• Dependence on infrastructure. Platform failures or crypto wallet issues may make it difficult to withdraw funds.

• Lack of regulation. Not all platforms meet the requirements that apply to regulated exchanges or effectively prevent market manipulation. In addition, platforms may charge trading fees.

• Limited choice. Some contracts have only two possible outcomes, which simplifies analysis but limits strategy choices.

Conclusion

Prediction markets combine elements of trading, analysis, and probability assessment. They allow participants to trade on events by turning future outcomes into tradable contracts. Despite real risks and liquidity constraints, prediction markets continue to grow as technology improves and regulations evolve. Event contracts are financial instruments used for both speculation and hedging.

Prediction market platforms have become an additional source of information about market participants’ expectations and can complement traditional economic data and analytical forecasts. Easy withdrawals and transparent pricing make these platforms more attractive, while regulated exchanges operate under established legal requirements. In 2026, prediction markets became widespread and gained a significant presence in financial markets.

However, traders can lose money as easily as they can make a profit. Therefore, consider the risks when trading event contracts.