How Do Prediction Markets Work? A Guide to Betting on Future Events

Unless you have been hiding under a rock for the past year or so, the chances are good that you have come across Polymarket, Kalshi, or Manifold. They belong to a growing class of gambling-esque platforms called prediction markets.

These platforms have been getting more eyeballs and pulling off deals worth upwards of $100m. With Polymarket paying an eye-watering $112m to bring QCEX into their fold, we can't help but predict that prediction markets are here to stay. But how do they work, and are they a form of gambling?

What are prediction markets?

If we had to pick the closest thing, prediction markets are betting exchanges where you can put money on pretty much any future event. Will the Fed raise interest rates next quarter? Will Avatar: Fire and Ash win Best Picture at the Oscars? Will the Patriots make the playoffs? If you are looking at a yes-or-no question with a fixed date, someone's probably running a market on it.

In prediction markets, there's no bookie setting the odds. The market dictates what the outcome of each event is worth. It all comes down to what the collective is willing to pay for an event contract (think: will the Patriots make the playoffs or won't they?).

If a contract for YES on the Patriots making the playoffs is trading at $0.70, it means 70% of public prediction money is on that happening. The trade price slides up or down as people choose to sell or buy on new info or even gut instinct. 

How do prediction markets work?

Each prediction market defines the event and the two possible outcomes. Think of a binary outcome in investing in lingo. That means you will buy shares that will pay $1 if your prediction comes true. If you are wrong, you will get a $0 payout.

Let's take the S&P 500 ending the year above 7,000, for instance. That's the event. The binary outcomes are yes or no. If you think it will shoot past 7,000, you may purchase 100 shares for YES at $0.40 a share (that will set you back $40). If you end up being right when the market resolves at year-end, you will receive a $100 payout ($1 a share), and you're up $60.

You don’t have to wait until the outcome date. If more people think the event is likely, they will put more money into the YES shares and push the price up. The best collective belief can push or pull the price, and you can end up taking a profit or loss if you offload your shares in between.

What types of prediction markets are there?

Not all prediction markets work the same way under the hood. Some use a traditional order book system called Continuous Double Auction, where your buy orders match with someone else's sell orders. This works just like a stock exchange, with prices set by whatever buyers and sellers agree on.

Others rely on Automated Market Makers, which are basically algorithms that act as an automated counterparty. You're always trading against the system rather than another person. These platforms use fancy math formulas to set prices and make sure they don't lose their shirts on any single market. The upside is that you can always make a trade, even if no other humans want to bet against you.

Then there's the whole blockchain angle. Some platforms run entirely on decentralized networks, using smart contracts to handle everything. When an event resolves, the code pays out winners without any humans in between. 

Play money vs real money in prediction markets

Some platforms let you bet with real cash, while others use play tokens with no monetary value.

Real money markets let you deposit actual dollars (or crypto). If you win, you can cash out real profits. The financial stakes mean people tend to think harder about their bets, which often makes the predictions more accurate. These platforms face a mountain of regulatory scrutiny.

Play money markets give you fake currency to bet with. You might start with 10,000 tokens and try to grow your balance by making smart predictions. There's no real financial risk, which makes them great for practicing or just having fun. Some platforms let top performers convert their play money into small real-world prizes, but mostly it's about bragging rights.

Are prediction markets legal?

The legal situation has been messy, but it's getting clearer. For years, federal regulators treated prediction markets with suspicion, especially when they involved elections. The Commodity Futures Trading Commission (CFTC) shut down several platforms.

Things shifted in 2024 and 2025. Kalshi won a court case that let them offer certain election markets, and in May 2025, the CFTC dropped its appeal. PredictIt also won its lawsuit and got licensed as a regulated derivatives exchange. 

That said, it's not free-for-all. Six states have issued cease-and-desist orders against a clutch of platforms. If you're in Illinois, Maryland, or Montana, you're out of luck. The same goes for Nevada, New Jersey, or Ohio residents.

Wrapping up – Responsible gambling at prediction markets

Making a nice prediction is all good and dandy, but contract markets are all-or-nothing betting on future events that are not exactly certain. In some respects, prediction markets are an investment-like form of gambling, though Kalshi won a court case against that line of thinking.

As with any sort of gambling, betting on future events can be addictive. That’s why pretty much all gambling sites with the best interests of bettors at heart provide responsible gambling resources. 

As a rule of thumb, you should only bet what you can afford to lose and take your bets as a cost of entertainment. It also pays to set a budget and deposit limits. If you need more resources, you can visit this website to learn about reality checks and other responsible gambling tools that you can take advantage of.