What Are Prediction Markets? A Trader’s Guide to Event Contracts

What Are Prediction Markets?

Prediction markets are platforms where you trade contracts based on the outcome of real-world events. Instead of betting on price movements of currencies or stocks, you’re betting on whether something will happen—an election result, an economic indicator, a sports outcome, or even weather patterns.

The concept is simple: buy a contract if you think an event will occur, sell if you think it won’t. Prices range from $0.01 to $0.99, and the price reflects the market’s collective probability estimate. A contract trading at $0.65 implies a 65% chance of that outcome happening.

If you’re right, the contract settles at $1.00. If you’re wrong, it settles at $0.00. Your profit is the difference between your purchase price and the settlement price.

Prediction markets have existed in various forms for centuries—Wall Street ran election betting pools in the late 1800s. But they’ve exploded in popularity recently. In 2024, platforms like Polymarket and Kalshi processed billions in trading volume, particularly around the US presidential election. The industry is now projected to reach $1 trillion in annual volume by the end of this decade.

How Prediction Markets Work

The mechanics are straightforward once you understand the basic structure.

Binary Contracts

Most prediction markets use binary contracts—yes or no outcomes. “Will Candidate X win the election?” Either they do (contract settles at $1) or they don’t (contract settles at $0).

When you buy a YES contract at $0.40, you’re risking $0.40 to potentially win $0.60 (the difference between your price and $1.00). The implied probability is 40%, meaning the market thinks there’s a 40% chance of that outcome.

You can also sell contracts short if you think an event won’t happen. Or you can trade in and out of positions as probabilities shift based on new information.

Price Discovery

Prediction market prices update in real-time as traders buy and sell based on their views. When breaking news hits, prices adjust within seconds. This makes prediction markets highly responsive—often more so than traditional polling or expert forecasts.

During the 2024 US election, prediction markets showed Trump with higher odds than most polls suggested. The markets turned out to be more accurate. This pattern has repeated across multiple elections and events, giving prediction markets credibility as forecasting tools.

Settlement and Resolution

After an event occurs, contracts settle based on verifiable outcomes. For elections, it’s the official result. For economic data, it’s the government release. Platforms use different resolution mechanisms—some rely on trusted data sources, others use decentralized oracle systems.

Settlement typically happens within hours or days of the event, and payouts are automatic. If you held winning contracts, the funds appear in your account.

Major Prediction Market Platforms

Two platforms dominate the current landscape, each with distinct characteristics.

Polymarket

Polymarket is a blockchain-based platform running on Polygon. It uses USDC stablecoin for trading and operates globally (with some geographic restrictions). Polymarket processed over $9 billion in trading volume in 2024 alone.

The platform offers markets on politics, sports, crypto prices, entertainment, and current events. It’s known for launching markets quickly on trending topics—sometimes within hours of news breaking.

Polymarket uses UMA’s optimistic oracle system for settlement. This decentralized approach means outcomes are determined through a challenge-and-vote mechanism rather than a central authority. It adds complexity but also transparency.

In November 2025, Polymarket received CFTC approval to operate in the US through a regulated structure, expanding its accessibility.

Kalshi

Kalshi is a CFTC-regulated Designated Contract Market—the same regulatory framework that governs futures exchanges like CME. It’s US-based and uses US dollars.

Kalshi offers markets on economics (GDP, inflation, Fed decisions), politics, weather, and more recently, sports. The platform’s regulatory status gives it legitimacy with institutional participants and provides clearer legal standing for US traders.

In 2024, Kalshi won a significant legal battle against the CFTC over political event contracts. The ruling opened the door for broader prediction market offerings in the US. Kalshi now processes billions in monthly volume and recently moved to 24/7 trading operations.

Other Platforms

PredictIt is an older platform focused on US politics, operating under a CFTC no-action letter for academic research purposes. It has position limits and is more retail-focused.

Manifold Markets uses play money rather than real currency, making it accessible for those who want to practice or participate without financial risk.

Why Traders Are Paying Attention

Prediction markets offer characteristics that appeal to traders from various backgrounds.

Clear, Defined Outcomes

Unlike forex or equities where positions can drift for extended periods, prediction markets have defined endpoints. A market resolves, you win or lose, and you move on. This clarity appeals to traders who prefer bounded risk.

Information Edge Opportunities

If you have superior knowledge about a topic—whether through research, domain expertise, or faster information processing—you can capitalize on that edge. Prediction markets reward those who can accurately assess probabilities better than the crowd.

This is similar to the edge-seeking approach that works in algorithmic trading strategies. The difference is you’re predicting events rather than price movements.

Uncorrelated Returns

Prediction market outcomes often have low correlation with traditional financial markets. An election result doesn’t care about the S&P 500. This makes prediction markets interesting for portfolio diversification.

Market Inefficiencies

The prediction market space is still maturing. Prices don’t always reflect true probabilities, especially in less liquid markets or around fast-moving events. Experienced traders can identify mispricings and capitalize on market inefficiencies before they correct.

Automation Potential

Both Polymarket and Kalshi offer APIs for programmatic trading. Traders are building bots that monitor markets, identify opportunities, and execute trades automatically. The 24/7 nature of these markets makes automation particularly valuable—you can’t watch every market around the clock manually.

How to Get Started

Getting into prediction markets requires a few steps depending on your location and preferred platform.

For US Traders

Kalshi is the most straightforward option. Create an account, verify your identity (standard KYC requirements), fund via bank transfer or card, and start trading. The interface is intuitive if you’ve used any trading platform before.

Polymarket recently became available to US users through regulated channels. Check their current onboarding process as requirements may vary.

For International Traders

Polymarket is accessible in most countries outside the US. You’ll need a crypto wallet, USDC stablecoin, and familiarity with blockchain transactions. If you’ve traded crypto before, the process is familiar. If not, there’s a learning curve around wallet management and on-chain transactions.

Start Small

Like any new market, start with small positions until you understand the mechanics. Watch how prices move around events. Note how liquidity varies across different markets. Learn the platform’s fee structure.

Many traders start with markets they have genuine expertise in—maybe you follow politics closely, or you understand tech industry dynamics, or you have strong views on economic indicators. Your existing knowledge becomes an asset.

Risks and Considerations

Prediction markets carry specific risks worth understanding.

Binary Outcomes

The all-or-nothing nature means positions can go to zero. If you buy YES at $0.80 and the event doesn’t happen, you lose the entire $0.80 per contract. There’s no partial recovery like there might be with a stock that drops but doesn’t go to zero.

Liquidity Risk

Not all markets have deep liquidity. Niche markets might have wide bid-ask spreads, making it expensive to enter and exit positions. Check order book depth before sizing positions.

Resolution Risk

Sometimes event outcomes aren’t clear-cut, leading to disputes over how markets should resolve. Different platforms handle edge cases differently. Read the resolution criteria carefully before trading.

Regulatory Uncertainty

While the regulatory landscape has improved, it’s still evolving. Rules may change, platforms may face restrictions, and tax treatment isn’t always clear. Stay informed about developments in your jurisdiction.

Infrastructure for Prediction Market Trading

Serious prediction market traders are starting to think about infrastructure the same way forex and crypto traders do.

Markets operate 24/7. Events can resolve at any hour. Breaking news that moves prices doesn’t follow business hours. If you’re running automated strategies or need to monitor multiple markets, uptime matters.

Latency also plays a role, particularly for arbitrage strategies that exploit price differences across platforms or within the same platform. The trader who executes first captures the opportunity.

These requirements are similar to what forex traders face when running expert advisors—continuous operation, reliable connectivity, and fast execution. A trading VPS provides the infrastructure foundation for automated prediction market strategies, just as it does for forex automation.

The Future of Prediction Markets

The prediction market industry is at an inflection point. Several trends suggest continued growth.

Regulatory clarity is improving. Kalshi’s legal victories and Polymarket’s CFTC approval signal a more permissive environment. More platforms are seeking proper licensing.

Institutional interest is growing. Susquehanna International Group now makes markets on Kalshi. Intercontinental Exchange (owner of the NYSE) invested in the space. Traditional finance is paying attention.

Product expansion continues. Sports prediction markets are growing rapidly. Economic indicators, corporate events, and scientific milestones are becoming tradeable. The range of events you can take positions on keeps expanding.

Technology improvements make participation easier. Better APIs, faster settlement, improved user interfaces—the friction of participating is decreasing.

Industry projections suggest prediction markets could reach $1 trillion in annual trading volume by the end of this decade. That’s a significant jump from today’s roughly $30 billion, but the growth trajectory supports ambitious forecasts.

Trade Prediction Markets with Reliable Infrastructure

As prediction markets mature, the traders who succeed will be those who can monitor markets continuously, execute quickly when opportunities arise, and run automated strategies reliably.

NYCServers provides the infrastructure serious traders need. Our VPS solutions offer 1ms latency to major financial hubs, 100% uptime during trading hours, and 24/7 support. Whether you’re running prediction market bots, monitoring multiple platforms, or executing algorithmic strategies, stable infrastructure makes a difference.

Explore our Forex VPS plans starting at $25/month—the same infrastructure that powers forex and crypto automation works for prediction market trading.

Frequently Asked Questions

Are prediction markets legal?

In the US, CFTC-regulated platforms like Kalshi are legal. Polymarket received regulatory approval in late 2025 to operate in the US. International legality varies by country. Always check your local regulations before participating.

How are prediction markets different from sports betting?

Prediction markets function more like financial exchanges than traditional bookmakers. Prices are set by supply and demand among traders rather than by a house. There’s no built-in house edge—you’re trading against other participants. Fees are typically lower than the vig charged by sportsbooks.

Can I make money trading prediction markets?

Like any trading market, profits are possible but not guaranteed. Success typically requires an edge—better information, faster execution, or superior probability assessment. Many participants lose money, especially those treating it as gambling rather than informed trading.

What happens if an event outcome is disputed?

Resolution processes vary by platform. Kalshi uses verified data sources and has a defined resolution process. Polymarket uses UMA’s oracle system where outcomes can be challenged and voted on. Read the specific market rules before trading—they define exactly how disputes are handled.

How much capital do I need to start?

Minimums are low—you can start with as little as $10 on most platforms. However, trading fees and the need to diversify across positions means most active traders work with at least a few hundred dollars. Start small while learning the mechanics.

Do I need special software to trade prediction markets?

Basic trading can be done through web interfaces. For automated strategies, you’ll need programming skills and familiarity with platform APIs. Both Polymarket and Kalshi offer REST and WebSocket APIs for programmatic trading.

How are prediction market profits taxed?

Tax treatment varies by jurisdiction and isn’t always clearly defined. In the US, prediction market gains may be treated as gambling winnings, capital gains, or ordinary income depending on circumstances. Consult a tax professional for guidance specific to your situation.