Prediction markets: What are they & how they work
Prediction markets are platforms where contracts are tied to the outcome of a specific future event, and each event contract settles at a fixed value depending on whether the event occurs or not.
The typical fixed value of an event contract is often $1 if the event happens and $0 if it doesn’t. So, for example, if a contract trading at, say, $0.85 asks, “Will candidate X win the 2026 election?”, the market is pricing that outcome at an 85% probability.
Each prediction market contract includes three things: a defined expiration date, a clear resolution source, and specific settlement criteria, and most event contracts fall into these 3 categories:
- Binary contracts – Two possible outcomes, Yes or No
- Multi-outcome contracts – Many possible results, each trading separately
- Scalar contracts – Connected to numerical ranges or measurable values
Lastly, different prediction market apps use different liquidity models. Some run on traditional order books, where buyers and sellers trade directly with each other, while others use automated systems that continuously generate prices. Still, liquidity is what actually defines how stable a market feels.
Types of prediction markets
Political prediction markets – Focus on elections, policy outcomes, and legislative decisions, and because of their public visibility, they often attract heavy media coverage and public interest.
Financial & economic markets – Concentrate on macroeconomic indicators and financial developments. Inflation, interest rates, GDP growth – the list can go on and on. Some jurisdictions treat them as derivatives because they so closely resemble financial forecasting.
Sports & entertainment markets – These contracts include championship winners, award show results, and box office milestones, and this is where most of the money sits. Research has found that sports made up around 80% of Kalshi’s and 39% of Polymarket’s volume since 2024.
Decentralized prediction markets – Operate on blockchain infrastructure, with smart contracts automating execution and settlement, while digital assets serve as collateral.
How are prediction markets regulated?
The first thing lawmakers evaluate before deciding on prediction market regulations in their jurisdiction is whether an event contract qualifies as:
- A financial derivative
- A commodity contract
- A gambling product
- An unlicensed hybrid instrument
Based on this decision, the legal status and regulation of prediction markets vary from country to country. One of the most notable cases is the United States, which made event contracts available in all 50 states in 2024, under the federal supervision of the CFTC. Europe, on the other hand, has mostly taken a stricter approach. As reported by the International Association of Gaming Regulators, Germany, the Netherlands, France, Belgium, Poland, Spain, and Italy have all either blocked prediction markets or classified them as illegal gambling.
Another major win for the sector came with Gibraltar introducing the first-ever exclusive prediction market regulations globally in July 2026. Unlike other countries that regulate prediction platforms under gambling or financial legislation, Gibraltar created dedicated rules only for event-based trading, effectively opening the path for similar reforms in international markets.
The most uncertain region regarding prediction market regulations still remains Latin America. Brazil, once seen as a possible friendly market, shut the door in April 2026, as a National Monetary Council resolution banned derivatives, while regulators blocked 27 platforms. Colombia’s and Argentina’s iGaming markets have also imposed bans on Polymarket, while Mexico still allows the platforms to operate in a legal grey area.
Prediction markets vs traditional polling vs gambling
If we try to compare prediction markets, gambling, and traditional polling, we’ll notice that all three try toput a numbe ron the future, but they get there in very differnet ways:
| Feature | Prediction markets | Traditional polling | Gambling products |
| Based on | Tradable event contracts | Public opinion surveys | Fixed-odds betting |
| Pricing model | Dynamic market pricing | Statistical sampling | Odds set by bookmakers |
| Updates in real time | Yes | Usually delayed | Odds may periodically adjust |
| Financial exposure | Users trade positions | No financial risk | Users bet against the house |
| Influenced by market sentiment | Strongly | Indirectly | Controlled by bookmaker pricing |
| Accuracy mechanism | Incentivized participation | Sampling methodology | Odds balancing & risk management |
Biggest misconceptions about prediction markets
Prediction markets can feel confusing, even misleading. Are the prices just guesses? Can they really be trusted? These are all valid questions that come up often, and for good reason. They’re easy to misunderstand, so let’s clear up the most common misconceptions.
“Prices are random or based on guesswork” – The reality is that the prices in prediction markets reflect collective expectations. They move as new information becomes available in the market, like economic data, political developments, or breaking news, which makes them closer to real-time indicators than random guesses.
“No one can have an unfair edge” – Not guaranteed. Someone with non-public information, like an employee who knows about an upcoming announcement, could trade on it
“Event trading is a method of making money” – Research suggests the opposite. Long-term high performance on prediction markets is uncommon, and data shows that the chance of consistently earning $5,000 in a month (which is lower than the average salary in the U.S.) is less than 1%, stressing the importance of responsible gaming practices when using products that involve financial risks.
“Prediction markets always accurately predict the future” – No, they don’t guarantee outcomes, because the prices show probability, not certainty. Also, accuracy relies heavily on liquidity, participation, and how much relevant information is available
“Low prices mean something won’t happen” – Actually, a low price doesn’t mean that something is impossible; it simply shows a lower perceived probability. Unexpected outcomes can still happen, especially if we’re talking about unstable or uncertain environments.
“Prediction markets eliminate bias” – They don’t. Incentives in event contracts help, but studies comparing prediction markets with polls have been mixed, with bias coming back when traders are emotionally invested in the outcome.
Prediction market trends in 2026
Prediction markets are clearly becoming a broader industry that combines elements of trading, forecasting, and entertainment. In 2026, operators are focusing on expanding their market categories and making prediction products more accessible to wider audiences. The biggest trends in the industry today include:
- Sportsbooks and retail brokers expanding into event contracts
- Increased regulatory pressure in the U.S. and Europe
- Growth of decentralized prediction markets
- Stablecoin-based settlement systems
- Institutional use of prediction data for forecasting
- Rising interest in political and geopolitical event trading
Prediction markets do not predict the future, but they do measure how strongly the present believes in it, and if you want even more insights into iGaming in 2026, regulatory trends, and where the industry is heading next, join AffPapa for deeper analysis.
Prediction Markets: FAQs
What is a prediction market?
A prediction market is a platform where users can buy or sell contracts based on the outcomes of future events on topics like sports, politics, and economics.
Are prediction markets legal?
Prediction markets are legal in the U.S. under the supervision of the CFTC, although some states are seeking to ban them. They’re also banned in Germany, the Netherlands, New Zealand, Brazil, and most of Asia; however, Gibraltar recently introduced a dedicated regulatory regime for the sector.
Are prediction markets the same as gambling?
Prediction markets are not the same as gambling, and although both involve forecasting future events, prediction markets allow participants to buy and sell event contracts whose prices change based on market expectations, while gambling relies on fixed odds and predetermined payouts.
