How prediction apps like Polymarket are redefining gambling

Wanna bet?

Throughout history, people have put their money on the uncertain outcomes of all kinds of events.

In ancient Rome, for instance, people placed wagers on gladiator matches, chariot races, military campaigns, or crop harvests. During the 16th Century, people bet on who would succeed the Pope. In the 18th Century, London coffee houses were used for betting on parliamentary scandals and changes in political leadership. In the U.S., people have bet on the outcomes of presidential elections since George Washington.

These are early examples of prediction markets, in which people trade contracts on the outcomes of future events.

Prediction markets entered the modern age when the Iowa Electronic Markets (IEM) launched in 1988 at the University of Iowa as the first online, real-money prediction market, allowing students to trade contracts predicting the outcome of that year’s presidential election.

Modern-day prediction market apps like Kalshi and Polymarket, which allow ordinary individuals to wager real money on the outcomes of future events,  have catapulted rapidly into the mainstream, with daily trading volumes in the hundreds of millions.

Due to the industry’s rapid growth, regulation of prediction markets is lagging, and the controversial new industry faces constant scrutiny for its gray-area legality, potential for insider trading, and dubious influence on media and statistics. 

But what exactly is a prediction market, and why is it legal in places where traditional gambling isn’t? Here’s everything you need to know about prediction markets, event contracts, and the major players that dominate this emerging industry. 

What are prediction markets & how do they work? Event contracts explained

Prediction markets are exchanges for the trading of event contracts, which pay out (or not) based on the outcome of a specific real-world event.

In prediction markets, these contracts are typically structured as binary “yes/no” positions that settle at a fixed value—often $1 if the chosen outcome occurs and $0 if it does not—with market prices reflecting the collective probability assigned to that outcome.

In other words, if 60% of existing market participants have purchased “yes” contracts on an event, and 40% have purchased “no” contracts, a “yes” contract might trade at around 60 cents, while a “no” contract might trade at around 40 cents, with each type of contract paying out $1 if correct and $0 if incorrect.

As contracts near resolution, spreads often widen and trading volumes tend to spike, particularly around political and macroeconomic events—amplifying both price discovery and volatility.

Related: Prediction markets like Kalshi are monetizing reality & the gaming industry is pushing back

The rapid rise of digital prediction markets

Polymarket and Kalshi are widely considered the two leading and largest prediction market platforms. While Polymarket focuses on crypto-native, global access, Kalshi operates on a federally regulated U.S. exchange model for event contracts.

“Despite prediction markets being less well-known than traditional polls, platforms like Kalshi and Polymarket proved their worth during the 2024 Presidential Election,” a study by the Wharton School of the University of Pennsylvania said.

“Media outlets and the public were previously unaware of the accuracy of prediction markets, even though academic research had long supported their effectiveness.”

Prediction markets are experiencing a mainstream moment. Both CNN and CNBC have struck deals to incorporate Kalshi prediction markets into coverage, while the Wall Street Journal’s owner, Dow Jones, is partnering with Polymarket.

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During the 83rd Golden Globe Awards on CBS, a live ticker of Polymarket predictions for various awards appeared during the broadcast.

“Prediction markets burst onto the American marketplace in the fall of 2024, and their popularity has only grown since,” KPMG said in a recent research note.

“While these markets have existed in the U.S. for decades, their use expanded rapidly last year after Kalshi, a federally regulated derivatives exchange and clearinghouse, began offering contracts based on the outcome of political events.”

The Commodity Futures Trading Commission (CFTC) under the Biden Administration sought to prohibit such contracts, arguing that they were akin to gaming and contrary to the public interest, KPMG said, but Kalshi sued the CFTC in court and won.

“Since Kalshi’s 2024 legal victory, prediction markets have expanded to offer event contracts based on crypto, climate, economics, financials, companies, and—most controversially—sports,” the firm said.

Polymarket vs. Kalshi at a glance

Why are prediction markets so controversial?

Due to the industry’s rapid growth, regulation of prediction markets is lagging, and the controversial new industry faces constant scrutiny for its gray-area legality, potential for insider trading, and dubious influence on media and statistics.

Potential for insider trading

Prediction markets are contending with insider trader concerns, which were underscored by the recent capture of Nicolás Maduro.

An anonymous user on the prediction market Polymarket won over $400,000 by betting on the Venezuelan President’s ouster just hours before US forces apprehended him.

The incident led to calls for new legislation, like the Public Integrity and Financial Prediction Markets Act of 2026, which aims to prohibit government employees from using prediction markets with non-public information.

Risks to investors

Prediction markets also pose risks for everyday investors. Prices can become more volatile near elections or big data releases, as these contracts can represent highly volatile events, according to Bedel Financial.

Retail investors can also suffer rapid losses if they misinterpret probabilities or overleverage their positions.

Regulatory uncertainty adds another layer of risk, as changes in policy or enforcement can abruptly restrict certain contracts or platforms, affecting liquidity and access for the average investor.

Potential influence on elections

Critics claim that politically based contracts can distort elections. High betting prices can lead to “bandwagon” behavior, where voters favor a candidate who appears to be winning, regardless of the actual, underlying voter sentiment.

Pushback from existing gambling organizations

Detractors of prediction markets claim that sports-based contracts may be exploited to circumvent state-level gambling provisions and effectively make “sports betting legal” in all 50 states, in addition to opening markets to bettors starting at a younger age.

Gaming associations, Tribal nations, and various States have filed lawsuits and cease-and-desist letters to protect what was traditionally their domain.

While some platforms operate under federal derivatives oversight, state regulators and gaming authorities have challenged whether certain event contracts—particularly those tied to sports outcomes—functionally resemble traditional gambling.

Trading platforms counter, claiming that event contracts fall under commodities and derivatives regulation rather than gaming statutes.

As a result, the legal status of prediction markets can vary by jurisdiction, and the availability of certain contracts may change over time depending on regulatory interpretation and court rulings.

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The Trump family’s ties to the prediction market industry

When it comes to prediction markets, the Trump family is getting in on the action in a big way. The president’s son, Donald Trump Jr., is an advisor to Polymarket and Kalshi, while his venture capital firm, 1789 Capital, is heavily invested in Polymarket.

Truth Social, President Donald Trump’s social media site, said in October that it is planning to launch its own prediction market called Truth Predict through its parent company, Trump Media & Technology Group (TMTG).

TMTG said that Truth Predict will use Crypto.com Derivatives North America to enable prediction wagers, allowing users to trade contracts on future events like elections, economic data, and sports outcomes.

Prediction market FAQs

Below are answers to some of the most common questions investors have about prediction markets like Kalshi and Polymarket.

Do prediction markets charge fees?

Most prediction markets charge fees, but the structures vary, from small percentages on trades to higher commissions or fixed fees per contract.

How are prediction market winnings taxed?

“Prediction market winnings are generally taxed as ordinary income, but some CFTC-regulated platforms like Kalshi may qualify for favorable Section 1256 capital gains treatment, making them potentially more tax-efficient than traditional sports betting” Forbes reported.

Do prediction markets use market makers?

These platforms heavily rely on market makers—both human and automated—to liquidity in financial markets by quoting both a buy price and a sell price for a security, ensuring buyers and sellers can trade quickly.