It seems like you can place a bet on the outcome of just about anything these days: a football game, a midterm election, the Grammys, even the likelihood of an impending natural disaster. The rise of prediction markets like Kalshi and Polymarket has made it not only possible but easy to take a stab at making money based on correctly predicting the outcome of a future event.
Before you give it a try, though, it’s worth understanding how exactly prediction markets work. It is not the same as online betting, and it’s important to know the risks involved, including shifting regulations.
How do prediction markets work?
Prediction markets “run on a type of financial instrument known as an event contract,” said NerdWallet. These contracts have a “nominal value — often $1 — and traders can buy ‘yes’ or ‘no’ positions on it for some fraction of that value.” Once the event occurs, the contract pays out to those with the position that ended up being correct.
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The positions people can buy into are wide-ranging. Examples have included “when Prime Minister Keir Starmer of Britain will leave office, how many social media messages Elon Musk will send next month or how hot it will be in Paris on a given day,” said The New York Times. If someone were to, say, correctly bet Starmer would leave office by the end of the year, buying a 20-cent ‘yes’ position, they would have made 80 cents, minus any fees the platform may charge. But if they had bet he would not, they would lose the money they had put down.
What are the risks of prediction markets?
One risk is that not everyone will be entering on equal footing. Some people may have greater knowledge than others, whether due to expertise in that area or, in some cases, potential insider trading. “Several high-profile instances occurred this past year, including an Army soldier charged with using classified information to place bets regarding the capture of Venezuelan President Nicolás Maduro,” said Kiplinger.
Similar to betting, prediction platforms can also encourage the gamification of money, potentially leading to overspending and frequent losses. “Most people don’t come out ahead,” and “more than 100,000 accounts have lost at least $1,000 on Polymarket, but only half as many have won that much,” said Kiplinger, citing a Bloomberg analysis.
While prediction markets may seem akin to investment products in some ways, they do not offer the same potential for long-term growth that investing does. “You’re going to end up with a lot more money over the course of 10 or 20 years in the market, with consistent investing, than you would with the win-some-lose-some approach of betting on sports on a weekly or monthly basis,” said Chris Woods, a certified financial planner, to NerdWallet.
Are prediction markets regulated?
Regulations are another potentially murky area for prediction markets. While currently overseen at the federal level by the Commodity Futures Trading Commission, certain “states view outcome-based markets, much like sports betting or gambling, as subject to state oversight,” said Forbes, which has led to lawsuits and uncertainty. Due to the “evolving” nature of prediction markets, “market rules, permitted contract types and regulations can change over time and may vary by jurisdiction,” said Fidelity.
