What Are Prediction Markets and How Do They Work in 2026?

Prediction markets drew global attention during the 2024 US presidential election, when users on Polymarket bet real money on Donald Trump’s victory. As the election approached, the platform showed significantly higher odds of a Trump win than many traditional polls, and after the results were confirmed, holders of “Trump wins” contracts received payouts—while one French trader reportedly earned around $85 million.

Since then, prediction markets have exploded in popularity. Global trading volume reached an estimated $51 billion in 2025 and is projected to grow to $240 billion in 2026, with Bernstein analyst Gautam Chhugani estimating the market could eventually exceed $1 trillion in annual volume by 2030. Over the past year alone, weekly trading volumes on Kalshi reportedly grew from roughly $100 million to $3 billion.

At their core, prediction markets allow users to trade contracts tied to future events, with prices reflecting the perceived probability of an outcome occurring. For companies operating in this space, however, the opportunity comes with significant regulatory complexity. Depending on the jurisdiction, prediction markets may fall under financial regulation, derivatives law, gambling frameworks, or a combination of all three—creating evolving tax, licensing, AML, and KYC obligations. As the sector grows and regulators attempt to catch up, understanding both how these markets function and the compliance risks they create is becoming increasingly important.

What is a prediction market?

A prediction market is an online platform where users trade event contracts tied to the outcome of real-world future events. In essence, users “bet” on whether a future outcome will happen or not. 

Each contract represents a binary “yes” or “no” outcome and is typically priced between $0 and $1, with the price reflecting the market-implied probability. 

How event contracts work

Event contracts are the core mechanism behind prediction markets. A contract trading at 40 cents suggests that the market believes there’s a 40% chance that the event will occur. If a user believes there is a higher chance of an event occurring, they can buy shares at 40 cents. If the event happens, then the share is worth $1, and the user makes a profit of 60 cents.

If the event does not happen, then the share is worthless, and the user loses everything.

Unlike traditional “betting” against the “house,” prediction market platforms do not profit when users lose. Instead, they make money from charging transaction fees. In this system, prices move continuously based on peer-to-peer supply and demand, allowing markets to update in real time as new information emerges.

Prediction markets vs. sports betting

Users can trade contracts on anything from alien invasions to Bitcoin's price. However, the most popular category is sports, with 87% of Kalshi’s March 2026 trading volume coming from sports events. While prediction market platforms argue they are not gambling platforms and merely allow users to exchange derivatives, their use in sports has exposed them to lawsuits and regulatory scrutiny.

Although prediction markets are often compared to sports betting, their underlying structures and regulatory treatments can differ significantly. Traditional betting involves fixed odds set by a bookmaker, whereas prediction markets rely on peer-to-peer trading, with prices determined by market participants. This means prediction markets function more like financial exchanges than betting platforms. 

Whether regulators accept that distinction is central to how they approach them. In the US, for example, Kalshi operates as a federally regulated exchange, while offshore platforms, including Polymarket, have faced scrutiny over whether their products resemble unlicensed gambling.

Types of prediction markets

Prediction markets span many real-world events, but trading activity is concentrated in a few main categories. Each category attracts distinct users and creates unique market dynamics.

Election and political contracts

These markets allow users to trade on the outcomes of elections, referendums, legislative votes, and political appointments. Contracts may ask whether a candidate wins a primary, if a bill passes Congress, or who will be appointed to a cabinet position.

Political markets are distinguished by the quality of information participants bring, such as polling data, fundraising figures, and news cycles. Participants are typically engaged and informed, which has led to a reputation for forecasting accuracy. In some cases, these markets have outperformed traditional polling, most notably during the 2024 US presidential election. This accuracy has attracted mainstream attention and driven significant growth in trading volumes.

Sports-event contracts

Sports contracts enable users to trade on the outcomes of games, tournaments, season standings, and player performance. Users may take positions on whether a team wins a match, who wins a championship, or how many points a player scores.

This category represents the largest share of trading volume, accounting for 87% of Kalshi's activity in March 2026. For many users, sports contracts serve as their introduction to prediction markets.

​Unlike traditional sports betting, users do not bet against a bookmaker with fixed odds. Instead, they trade against other participants, with prices adjusting continuously as new information such as injuries, weather, or team news becomes available. Positions can be bought and sold before the event concludes, adding a trading dimension not present in conventional wagering.

Economic and financial contracts

These markets focus on measurable economic indicators such as inflation, GDP growth, central bank rate decisions, and unemployment data. Contracts may ask whether the Federal Reserve will raise rates at its next meeting or if CPI will exceed a specified threshold.

Economic contracts attract analysts, institutional participants, and businesses with exposure to macroeconomic outcomes. Since the underlying data is published by official sources on set schedules, these markets aggregate diverse forecasts into a live probability, providing practical value as a real-time sentiment indicator in addition to their trading function.

Cultural and miscellaneous contracts

In addition to politics, sports, and economics, prediction markets offer contracts on entertainment awards, technology milestones, celebrity events, and other speculative topics. These markets often have lower liquidity and less predictable outcomes, but they attract casual users and generate significant public interest, especially during events like the Oscars or major product launches.​

How prediction market platforms differ in practice

​The contract types described above are available across various platforms, but the user experience varies significantly by platform.

On centralized exchanges such as Kalshi, the experience is similar to a financial trading platform, with verified accounts, order books, contract specifications, and clear settlement rules. Users interact within a structured marketplace with defined terms.

On brokerage platforms such as Robinhood and Coinbase, prediction market contracts are offered alongside stocks, options, and crypto assets. For many retail users, this is their first exposure to event contracts, accessed through an app they already use for investing.

On crypto-native platforms such as Polymarket, users connect a digital wallet rather than create a traditional account. Markets can be created and resolved quickly, the range of contracts is broader and less restricted, and trading is conducted in digital assets rather than dollars. The experience is more similar to decentralized finance than to a conventional exchange.

❗Crypto-native prediction markets can also face greater regulatory scrutiny. Platforms such as Polymarket allow users to trade contracts on politics, sports, economics, and other real-world events using digital assets and wallet-based access rather than traditional brokerage accounts. However, this model has attracted increasing attention from regulators. As regulators continue to examine how such platforms as Polymarket fit within derivatives, gambling, and financial services frameworks, expectations around AML and KYC controls are likely to become stricter across the sector.

Suggested read: KYC vs AML: Complete Global Guide to Key Differences and Best Practices 

Top prediction market platforms

A growing number of platforms now offer access to prediction markets, ranging from regulated exchanges to crypto-native apps and brokerage integrations. Some operate under strict financial oversight, while others remain largely offshore or decentralized. This split is particularly clear when comparing regulated providers like Kalshi with crypto-based platforms like Polymarket.

Kalshi

Kalshi is the first fully regulated prediction market exchange in the United States, operating under federal oversight from the CFTC. It offers event contracts on a wide range of topics, although the vast majority of its trading volume comes from sports event outcomes.

Because Kalshi is regulated, it requires full identity verification and enforces strict compliance standards, including AML/KYC checks and reporting obligations. This makes it more accessible to institutional participants and businesses, but also limits the range of markets it can legally offer, particularly around politically sensitive events.

Polymarket

Polymarket is a crypto-based prediction market platform that has gained significant attention through its broad range of event contracts and accessibility to users in many jurisdictions. Users trade through crypto wallets using digital assets, with markets covering topics ranging from politics and economics to sports and cultural events.

Polymarket’s fee structure is generally lower than that of many traditional financial trading platforms, with costs primarily embedded in transaction and spread-related fees rather than fixed brokerage commissions. However, the platform has faced regulatory scrutiny in the United States. In 2022, the Commodity Futures Trading Commission (CFTC) fined Polymarket for operating an unregistered event-based derivatives market and required the platform to restrict access for US users. As prediction markets continue to evolve, crypto-based platforms remain an active area of discussion around licensing, AML, and KYC compliance obligations.

Robinhood and brokerage-integrated markets

Traditional financial platforms are also moving into prediction markets. Robinhood, for example, has integrated event contracts into its app, allowing retail users to trade on real-world outcomes alongside stocks and options. Coinbase has also expanded prediction-market-related offerings within its crypto ecosystem.

These integrations could significantly broaden adoption by lowering barriers to entry and embedding prediction markets into mainstream financial and crypto platforms. However, they also introduce additional regulatory complexity. Robinhood’s prediction market offerings, developed through its partnership with Kalshi, have become involved in multiple ongoing legal disputes and regulatory challenges in the United States, including litigation related to state gambling laws, federal preemption, and tribal gaming rights. Similar questions are emerging across the broader prediction market sector as regulators and courts continue to debate whether event contracts should be treated as financial derivatives, gambling products, or a hybrid of both.

As prediction markets expand into mainstream brokerage and crypto platforms, companies operating in this space must navigate evolving securities, derivatives, gambling, consumer protection, AML, and KYC requirements, at the same time maintaining strong identity verification and fraud prevention controls.

Are prediction markets legal?

The legality of prediction markets is not a simple yes-or-no question. It depends on where a platform operates, what contracts it offers, and who is asking.

In the US alone, three legal frameworks compete to claim jurisdiction over the same platforms and products. Federal regulators treat event contracts as financial derivatives under CFTC oversight. State governments argue that these contracts constitute unlicensed sports betting or gambling and are subject to state licensing. Tribal governments contend sports-event contracts violate their exclusive gaming rights under federal law. Each framework has different registration requirements, enforcement mechanisms, and consequences for non-compliance.

Outside the US, the picture is equally fragmented. Some jurisdictions treat prediction markets as regulated financial products. Others classify them as gambling and require betting licenses. Some have moved to restrict or block access altogether.

For businesses, this fragmentation creates a compliance challenge. A platform operating legally under one framework may violate another. A CFTC-registered exchange with full federal authorization can still face criminal charges at the state level. A crypto-native platform accessible globally may be unlicensed in every market it serves.

The classification question (derivatives, gambling, or tribal gaming) is not yet resolved in the US, and no definitive ruling from the Supreme Court or Congress has been issued. Until that changes, the legal status of prediction markets should be treated as jurisdiction- and contract-specific and actively evolving.

US federal regulation and the CFTC

In the United States, prediction markets offering event contracts are generally regulated by the Commodity Futures Trading Commission (CFTC) when structured as derivatives contracts. Platforms such as Kalshi operate within this framework as CFTC-regulated designated contract markets, listing contracts tied to measurable future outcomes.

Regulatory scrutiny around these markets has intensified in recent years, particularly as event contracts expanded into politically and culturally sensitive areas such as elections and sports. At the same time, disputes have emerged between federal regulators, states, and tribal authorities over whether certain prediction markets should be treated as regulated derivatives platforms, gambling products, or both. By 2026, disputes had escalated into multiple legal battles involving federal regulators, states, and platform operators over whether state gambling laws could be applied to CFTC-regulated prediction markets. In several cases involving states including Arizona, Connecticut, Illinois, New York, and Wisconsin, the central issue became whether the CFTC holds exclusive federal authority over designated contract markets offering event contracts.

The debate escalated after Kalshi sought to offer contracts tied to US congressional elections. The CFTC attempted to block the contracts on public interest grounds, arguing that election betting could raise concerns related to market integrity and the public interest. Kalshi challenged the decision in federal court and obtained a significant legal victory in 2024, with the court ruling that the CFTC had exceeded its authority in blocking the contracts under the relevant statutory framework. The CFTC later withdrew its appeal in 2025.

However, the ruling was narrow and did not fully resolve broader questions surrounding sports-event contracts and other prediction markets. As of 2026, litigation and regulatory disputes involving event contracts remained active in multiple states, with courts and regulators continuing to debate the boundaries between derivatives regulation, gambling law, and federal oversight.

State-level restrictions

Alongside federal oversight, state-level laws add another layer of complexity in the US. If prediction markets are classified as gambling rather than financial instruments, they may fall under state betting regulations, which vary widely across the US, and may even be illegal. This can restrict access, limit the types of contracts offered, or require additional licensing.

Nevada is actively enforcing gaming laws. In February 2026, the Nevada Gaming Control Board took legal action against Kalshi. In March 2026, a state court ordered Kalshi to stop offering contracts. Similar actions targeted Coinbase and Polymarket. A federal court initially ruled in favor of Kalshi, but a district judge later reversed that ruling. The case is now being appealed in the US Court of Appeals for the Ninth Circuit, along with related cases involving Robinhood and Crypto.com. As of May 2026, the focus in Nevada is leaning towards the state.

Meanwhile, Arizona filed criminal charges against Kalshi on March 17, 2026. This was the first criminal prosecution of a major prediction market platform in the US, accusing the company of operating an unlicensed, illegal gambling business. However, a federal judge issued a temporary restraining order barring the case from proceeding, siding with the CFTC that Arizona's actions were preempted by federal law. The underlying preemption dispute (US v. State of Arizona) remains pending, so the criminal prosecution is suspended but not dismissed.

For offshore or crypto-based platforms like Polymarket, the situation is even less clear. Jurisdictions such as the Netherlands and Argentina have taken enforcement action or restricted access when platforms are found to be offering unlicensed betting products. For businesses, this fragmented landscape creates real compliance challenges, particularly when onboarding users across multiple regions and ensuring adherence to local licensing, AML/KYC, and consumer protection requirements.

Suggested read: Fraud Trends 2026: AI Scams, Deepfakes, and Emerging Threats

Risks of trading prediction markets

Prediction markets carry a range of financial, tax, and regulatory risks, particularly as the sector grows and attracts more retail and institutional participation. Unlike traditional investing, these markets are tied to fixed outcomes, which creates a different risk profile and can expose both users and businesses to compliance challenges across jurisdictions.

Even if prediction markets themselves are legal, they are at significant risk of insider trading abuse and cheating, which leads to greater regulatory focus on this issue.

Financial risks

Trading event contracts is inherently high-risk. Each position resolves to either $0 or $1, meaning losses can be total if the outcome is incorrect. While prices reflect implied probabilities, they are not guarantees as markets can be driven by sentiment, thin liquidity, or sudden information shifts, which all lead to to mispricing or volatility.

Users can trade in and out of positions before settlement, yet, in less liquid markets, exits may be limited. This is particularly relevant on smaller platforms, where a lack of counterparties can make it difficult to manage exposure. As a result, prediction market trading can resemble speculative betting more than traditional portfolio-based investing.

Tax and regulatory risks

The tax treatment of prediction market gains is not always clearly defined and can vary depending on how the activity is classified, whether as trading income, capital gains, or gambling winnings.

From a regulatory perspective, the risks are also complex. Platforms may fall under financial, derivatives, or gambling frameworks depending on their structure and location. For example, US-based exchanges like Kalshi operate under established regulatory oversight, while offshore or crypto-based platforms such as Polymarket face ongoing suspicion from regulators worldwide.

Prediction markets remain legally contested in the US, as regulators and courts continue to debate whether they should be treated as financial products or a form of betting. As the market grows, it becomes harder to monitor risks such as insider trading, market manipulation, and even disputes over how events are defined or resolved.

At the same time, established players in the sports betting sector, including gaming operators and regulators, have pushed back through lawsuits and cease-and-desist actions, highlighting how the rapid financialization of real-world events is colliding with existing legal frameworks that were not designed for it.

Prediction markets and the wisdom of crowds

Prediction markets are often associated with the idea of the “wisdom of crowds.” This theory, popularized by James Surowiecki, suggests that large, diverse groups can collectively produce more accurate forecasts than individuals or small expert panels. Because traders put real money behind their views, markets continuously aggregate information, incentives, and sentiment into a single price, which acts as a live probability of an outcome.

In practice, prediction markets have shown strong forecasting performance in certain areas, particularly elections and economic indicators, where new information is quickly reflected in prices.

An early implementation of this concept is the Iowa Electronic Market, which was developed by the University of Iowa in 1988, and allowed users to trade contracts on the US presidential election. Tech giants are now taking this data seriously, with Google recently adding prediction market data to its AI-assisted Google Finance tool.

Suggested read: Know Your Machines: AI Agents and the Rising Insider Threat in Banking and Crypto

Identity verification on prediction markets

As prediction markets expand, identity verification has become a core requirement on regulated platforms. Because these markets involve real-money trading and resemble financial derivatives, operators are expected to implement KYC and AML controls similar to those used in traditional finance. This is especially important where platforms operate across borders or offer contracts tied to sensitive information.

Why KYC is required for prediction markets

KYC verification is primarily driven by AML and CTF obligations. Regulators require platforms to confirm user identities to prevent illicit activity, including fraud, money laundering, sanctions evasion, and market manipulation. In the US, platforms like Kalshi must comply with strict regulatory standards, including verifying users, monitoring transactions, and reporting suspicious activity as part of AML compliance obligations.

What the verification process involves

The KYC process on prediction market platforms typically involves collecting and verifying personal information such as name, date of birth, and address, along with government-issued identification. Users may also be required to complete biometric checks to confirm that the ID matches the individual opening the account.

On regulated platforms like Kalshi, this process is mandatory before users can fund accounts or trade contracts. Additional checks, such as enhanced due diligence, may apply depending on risk level, transaction size, or jurisdiction.

Protecting users through compliance

Effective identity verification plays a key role in protecting both users and platforms. By ensuring that participants are verified and compliant with regulators like the CFTC, prediction market platforms can reduce the risk of fraud, account takeovers, and market abuse. It also helps create a more transparent trading environment, where outcomes are less likely to be influenced by bad actors.

For businesses, robust KYC and AML compliance controls are both critical safeguards and regulatory requirements. As authorities increase scrutiny of event-based trading, platforms that fail to implement robust compliance frameworks risk enforcement action.

Prediction markets FAQ

• What are prediction markets?

  Prediction markets are platforms where people trade contracts based on the outcomes of real-world events. Simply put, these markets use prices to show how likely an event is to happen.
  
  These events can include elections, sports matches, economic indicators, cryptocurrency prices, weather events, entertainment awards, or even cultural trends. For example, a platform may offer a contract asking whether a certain candidate will win an election or whether Bitcoin will reach a specific price by the end of the month. If traders believe the outcome is likely, the price of that contract rises; if confidence falls, the price drops. Once the event is resolved, winning contracts pay out according to the final result.

• How do prediction markets work?

  Prediction markets work by allowing users to buy and sell event contracts priced between $0 and $1, representing the likelihood of an outcome. These prices fluctuate in real time as traders react to new information, effectively turning market activity into a live forecast.

• Are prediction markets legal in the US?

  As of mid-2026, US federal courts reach different conclusions on an important question: are sports-event contracts federally regulated financial products or illegal state-level gambling? In New Jersey, a federal appeals court ruled in favor of prediction markets, saying states cannot block them. In Ohio, another federal court supported the states and rejected the idea that these contracts are financial products.
  
  Until the Supreme Court or CFTC settles this, a platform's legal protection depends on where enforcement occurs, not on what the product is. No prediction market can claim nationwide legal cover right now.

• What is the best prediction market platform?

  The best prediction market platform depends on a user’s location and compliance requirements. Kalshi is currently the only CFTC-registered prediction market exchange in the United States, offering the clearest federal compliance framework. However, it faces active legal and regulatory disputes in multiple states, meaning that federal registration alone does not necessarily guarantee legal certainty in every jurisdiction.
  
  Robinhood and Coinbase offer prediction market products within their existing regulated brokerage and crypto ecosystems, where established KYC and AML frameworks are already in place.
  
  Polymarket offers one of the broadest ranges of event markets and is accessible in many jurisdictions through crypto wallets. However, it operates without CFTC registration and has faced regulatory enforcement in the United States, giving it a higher regulatory risk profile than more heavily regulated competitors.

• Do prediction markets require identity verification?

  Regulated prediction market platforms typically require identity verification through KYC checks to comply with financial regulations, reduce fraud risk, and support AML obligations. However, identity verification requirements vary significantly depending on the type of platform involved.
  
  CFTC-regulated exchanges such as Kalshi require full KYC before users can trade, including identity verification, address checks, and ongoing AML monitoring.
  
  Brokerage-integrated platforms such as Robinhood and Coinbase apply the existing KYC and compliance frameworks already used across their financial and crypto services. In most cases, users are verified during the platform’s standard onboarding process.
  
  Crypto-native platforms such as Polymarket operate differently, allowing users to access markets through crypto wallets rather than traditional brokerage-style accounts. While wallet access does not provide the same level of identity verification as conventional KYC frameworks, this model has attracted increased regulatory scrutiny in the United States. The CFTC has previously taken enforcement action against Polymarket related to its regulatory status and market operations.