Do you have a gut feeling about who will win your state’s midterm elections? Or when the Federal Reserve will next cut interest rates? Or which actor will nab an Oscar next year? Prediction markets hope you do — and that you’re confident enough in your intuitions to stake money on them.
Prediction markets, which allow you to place wagers on the outcome of future events, have existed in the U.S. in various forms for decades. But recent technological advances and legal changes under the Trump administration have allowed a host of new players — Kalshi, Polymarket and DraftKings Predictions among them — to turn the concept into massive betting hubs any American can use.
Trades on these platforms are expected to top $240 billion this year and reach $1 trillion by 2030, according to investment firm Bernstein.
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To sustain their record growth, prediction-market companies have begun to look outside their typical younger, male users to other demographics, including older Americans, who currently account for less than 7% of their traffic, data from Truist Securities shows.
One key way they’re doing this: marketing their offerings as investments regulated by the federal government to differentiate them from gambling on traditional betting platforms.
“Prediction-market companies want to take this as far as they can,” says Barry Jonas, senior gaming equity analyst for Truist Securities. “They need to expand, and why wouldn’t they go after folks with more disposable income and time?”
You’ve likely already been exposed to prediction markets, thanks to their ubiquitous ads during prime-time events or their prediction odds appearing in news coverage.
As these platforms become more entrenched in everyday life, here’s what you need to know about how they work and what the risks are.
How prediction markets operate.
Either on a freestanding platform, such as Kalshi or Polymarket, or one built into an online brokerage account or crypto app, as with Robinhood and Coinbase, prediction markets allow you to wager on an event by purchasing a contract tied to a specific outcome.
The price you pay typically ranges from 1 cent to 99 cents, depending on how strongly the market thinks that outcome will occur. Most contracts are framed as yes-no propositions, offer a fixed payout of $1 if you’re right, and have a set end date.
So if you think it will rain tomorrow, you buy a contract with a 20-cent “yes” position, and it pours, you’ll make 80 cents. If you were to bet against rain in this scenario, you’d lose the money you put up.
Unlike traditional gambling, there is no house or bookmaker setting the odds. Instead, the platforms create the contracts and then the market determines pricing, with odds being set by the first users to place an order. Revenue comes mostly from fees, typically a small percentage of the contract price or share of the profits.
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You can also make a new wager or sell your contract any time before the event happens as prices fluctuate and new information comes to light — a feature more akin to stocks than gambling, says Glenn Yamagata, executive director of the Oregon Council on Problem Gambling.
Because of these distinctions, prediction markets are treated as derivatives and regulated by the federal Commodity Futures Trading Commission rather than state gambling agencies. However, at least 16 states have introduced legislation to regulate or ban prediction markets, arguing that they essentially function as sports betting markets do.
The result of this ongoing legal debate: confusion. One-fourth of prediction-market users regard their bets as a form of entertainment and 18% view them as “speculative gambling with an intellectual veneer.”
Another quarter say they’re a useful supplement to their portfolios and 20% believe they are a legitimate alternative asset class, Truist reports. Additionally, 25% of participants fund their bets from their investment budgets, a study by the American Gaming Association found.
The risks of prediction markets.
One big draw of prediction markets for many users is the ability to place wagers on developments that overlap with their hobbies or expertise. That can lead people to believe they have an edge over others betting on the same event. But they’re not just competing against other individuals.
“There is this perception that it’s just Joe Public versus Joe Public, but in reality, you’re betting against very sophisticated institutional organizations that have access to information the typical citizen does not,” Jonas says.
There are also concerns that prediction markets can be manipulated, especially by 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 to win more than $400,000 on Polymarket.
(Image credit: Getty Images)
Still, more than half of users told Truist they preferred event contracts to sports betting or gambling because they felt they got better odds, and 70% thought they made money.
The reality looks quite different. Even though bets tend to be small, with about half of users wagering less than $100 per contract, most people don’t come out ahead. More than 100,000 accounts have lost at least $1,000 on Polymarket, but only half as many have won that much, a Bloomberg analysis found. Additionally, researchers found that since 2022, about seven in 10 Polymarket accounts have lost money.
If you do want to give prediction markets a try, experts suggest you set limits in advance on how much you’ll bet and how often, and never fund your wagers with money earmarked for saving goals.
The key, they urge, is to treat these bets as a fun expense, akin to going out for dinner or a movie, not as an investment.
“Prediction markets can be entertaining, but you should think of them the same way you do sports betting or visiting a casino,” says Richard Warr, a professor of finance at NC State University. “There are much better places to put your money if you’re looking to invest.”
If your goal is building long-term wealth instead of betting on short-term outcomes, a financial professional can help you create an investment strategy based on your goals and risk tolerance.
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Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.