Prediction markets: What they are and how they work

Core Insights - Prediction markets allow individuals to bet on the outcomes of various events, providing a platform for financial speculation based on collective insights [1][7][13] Prediction Market Basics - Prediction markets operate as exchanges where participants can purchase binary contracts that pay out based on the occurrence of specific events [1][15] - The cost of an event contract is typically lower than its payout, with the difference reflecting the odds based on market sentiment [2][15] Value of Prediction Markets - Transaction fees vary by platform, with Kalshi charging $0.02 for a $0.40 contract, while Polymarket operates without fees, profiting from the bid-ask spread [6] - Platforms require users to fund accounts before purchasing contracts, with Kalshi accepting various funding methods, including bank transfers and cryptocurrencies [6] - Some platforms may offer interest on uninvested cash, enhancing the value proposition for users [6] - Users can sell contracts before events occur if they change their outlook, allowing for flexibility in trading [6] Risks of Prediction Markets - Financial losses are a significant risk, as event contracts are speculative and may favor well-funded market makers [8] - The legality of prediction markets is under scrutiny, with the CFTC regulating real-money markets in the U.S. and past fines imposed on operators like Polymarket [9][10] Prediction Market Platforms - Notable platforms for U.S. users include Polymarket, which recently gained CFTC approval to relaunch, and Kalshi, which offers a wide range of event categories [11][14] Trading in Prediction Markets - Participants can assess contract costs to gauge event probabilities, with lower costs indicating higher perceived risk [18] - The ability to sell contracts as event dates approach allows traders to capitalize on changing market sentiments [19]