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Prediction markets such as Kalshi have exploded in popularity in the US over the past few years, leading the charge in what has become the biggest development in the American gaming industry since the Supreme Court of the United States repealed the Professional and Amateur Sports Protection Act in 2018 and opened the door to legal sports betting.
The markets carve out a niche for bettors in states where sports betting is outlawed because they offer contracts on sporting events. In some cases, they may face pushback from states that have legalized sports betting. Do not mistake prediction markets for just another form of sports betting, though. They offer contracts on a wide range of events beyond sports, and the way they price events is far different from how a sportsbook sets betting lines.
A beginner-friendly explanation of how event contracts get priced
Prediction markets are vastly different. Rather than offering wagers based on odds, they offer contracts with two outcomes: yes and no. Because prediction markets are contract-based rather than wager-based, they are governed by federal regulations for trading commodities, not state-level sports betting laws.
Because prediction markets are contract-based, participants can buy contracts on virtually any event: the time of Taylor Swift’s wedding, how many hurricanes will make landfall in Florida in 2026, or how many times Donald Trump uses the word “greatest” during a State of the Union address.
The price of a contract is determined by supply and demand. For example, consider a contract on whether Taylor Swift’s wedding will take place after 5 p.m. Each contract pays out $1, but the cost to buy it depends on how many people are buying “yes” contracts versus “no” contracts. If “yes” contracts are more popular, their price increases, and vice versa.
If a majority of participants are buying “yes” contracts, those contracts may cost 70 cents, while “no” contracts cost 30 cents.
If you have it on good authority from a Swiftie blog that Taylor and Travis are getting married at 6 p.m. and you buy a “yes” contract for 5 p.m. or later at 70 cents, you’ll receive your 70 cents back plus 30 cents if you are correct. If you are wrong, you’ll lose the 70 cents.
What prediction market prices represent
One helpful way to think about prediction market prices is as implied probabilities. If a “yes” contract is trading at 60 cents, the market is essentially saying there is about a 60% chance that the outcome will happen. Prices update in real time as new information becomes available and traders buy or sell contracts based on changing expectations.
In markets with fewer participants, prices can swing more sharply, while heavily traded markets tend to be more stable. Unlike traditional sports bets, traders can often sell their contracts before an event is decided, locking in a profit or loss early.
