What Are Prediction Markets and Why Are They in the News?
Prediction markets have become a major topic in the financial and political world. These platforms let people buy and sell contracts based on the outcome of real-world events. The price of each contract reflects the market’s best guess about the likelihood of an event happening. For example, if a contract on whether a candidate will win an election trades at $0.70, the market estimates a 70% chance of that outcome. Prediction markets are not new, but their popularity has exploded in recent years, especially as more people look for ways to profit from their knowledge of politics, sports, and even global events.
Yesterday, the most widely reported story about prediction markets was the State of New York’s lawsuit against Coinbase and Gemini. The state accuses these companies of running illegal gambling operations by offering prediction markets without proper licenses. This legal battle could shape the future of prediction markets in the United States and beyond.
New York’s Lawsuit: Billions at Stake for Coinbase and Gemini
On April 21, New York Attorney General Letitia James filed lawsuits against Coinbase and Gemini, two of the largest cryptocurrency exchanges in the country. The state claims these companies violated gambling laws by letting users bet on the outcomes of sports, politics, and entertainment events through their prediction market platforms. New York is seeking at least $2.2 billion from Coinbase and $1.2 billion from Gemini in damages.
The lawsuit argues that because users have no control over the outcome of these events, prediction market contracts are a form of gambling under state law. Coinbase and Gemini allegedly failed to obtain the required gaming licenses before offering these services to New York residents. The case is not just about money—it is about who gets to regulate prediction markets: the states or the federal government.
Prediction Markets: Growth, Popularity, and Controversy
The timing of the lawsuit is significant. Prediction markets have seen explosive growth. In 2025, total trading volume on these platforms reached over $44 billion, a fourfold increase from the previous year. Analysts expect volumes to exceed $325 billion in 2026, with some predicting the market could top $1.1 trillion by 2030. This surge began after a federal court ruling in October 2024 allowed Kalshi, a federally regulated exchange, to offer election contracts legally.
Major investors have taken notice. ICE, the parent company of the New York Stock Exchange, invested $2 billion in Polymarket, valuing the company at nearly $9 billion. Kalshi raised over $300 million at a $5 billion valuation, with backing from top venture capital firms like Sequoia and a16z. Even mainstream trading platforms like Robinhood have entered the space, generating hundreds of millions in annual revenue from event markets.
How Prediction Markets Work
Prediction markets operate much like stock exchanges, but instead of trading shares in companies, users trade contracts tied to the outcome of specific events. For example, a contract might pay $1 if a certain candidate wins an election or if a sports team covers the spread. The price of the contract reflects the market’s collective view of the probability of that outcome.
Platforms like Kalshi and Polymarket allow users to buy and sell these contracts, with prices moving up or down as new information becomes available. If you buy a contract at $0.55 and the event happens, you receive $1; if not, you get nothing. This system lets people profit from their knowledge or research, and it also provides a real-time snapshot of public expectations.
Legal and Regulatory Uncertainty
The legal status of prediction markets is complicated. In the United States, gambling laws vary by state, and there is ongoing debate about whether prediction markets are gambling or financial instruments. The Commodity Futures Trading Commission (CFTC) claims exclusive authority to regulate event contracts as commodity derivatives. However, states like New York argue that these platforms are offering unlicensed gambling products.
The conflict has led to a patchwork of regulations. Some states, including Nevada, Arizona, Tennessee, Illinois, Connecticut, and Massachusetts, have taken legal or regulatory action against prediction market platforms. In April, the CFTC even sued three states—Arizona, Connecticut, and Illinois—to stop them from regulating prediction markets, asserting federal authority.
A recent federal appeals court decision sided with Kalshi, affirming the CFTC’s exclusive oversight of sports-related event contracts. Despite this, states continue to challenge the federal government’s role, leading to what some call a “regulatory hot potato.” The issue may ultimately be decided by the Supreme Court or through new Congressional legislation, but that could take years.
Why the Stakes Are So High
The outcome of this legal battle will have major consequences for the future of prediction markets in the United States. If states win, platforms like Coinbase and Gemini could be forced to shut down their prediction markets or obtain costly state licenses. This could limit access for users and slow the growth of the industry. If the federal government prevails, prediction markets could become a mainstream part of the financial system, with national rules and oversight.
The stakes are not just financial. Prediction markets are used for more than just gambling. Advocates argue they are valuable tools for price discovery, helping businesses and governments understand public expectations about everything from elections to geopolitical risks. For example, a single contract on Polymarket about whether the U.S. would strike Iran by February 2026 attracted $73 million in trading volume, showing the power of these markets to aggregate information.
However, critics say most trading volume is driven by sports and politics, not sophisticated risk management. On Kalshi, about 85% of national volume comes from sports betting. On Polymarket, over 90% of volume is tied to sports, politics, and crypto. This undermines claims that prediction markets are mainly financial tools rather than gambling products.
How Prediction Markets Are Used in Politics and Sports
Prediction markets have become a popular way to gauge public sentiment in elections and major sporting events. For example, in Virginia, prediction markets are tracking the odds of a redistricting referendum passing. The outcome could reshape the state’s congressional delegation and influence national politics. Heavy trading volume—approaching $1.5 million—shows how seriously both parties take the market’s signals.
In sports, prediction markets offer real-time odds on games and player drafts. For instance, the New York Giants’ picks in the 2026 NFL Draft have sparked debate between oddsmakers and prediction markets. Platforms like Kalshi and Polymarket let users trade contracts on which player will be selected, with prices shifting as new information emerges.
These markets are also used to predict outcomes in entertainment, weather, and even global events. The flexibility and speed of prediction markets make them attractive to traders, analysts, and even journalists looking for up-to-date insights.
Concerns About Manipulation and Reliability
Despite their popularity, prediction markets face criticism over reliability and the risk of manipulation. Because these markets are less regulated than traditional financial exchanges, there are concerns about transparency and fairness. In smaller markets, such as state primaries or local elections, even modest bets can shift odds dramatically. This raises questions about whether prediction markets truly reflect public sentiment or just the actions of a few well-funded participants.
Experts warn that prediction market data should be used alongside other sources, such as polling and historical trends. While these markets can aggregate diverse information, their accuracy depends on the quality of data and the level of participation. Large swings in odds often signal uncertainty rather than clear momentum.
The Future of Prediction Markets: Mainstream or Marginalized?
The legal showdown in New York is just the latest chapter in the story of prediction markets. As trading volumes soar and more companies enter the space, the need for clear rules and oversight becomes urgent. Some experts, like fintech commentator Alex Johnson, suggest that the future of prediction markets depends on how they are defined. If they are tools for hedging risk, they belong in the financial system. If they are gambling, they should be regulated as such. If they are mechanisms for discovering truth, they could become part of news and research platforms.
Already, mainstream platforms like Google Finance have begun embedding live odds data from Polymarket and Kalshi. This signals growing acceptance of prediction markets as sources of information, not just gambling products.
However, until the legal questions are resolved, every prediction market operating in the United States faces significant regulatory risk. Multi-billion-dollar lawsuits, like those against Coinbase and Gemini, could reshape the industry overnight. The outcome will likely depend on future court decisions and, eventually, Congressional action.
Conclusion: A Market at the Crossroads
Prediction markets are at a crossroads. Their rapid growth and mainstream adoption have brought them into conflict with state and federal regulators. The lawsuits filed by New York against Coinbase and Gemini highlight the urgent need for clear rules. As billions of dollars and the future of a new industry hang in the balance, the world is watching to see whether prediction markets will become a permanent part of the financial landscape or face new restrictions.
For now, the only sure bet is that the debate over prediction markets is far from over. With more states considering legal action and federal agencies asserting their authority, the next few years will be critical in determining how Americans can use these powerful tools to predict—and perhaps even shape—the future.