What Are Prediction Markets and Why Are They Growing?
Prediction markets are online platforms where people buy and sell contracts based on the outcomes of real-world events. These contracts are usually simple “yes” or “no” bets on topics like sports, politics, economics, and even celebrity relationships. The price of each contract reflects the market’s collective view of the likelihood that an event will happen. For example, if a contract on a Federal Reserve rate cut is trading at $0.70, the market believes there is a 70% chance of that outcome. The growth of these markets has been explosive, with trading volume exceeding $60 billion in 2025, a 400% increase from the previous year. This surge is driven by both new platforms and established companies entering the space, as well as a growing public interest in betting on current events.
The Return of Polymarket and the Rise of Kalshi
Polymarket, one of the most prominent prediction market platforms, recently made headlines by returning to the U.S. market after a period of regulatory trouble. The company marked its comeback with a promotional event—a free grocery store in New York City’s Greenwich Village. This event was seen as a nod to local political debates about city-run grocery stores. Polymarket allows users to trade contracts on a wide range of events, from the outcome of the Super Bowl coin flip to major economic decisions. In 2022, the Commodity Futures Trading Commission (CFTC) fined Polymarket $1.4 million for operating an unregistered derivatives market, forcing it to block U.S. users. However, after acquiring QCEX, a regulated options trading platform, for $112 million in July 2025, Polymarket secured federal regulatory approval and relaunched its app in the U.S. in November.
Kalshi, another major player, has also expanded rapidly. Both companies are now at the center of legal battles over whether their event contracts should be regulated as gambling or as federally overseen derivatives. States like Nevada, New York, and New Jersey have challenged these platforms, while Massachusetts recently won an injunction against Kalshi, temporarily banning sports-related contracts. Kalshi responded by criticizing the use of outdated laws and has vowed to defend its technology in court. Meanwhile, Polymarket has filed its own lawsuit against Massachusetts, seeking to prevent the enforcement of state gambling laws against federally regulated exchanges.
How Prediction Markets Work
Prediction markets operate by letting users buy and sell event contracts priced between $0 and $1. The price reflects the market’s estimate of the probability that the event will occur. For example, before the Super Bowl, a contract predicting a Seattle Seahawks win might trade at $0.68, suggesting a 68% chance of victory. Unlike traditional casinos, where players bet against the house, prediction market participants trade contracts with each other. The platforms collect small fees on each trade. Prices fluctuate as new information becomes available and as more money is invested on either side of a contract. This system allows for real-time, crowdsourced odds that can be more dynamic and accurate than traditional expert analysis.
Legal and Regulatory Uncertainty
The legal status of prediction markets remains unsettled. The CFTC regulates these platforms at the federal level, classifying them as derivatives markets. However, many state regulators argue that prediction markets are a form of gambling and should be subject to state laws and taxes. There are at least 19 ongoing federal lawsuits challenging the legality of platforms like Kalshi. In Massachusetts, a judge banned Kalshi from offering sports contracts after the state sued for operating without a gambling license. Kalshi has counter-sued, arguing that state regulators lack authority over federally regulated derivatives markets.
A group of 23 Democratic U.S. senators recently sent a letter urging the CFTC to stay out of ongoing state lawsuits and to bar prediction markets from offering contracts on sensitive topics like war, terrorism, and sports. The senators argue that current products evade state and tribal consumer protections and generate no public revenue for local governments. Industry advocates, however, support the CFTC’s exclusive jurisdiction, claiming that state gaming commissions are not equipped to oversee complex derivatives markets.
Insider Trading and Ethical Concerns
Prediction markets have also come under scrutiny for potential insider trading and ethical issues. In a recent high-profile case, Israeli authorities arrested two individuals—a civilian and a military reservist—accused of using classified military secrets to place bets on Polymarket about military operations. This is the first known instance of arrests linked to prediction market bets allegedly made with military secrets. The case has raised alarms about the risk of sensitive information being used for profit and the potential for such markets to signal operational details to adversaries.
Former SEC commissioner Joseph Grundfest warned that anonymous, crypto-based markets like Polymarket could facilitate illegal or immoral trading activities. There have also been cases where users made large profits by correctly predicting political events before they became public knowledge, raising questions about the use of nonpublic information. While Kalshi bans betting by anyone with material non-public information, enforcement remains a challenge.
The Role of the CFTC and Federal Oversight
The CFTC has signaled a renewed focus on prediction markets, especially regarding insider trading and market manipulation. In 2025, the agency filed only 11 enforcement actions related to these markets, down from 58 the previous year, but officials expect oversight to increase in 2026. CFTC Chairman Michael Selig has outlined a four-point plan for prediction markets, emphasizing the need to monitor for fraud and manipulation. The agency is also working with market operators and sports leagues to stay informed about potential abuses.
The U.S. Attorney’s Office for the Southern District of New York has also indicated that it expects to prosecute fraud related to prediction market trading. Such cases could involve charges under the Commodity Exchange Act, which carries criminal penalties. As the industry grows, both federal and state authorities are likely to increase their scrutiny of these platforms.
From Academic Experiment to Billion-Dollar Industry
The modern prediction market industry traces its roots to a 1988 experiment by three economists—Robert Forsythe, George Neumann, and Forrest Nelson—at the University of Iowa. They created the Iowa Electronic Markets (IEM) to test whether betting markets could provide more accurate forecasts than traditional polls. The IEM proved highly accurate, even with a small number of traders, and inspired the creation of commercial platforms like Polymarket and Kalshi.
The industry has since grown into a multibillion-dollar business, with platforms now offering bets on everything from political elections to the outcome of the Super Bowl halftime show. The success of these markets has attracted investors, including Donald Trump Jr., who serves as an advisor to both Polymarket and Kalshi. His involvement, along with plans for a prediction market on the Truth Social platform, has drawn criticism from those concerned about the influence of political figures on regulatory policy.
Entertainment, Investment, or Gambling?
Experts are divided on whether prediction markets should be seen as investment tools, entertainment, or gambling. Financial professionals recommend treating prediction markets as part of an “opportunity portfolio,” limited to a small portion of investable assets. Certified financial planner Ivory Johnson advises participants to view prediction market activity as entertainment spending, similar to hobbies like golf, rather than as a reliable source of income. The risks are similar to those of recreational gambling, and overconfidence can lead to significant financial losses.
Critics warn that the easy accessibility of prediction markets could encourage broader gambling habits, especially as platforms allow bets on virtually any topic, including celebrity relationships and global conflicts. Supporters argue that prediction markets harness the “wisdom of the crowd,” producing more accurate forecasts than individual experts. However, the potential for scams, insider trading, and manipulation remains a concern.
The Future of Prediction Markets
Despite legal and ethical challenges, prediction markets continue to grow in popularity and influence. The industry’s rapid expansion has prompted calls for clearer regulatory standards and stronger consumer protections. As more companies enter the space—including traditional sports betting firms and social media platforms—the debate over how to regulate prediction markets is likely to intensify.
For now, prediction markets offer a unique blend of entertainment, investment, and forecasting. They provide real-time, crowdsourced odds on a wide range of events, giving participants a stake in the outcomes of the world’s biggest stories. As regulators, lawmakers, and industry leaders grapple with the challenges posed by these platforms, the future of prediction markets remains uncertain—but their impact on how we predict and understand real-world events is undeniable.
