The Rise of Prediction Markets

The Rise of Prediction Markets and Why They Matter to Investors

I first wrote about sports betting in September, 2021. In that piece, I talked about the proliferation of events that we can bet on; it’s not about simple winners and losers any more. Using an example from football, touchdowns, field goals, passes completed, yards rushed, interceptions, fumbles, etc., practically any action in a football game creates a knock-on effect in the world of sports betting, or predicting as the industry prefers to call it. The crazy thing is, the term “prediction market” did not occur at all in that piece I wrote. Four years ago, “prediction markets” as a thing didn’t exist. Today, they’re trading over $2 billion a week. What are prediction markets? How do they work? How can investors participate in their growth? And finally, should investors participate in their growth?

What Are Prediction Markets and How Do They Work?

Prediction markets, also known as betting markets or event derivatives, are exchange-traded markets that enable the prediction of specific outcomes using financial payoffs. Bettors, or participants, buy and sell “event contracts” whose value is tied to the outcome of a future event, such as political elections, sports matches, economic indicators, and cultural events. Contracts are written such that the outcome is a binary event, a “yes” or “no” answer. “Will China invade Taiwan in 2025?” (currently trading at a 2% chance), or “Super Bowl Champion 2026: Philadelphia” (currently trading at a 15% chance) are examples. Contracts fluctuate in price between $0.01 and $1.00, with the implied probability being the current price. At the end of the time period, winning contracts are paid $1.00 each and losing contracts are worthless.

Source: Polymarket.com

Key Differences Between Prediction Markets and Traditional Betting

Although prediction markets and traditional betting both let people stake money on future events, they differ in structure, incentives, and market structure. First is the pricing mechanism. Prediction markets usually use continuous trading that lets prices move freely based on supply and demand. Traditional betting—especially with bookmakers—typically uses fixed odds set by the house, which include a built-in margin (the “vig”) to ensure profit for the operator. Second is the “wisdom of the crowd” effect. Prediction markets are explicitly designed as information-aggregation tools. Because traders can update positions continuously as new information arrives, the current price is interpreted as the prevailing consensus probability based on all trades placed. Third is the structure of the market itself: Peer-to-peer vs. bookmaker model. Many prediction markets are peer-to-peer (traders trade with other traders), while many betting platforms are bookmaker models where bettors take prices that the house sets. Peer-to-peer odds are set by the market itself, not by the house. This structure also means that a counter party has to arise for any given contract. Apparently, $255,098 has traded on whether the Earth is flat. While the odds are low (less than 1%), that’s still a lot of counter parties willing to risk some capital. Finally, prediction markets are frequently used by researchers, firms, and policy groups to forecast outcomes and keep tabs on expert judgment.

Source: Polymarket.com

Are Prediction Markets Legal in the United States?

Modern prediction markets have evolved rapidly with platforms like Kalshi, Polymarket, and others expanding the scope and accessibility of event trading. Legally, prediction markets occupy a complex territory, especially in the United States, where federal oversight is provided by the Commodity Futures Trading Commission (CFTC), which differentiates these markets from typical gambling activities. Traditional sports betting is regulated by the states, with 39 having legal sports betting available. Critics of sports-based contracts point out that they may be used to circumvent state-level gambling provisions and attract younger (18 rather than 21) bettors. In recent years, court victories and evolving CFTC policy have lent prediction markets partial legitimacy at the federal level; however, state-level regulators continue to scrutinize and sometimes prohibit these platforms, especially when event contracts resemble gambling or unregulated sports betting. As of late 2025, the markets remain under active legal and regulatory debate, with some states issuing cease-and-desist orders and others allowing activity, leaving the overall legal landscape patchy, dynamic, and very much in flux

How Traditional Betting Platforms Are Responding

Seeing the rapid growth in prediction markets, traditional betting sites such as DraftKings, FanDuel, and Fanatics are following parallel paths. These established leaders in sports betting are launching event contract trading platforms on their own while continuing their traditional platforms. Their moves are driven both by regulatory strategies—often targeting states where online gambling is banned—and to counter the competitive threat from the likes of Kalshi and Polymarket.

Should Investors Participate in Prediction Markets?

Without a doubt, the popularity of prediction markets is growing like wildfire. But is it gambling? Betting? Something new? The lines may be difficult to define. This could be a case akin to obscenity (“I know it when I see it”), but I’m sure the courts aren’t through with the legal wrangling. For the time being, I’ll call prediction markets “fintainment” (financial entertainment). Until the legal status becomes clearer, ACM portfolios, where appropriate, will stick to licensed and regulated providers in the fast-growing, quickly-evolving prediction market arena.

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