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Prediction markets let people trade contracts tied to future events. In a standard binary contract that pays $1 if an outcome happens and $0 if it does not, a Yes price of $0.70 is commonly read as a market-implied probability of about 70% at that moment. That is a signal from current trading—not a guarantee, objective odds, or promise that the market will be right.
The contract’s wording, payout, resolution source, deadline, liquidity, bid-ask spread, fees, taxes and venue rules all affect what the price means and what a trader can actually earn or lose. This guide explains the mechanics, the arithmetic, settlement and the U.S. regulatory context.
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What is a prediction market?
A prediction market is a marketplace for event contracts: financial positions whose value depends on a specified future outcome. The Commodity Futures Trading Commission (CFTC) describes these contracts as typically swaps. A contract might ask whether a named event will occur by a stated deadline, then pay a fixed amount if the settlement rules determine that the answer is Yes.
The simplest design is binary. A Yes contract pays $1 if the event occurs and $0 otherwise; a No contract pays under the opposite result. Other designs have several mutually exclusive choices, numeric ranges or partial payouts. Those details are not cosmetic. They determine how a price should be interpreted and which result counts at expiration.
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Prediction markets can be used to speculate on an outcome or to hedge exposure to a real-world event. For example, a citrus grower facing freeze risk could use a weather-related contract to offset some potential loss. A hedge does not eliminate risk: the contract may not match the exposure perfectly, and the position itself can lose money.
For background on the product category, see the CFTC’s explanation of prediction markets and event contracts and the Congressional Research Service overview.
How do prediction markets work?
The process is a trade followed by a rule-based settlement:
- A venue lists a question. The listing states the event, the possible outcomes, the payout and the expiration or resolution time.
- Participants submit orders. In an order-book market, buyers post bids and sellers post asks. A trade occurs when compatible orders meet. Some venues use other matching or pricing mechanisms, but the economic result is still a price created by willing buyers and sellers.
- Information changes the market. News, data and traders’ updated beliefs can shift bids, asks and the last traded price. A participant can sometimes close a position before settlement by selling it, if another trader is willing to transact.
- The contract is resolved. The venue applies the stated source, cutoff time, time zone and conditions. Winning contracts receive their specified payout; losing contracts receive nothing (or the amount specified by that contract).
Suppose a binary Yes contract with a $1 payout trades at $0.70. A buyer pays $0.70 and, if the contract resolves Yes, receives $1, for a gross gain of $0.30 before fees and taxes. If it resolves No, the contract pays nothing and the buyer loses the $0.70 purchase price. Selling before the event can produce a gain or loss at the then-current market price, but an exit is not guaranteed.
What does a 70-cent prediction-market contract mean?
For a binary contract with a $1 winning payout, divide the quoted price by $1 to get the simple implied probability. A $0.70 Yes price therefore corresponds to roughly 70% at that instant. A $0.25 price corresponds to about 25% under the same assumptions.
The CFTC summarizes the idea this way: “A contract’s price reflects traders’ perceived probability of the event outcome.” The word perceived matters. The figure is an interpretation of the price, not a measured frequency or a guaranteed forecast. It reflects the participants who are trading, the information they have, their incentives and the terms of the particular market.
The arithmetic also ignores costs. If a $0.70 contract incurs a $0.02 trading fee and a $0.01 settlement fee, the trader’s net cost is $0.73, so the maximum net gain on a $1 payout is $0.27 rather than $0.30. Taxes can further change the after-tax result. Always use the venue’s fee schedule and your own tax rules when estimating returns.
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A displayed quote is not necessarily the price at which every order can be filled. The bid is what a buyer currently offers; the ask is what a seller currently requests. The gap is the bid-ask spread. A trader who buys at the ask and immediately sells at the bid may lose the spread even if the underlying event view has not changed.
How are prediction-market prices set?
Prices emerge from supply and demand. Traders who believe an event is more likely may submit higher bids or buy available asks. Traders who believe it is less likely may sell, offer lower asks or buy No contracts. When new information changes those beliefs, the order book and transaction prices can move.
Liquidity determines how informative and usable a quote is. A liquid market has more willing counterparties and usually a narrower spread, so a modest order is less likely to move the price. A thin market may show a stale last trade, a wide spread or very little depth at the displayed quote. In that situation, the implied probability is a weaker signal and exiting a position can be difficult or expensive.
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Look at the order book, spread and available depth where the venue provides them. Trading activity can indicate whether a price has recently been challenged by other participants, but activity alone does not prove that a forecast is accurate. A market can be active and still be wrong.
Some venues use an automated market maker rather than a conventional order book. The mechanism changes how quotes are generated, but the same cautions apply: the contract terms, liquidity, fees and ability to exit determine what the quoted price means in practice.
What should I check in a contract before trading?
Read the complete contract specification rather than relying on its headline. The following checklist catches the most consequential ambiguities:
- Exact question: Identify the event, geography, entity, measurement and conditions. “Will inflation fall?” is incomplete without a defined index, release and threshold.
- Outcome structure: Confirm whether the contract is binary, multiple-choice, a range or a set of partial payouts.
- Payout: Note the amount for each outcome and whether it is paid in dollars, another asset or an account credit.
- Resolution source: Find the official data release, agency, election certification or other named source that determines the result.
- Cutoff and time zone: Check the exact closing time, publication deadline and any rule for delayed, revised or missing data.
- Expiration versus resolution: A market may stop accepting trades before the official result is certified. Those are separate dates.
- Early close or cancellation rules: Read what happens if the event is postponed, the source changes its methodology or the question becomes impossible to answer.
- Fees and taxes: Include trading, withdrawal and settlement charges in the payoff calculation and keep records for tax reporting.
- Trading conditions: Review spread, depth, open interest or recent volume where available, plus any position limits.
Platform documentation also directs users to the individual contract terms, certified results and timing used for resolution. The contract-terms explanation from Coinbase Help illustrates why the listing itself—not a casual interpretation of the title—controls settlement.
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How do binary, multiple-outcome and range contracts differ?
A binary contract has two exhaustive outcomes, normally Yes and No, with a fixed payout. Its price can be translated into a simple probability-like number only when the payout and definitions are clear.
A multiple-outcome market offers several mutually exclusive possibilities, such as different candidates winning or different temperature bands. Each contract has its own price, but the prices across the complete set are what matter. If the outcomes are truly exhaustive and the payout is the same, their prices may add to approximately the payout amount; fees, market frictions and incomplete or overlapping definitions can prevent an exact sum.
A range contract pays according to a band or formula. A price for “between 2% and 3%” is not automatically comparable with a binary Yes price for “at least 2%.” Partial payouts and boundary rules can materially change the payoff. Compare exact wording and settlement rules before comparing prices.
What happens when a prediction market settles?
At settlement, the venue applies the contract’s predefined resolution procedure. It identifies the authorized source, checks the result at the specified cutoff and marks each position according to the payout table. A winning binary contract paying $1 is credited with $1; a losing contract is credited with $0.
Pay attention to revisions and certification. A preliminary number may not be the value the contract uses if the rules specify a later certified release. Likewise, an event can occur but still resolve No if it fails a geographic, timing or definitional condition. If a source is unavailable or an event is postponed, the contract’s fallback, cancellation or rescheduling clause controls.
Settlement is not the same as an opinion poll. Once the rule-defined outcome is posted, the market does not pay according to what seems most plausible; it pays according to the stated source and terms. Disputes, corrections and appeals—if offered—follow the venue’s rules.
Are prediction-market prices reliable forecasts?
They can aggregate useful information, but reliability varies by market. A liquid market with clearly defined outcomes and timely information may incorporate many participants’ views. A thin market, unclear contract or one-sided order flow can produce a price that is noisy, stale or difficult to trade around.
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Do not treat an implied probability as an objective truth. Prices can be wrong, can move sharply after news and can be influenced by fees, hedging motives, risk limits or participants who are trading for reasons other than pure forecasting. The market also reports a probability at a particular time; it is not a promise about the final result.
When evaluating a quote, compare it with the spread and depth, inspect recent activity, verify the payout and ask whether the market’s participants have access to the relevant information. None of those checks guarantees accuracy, but they reveal when a percentage should be treated cautiously.
What are the main risks?
- Loss of principal: A losing position can forfeit the purchase price. A $0.70 Yes contract does not lose only the $0.30 potential profit; it can lose the full $0.70 paid.
- Liquidity risk: You may be unable to sell at a reasonable price before settlement, especially in a thin market.
- Spread and slippage: The price available for a larger order can be worse than the headline quote.
- Rule risk: A surprising definition, source, deadline or time zone can determine an outcome differently from the headline.
- Event and model risk: News, data revisions and forecasting errors can move the market or make the consensus wrong.
- Cost and tax risk: Fees and taxes reduce returns and may apply even when a displayed price suggests a gain.
- Regulatory and access risk: Availability, eligible customers and permitted contracts depend on the venue and jurisdiction and can change.
Use only money you can afford to lose, understand the maximum loss before placing an order and avoid treating a probability quote as a guarantee.
How can prediction markets be used for hedging?
Hedging means taking a position that may offset a separate exposure. A grower worried about a freeze could buy a contract that pays if a qualifying freeze occurs. If the freeze damages the crop, the contract payout may offset part of the loss; if no qualifying freeze occurs, the crop may fare better but the contract premium is lost.
A useful hedge requires matching the contract’s location, dates, measurement and payout to the real exposure. Basis risk remains when the contract’s weather station, threshold or timing differs from the actual loss. Speculation and hedging also have different objectives: a hedger may accept a negative expected return in exchange for reducing uncertainty.
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1Scan for outdated or missing drivers - takes under a minute2Repair Windows errors before they cause bigger problems3Fix the driver behind crashes, sound loss and screen glitchesWhat is the U.S. regulatory status of prediction markets?
In the United States, event contracts are generally treated as derivatives, and some venues register with the CFTC as designated contract markets. The CFTC describes oversight that includes exchange rules and monitoring. The legal status of a particular contract depends on its structure, venue, participants and jurisdiction.
The CFTC issued a proposed rule in 2026 addressing which event contracts may be listed. A proposal is not the same as a final rule, and regulatory treatment can change. Do not assume that permission to access one market means every event contract is lawful or available everywhere. Check the venue’s current eligibility, disclosures and jurisdiction-specific restrictions close to the time you trade. The CFTC/Federal Register proposed rule and the CFTC 2026 fact sheet provide primary-source context.
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How should I compare two prediction contracts?
Compare the contracts in this order:
- Read the full wording and confirm that the questions describe the same event.
- Compare resolution source, cutoff, time zone, certification and cancellation rules.
- Compare payout structure: binary, multiple outcome, range or partial payout.
- Record the bid, ask, spread and available depth—not just the last trade.
- Subtract all trading and settlement fees from the possible return.
- Compare expiration and whether early trading or exit is available.
- Check venue rules, position limits, eligibility and current regulatory disclosures.
Two contracts that appear to ask the same question may have different sources, deadlines or definitions. Their prices therefore should not be treated as interchangeable probabilities.
Where can I learn more?
The CFTC’s consumer explainer and fact sheet cover event-contract mechanics, risks and oversight. The CRS overview discusses derivatives and U.S. policy. For a deeper academic treatment, Springer lists Prediction Markets: Fundamentals, Designs, and Applications, a specialist book on market fundamentals, design and applications rather than a beginner trading manual.
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Frequently Asked Questions
Can I sell a prediction-market contract before it resolves?
Often, yes, if the venue has a willing counterparty and the contract remains tradable. Your exit price may be below your purchase price, and a thin market can make an exit impossible or costly. Selling also means you no longer receive the final settlement payout.
Why can two markets show different probabilities for the same event?
The contracts may use different deadlines, data sources, geographic definitions or payout rules. Even identical wording can produce different quotes when liquidity, fees, participant mix and trading hours differ.
Do prediction-market prices include fees?
Usually the displayed contract price is the trade price, not your all-in cost. Trading, settlement or withdrawal charges may be added separately, so calculate net returns from the venue’s fee schedule.
What if the official result is delayed or revised?
The contract’s resolution clause determines whether a preliminary release, a later certified figure or a fallback source controls. A revision matters only if the specified rules use that revised or certified value.
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