Prediction Markets: What They Are & How to Use Them to Bet on Sports

If you’re wondering, “What is a prediction market?”, you’re on the right page. Prediction markets are platforms where users trade shares based on what they think will happen in future events for sports, politics, finance, entertainment, and more. Read on to find out more about it and the sites available in the US market!

What Is a Prediction Market?

Prediction markets are platforms where people can trade on the outcome of future events. Instead of betting fixed amounts for a fixed payout like you would in gambling, you buy shares in an outcome. These events can cover a range of different topics, like elections, financial markets, pop culture or sports. 

The value of each contract shows what traders as a group think the chances are of something happening. The higher the price, the more likely they think it is. So if something’s trading at $0.40, it basically means traders think there’s about a 40% chance of it happening.

Here’s a clear example of how it works:

Will the LA Lakers make it to the NBA playoffs?

• Yes: $0.40

• No: $0.61

A trader buys “yes” positions on 1,000 contracts at $0.40 each, spending $400.

If the Lakers qualify, each share pays out $1, turning $400 into $1,000. But if they miss the playoffs, the shares are worth nothing, and the trader loses the full $400.

Prediction markets for sports can cover a wide range of scenarios, including team performance, player stats, game-specific events, off-the-field developments, statistical milestones, and fun, novelty markets. It can basically be any binary question with a clear result and deadline.

In the US, sports are still a developing category on prediction market platforms, but they are picking up momentum. So far, most of the action has been around politics and finance, but sports markets are slowly getting more attention as regulations evolve.

How Do Prediction Markets Work?

Prediction markets work as binary options, usually where each contract has a simple yes or no outcome. You’re choosing whether you think something will happen or not; it’s as simple as that. 

These contracts can be traded at any time before the result is finalised. If you believe an event will happen, you buy in. If you change your mind or think it won’t happen, you sell your position before the outcome is decided.

Each contract usually pays out $1 if your prediction is correct and $0 if not. Shares are bought for less than $1, and the exact price reflects the market’s confidence in the outcome. As more people trade, the price shifts based on supply and demand, showing what the market believes the odds to be.

Prediction markets usually show the average prices, how many shares you’d get for your money, and the possible return. It looks somewhat similar to a bet slip at a traditional sportsbook.

Here’s a football example: “Will the Philadelphia Eagles make it to the next Super Bowl?”

Say that the market priced the outcomes like this:

• Yes: $0.73

• No: $0.27

Since “Yes” is seen as more likely, it is priced higher. Choosing “No” would be the riskier pick, but it also offers a bigger potential payout if the team does make it. So, if you’d put $10 on “Yes” at $0.73, you’d get 13.7 shares. If the Eagles make it to the Big Game, each share pays out $1, giving you a total return of $13.70, which is $3.70 in profit. 

Conversely, if you placed $10 on “No” at $0.27, you’d get 37.04 shares. If the team doesn’t make it, those shares would pay out $1 each, and you’d receive $37.04, which is a $27.04 profit from your original $10.

Are Prediction Markets Considered Gambling?

Prediction markets may appear like gambling on the surface, but they are legally and structurally different. 

You’re not betting against a sportsbook or a fixed set of odds. Instead, you’re buying and selling shares in an outcome with other traders. The price of those shares changes based on what people are willing to pay, so it acts more like trading on a financial market.

Technically, whether prediction markets are considered gambling depends on how the platform is set up, what events are offered, and whether regulators have approved them. Some platforms have been forced to stop operating after being classified as offering unlicensed gambling.

Prediction Markets vs Sports Betting 

Both prediction markets and sports betting involve making a prediction about future events, but they’re entirely different in how they’re set up, regulated, and used. 

Prediction markets are financial exchanges where the prices change based on demand, much like in a stock market. The predictions you make are essentially taking a position against other traders, not taking action from the house.  

Sports betting, on the other hand, involves placing a set wager against odds created by a bookmaker. You’re locked in once the bet is placed, and you’re playing against the house.

In the US, that’s officially considered gambling and is regulated by state-level gambling laws. However, prediction markets in the US are usually governed by federal financial regulators, as financial exchanges that just happen to allow sports predictions.

How to Bet on Sports Using Prediction Markets (Best Strategies)

Prediction markets take a different approach to betting on sports. Since you’re trading outcomes instead of placing fixed bets, the way you make decisions works a little differently.

Keep in mind these key tips:

• Buy Low, Sell High: Unlike sports betting, Prediction markets allow you to sell shares before the event ends. If you see that the price of the shares has gone up, you can sell at a higher price and cash out without waiting for the outcome. That way, you’ve locked in profit even if the result doesn’t go your way. Sportsbooks do sometimes offer early cashout options, but generally at unfavorable rates for bettors.

• Take Advantage of Biased Markets: Sometimes, a market may be mispriced as it is based on the sentiment of other traders rather than logic or objective analysis. If you can spot this, you can take advantage of it by buying undervalued outcomes or selling overvalued ones.

• Use Past Data: Just like sports betting, researching teams or players can help you make smarter trades. You should look at their history, past stats, patterns, or even previous market results when deciding whether to buy in, hold, or sell shares.

• Stick to Active Markets: If not many people are trading in a market, it can be tricky to get in or out at the price you want. That’s why it’s better to stick with markets that have higher activity, allowing you to make moves without losing value.

• Useful for Hedging: Prediction markets can be used in conjunction with sports betting. If you’ve placed a traditional bet elsewhere, you can use prediction markets to hedge your risk or reduce losses.

Pros & Cons of Using Prediction Markets

Using prediction markets for sports isn’t the same as placing a standard gambling bet. It comes with its own advantages and disadvantages. 

Here’s a look at a few key pros and cons:

Pros:

👍 Better Odds: As you’re not betting against a bookmaker and trading with other users, it usually means fairer pricing with no built-in margin that’s working against you.

👍 Bow Out Early: Because you’re not tied to a fixed wager, you can sell anytime before the outcome is finalized. If the odds improve, you can take the win early instead of waiting until the end and potentially losing. There’s more flexibility compared to traditional betting.

👍 Accessibility: Predictions markets may be accessible in states where traditional sports betting is still restricted.

👍 Betting Odds Comparison: Since the prices reflect what traders think will happen, you can line them up against sportsbook odds to inform your decisions.

Cons:

👎 Limited Sports Contracts: You’re not going to find as many options for sports predictions as a traditional sportsbook, because the regulations around sports contracts are still strict across the US.

👎 Risk of Less Active Markets: Some prediction markets don’t have a lot of trading activity, which can make it harder to buy or sell shares at a good price. 

👎 Fewer Promos: Sportsbooks routinely offer all kinds of bonuses and promotions to attract bettors and keep them engaged. This is much less of a thing with prediction markets. 

Prediction Markets Sites

#1 Kalshi

Kalshi is the most popular legal prediction market site in the US. The CFTC regulates and approves it, so it is allowed to legally operate nationwide. Its popular sports categories include basketball, soccer, golf, tennis, baseball, football, Formula 1, hockey, UFC, and video games.

Typical examples of sports contracts include “Pro Hockey Champion,” “Champions League Winner,” and other future-like markets where you’re predicting the winner of a season or tournament before it concludes. Then, you simply pick “Yes” or “No” for each possible team or outcome listed.

Read our full Kalshi review for more details.

#2 Robinhood

Robinhood is a stock trading app that has recently launched a prediction market section on its platform. This is legal as it is powered by Kalshi. It started by offering contracts on men’s and women’s NCAA basketball tournaments, allowing users to trade on outcomes like which teams would advance or win it all.

Get more details in our in-depth Robinhood review.

Other

Right now, Kalshi and Robinhood are the only options for sports contracts in the US.

Kalshi is currently the only fully regulated prediction market offering contracts on sports-related events, and Robinhood can only do so because it partnered with Kalshi.

Other prediction market websites, like Iowa Electronic Markets, PredictIt, Interactive Brokers, Crypto.com, and NinjaTrader, don’t offer sports contracts.

Are Prediction Markets Legal?

It depends. Over the past few years, the legal landscape around prediction markets has become increasingly complicated. Both federal and state regulators have questioned how these platforms work and what types of events should be allowed for public trading. As a result, their legality depends on the specific platform, the markets offered, and whether the operator is working within regulation.

Legally speaking, prediction markets are in a bit of a grey zone in the US. The Commodity Futures Trading Commission (CFTC) oversees them, but not all markets are treated the same. A few platforms, like Kalshi, were initially given the green light to run specific types of contracts.

However, the CFTC has taken action against other platforms that launched markets without regulatory approval. While the agency has succeeded in shutting down some unregistered markets, its ongoing case against Kalshi regarding political event contracts has not been going well, which is good news for prediction market platforms.

Even if a platform is federally compliant, individual states in the US may still restrict or ban access. Several states have also issued cease-and-desist letters to operators they believe are violating state gambling laws.

Prediction Markets Conclusion

Prediction markets are still emerging in the context of sports in the US, but they offer a flexible alternative to traditional sportsbooks. While the current options are limited, the format opens the door to a whole new kind of sports prediction.

As regulation changes, prediction markets could become a bigger part of how people bet on sports in the future.