The rapid rise of sports prediction markets has already clinched first place for the biggest story in the U.S. betting industry this year.

Businesses offering contracts on sports events are now being valued in the billions. But while their water cooler conversation value has been priceless for industry insiders, they remain somewhat of an unknown to the average sports fan.

Proponents of prediction markets, in which people trade contracts tied to the result of future real-world events, describe them as a revolutionary asset class and, in the words of Kalshi CEO Tarek Mansour, a “truth machine.”

They claim the markets are more accurate than polls or other statistical prediction models, while being useful as a tool to hedge against the financial effects of real-world events.

Critics counter that sports futures trading is no different than gambling and must be regulated and taxed as such on a state-by-state basis. Since late December, sports prediction markets have been available in all 50 states, overseen by the federal Commodity Futures Trading Commission (CFTC) despite legal challenges.

Below, Sportico answers key questions about prediction markets.

What is a prediction market?

Prediction markets allow people to stake money on the results of real-world events: elections, papal conclaves, movie review scores and sports—which is more popular now than any other genre.

They are offered in the form of “yes” and “no” contracts. As in, “yes,” the New York Mets will win tonight. Or “no,” President Donald Trump will not say “China” in his next speech.

Prediction markets involving all sorts of topics have operated internationally for decades.

In the U.S., sports has taken off as the dominant prediction market menu item as regulations have loosened. Crypto.com became the first to offer sports contracts nationwide in late December, against the wishes of the departing Joe Biden presidential administration. Kalshi followed suit in January. Each knew the incoming Trump administration would be more permissive.

Before Crypto.com and Kalshi, only Sporttrade had active sports prediction markets in the U.S., albeit with a different approach. Sporttrade operates in just five states with oversight from state gaming regulators. The Pennsylvania-headquartered company has agreed with state governments that its prediction markets are a form of sports betting.

However, Sporttrade is now pushing for access to every state under the federal regulatory model to avoid suffering what it claims would be “irreparable harm” from competitors. The company hopes the state regulators it has long worked with understand its predicament.

How do prediction markets work?

Prediction markets offer contracts always priced at a fraction of $1. The prices correspond with the live probability of an event outcome happening, as determined by what the public believes at a given moment. The closer to $1 the contract is, the higher the expected probability of it happening—but also the lower the potential profit for buyers.

If the public determines there is a 40% chance of an event occurring, corresponding “yes” event contracts are priced at about $0.40 before trading fees. The corresponding “no” contracts cost $0.60.

Winning contracts are always paid out as a full dollar once the outcome is finalized.

Profit on each contract equals the difference between a user’s initial payment (plus fees) and the full $1 they receive per accurate prediction. So, if a user buys 10 contracts for the New York Mets to beat the Atlanta Braves at $0.40 a pop, and the Mets win, the user will earn a profit of $0.60 per contract, amounting to $6 in overall profit out of their $10 total return.

Users can also sell contracts mid-game as the value changes based on probability swings. With the Mets up big in the eighth inning, for example, the above user could sell the original $0.40 contracts for $0.95 apiece if they are worried the team will blow its lead late.

How is this different from sportsbooks?

Prediction market platforms often distance themselves from sportsbooks by highlighting how public sentiment drives their contract prices. Sportsbooks set odds themselves with a built-in edge, while Kalshi, Crypto.com and Polymarket (not yet available in U.S.) tout their peer-to-peer models.

But there is a caveat: Futures trading platforms like Kalshi turn to institutional market makers to fill contracts when there isn’t someone waiting on the other side to complete a deal. These are often huge funds like Susquehanna, which price contracts slightly above their true value, tipping the scale away from retail traders who take the deals anyway so they can immediately enter a market.

With prediction market platforms also charging trading fees on a per-contract basis, users almost always lose money in the long run, just like with sportsbooks.

Are prediction markets gambling?

This is the multibillion-dollar question being litigated in multiple courts, including the U.S. Court of Appeals for the Third Circuit where New Jersey received support in its battle against Kalshi via an amicus brief signed by a group of 34 states.

Most of the financial technology companies that offer prediction markets argue they are providing access to financial assets, not gambling, and thus should be overseen by the federal government rather than state gaming commissions. Proponents of prediction markets claim even sports markets have hedging utility, citing the example of a team winning a championship providing a boost to local businesses around a stadium.

But most U.S. state attorneys general, tribal groups, sportsbooks and gambling addiction organizations disagree. They point out the absurdity in saying there’s investment value in many sports prediction market contracts, such as the 2025 Nathan’s Hot Dog Contest winner or single-game baseball wagers.

Behaviorally, critics say, people approach prediction markets as a gambler would—and because prediction market platforms are promoted as an investment tool, there is arguably the danger of even riskier user activity due to overconfidence in trading.

Sporttrade’s business model further undercuts arguments that the market are not betting, operating as it has under state gaming licenses.

“You’re not going to hear me say this isn’t sports betting,” Sporttrade CEO Alex Kane told Sportico this year. “That’s a ridiculous comment.”

What’s next for sports prediction markets?

If courts determine event futures trading is a financial asset that falls under the purview of the Commodity Exchange Act, initially passed to set guidelines of futures such as oil and grain prices, then the federal Commodity Futures Trading Commission (CFTC) would be the exclusive source of oversight rather than states.

The nominee to lead that agency, Brian Quintenz, is continuing to serve as a Kalshi board member until his confirmation. He has for years argued in favor of sports prediction markets being under CFTC control, making the case they have financial utility and fall under the Congress-approved Commodity Exchange Act.

Conversely, if courts rule event futures trading is gambling and should be overseen by states, then the financial technology platforms would take a hit from a business perspective. The customer base of the companies would shrink from 50 states to just the states where mobile betting has been legalized (38 states and Washington, D.C.). They would also need to follow local regulations and pay local taxes, reducing potential profit margins and their competitive edge. They’d likely lose the ability to offer trading on political outcomes, too.

A third possibility is that Congress will either amend the Commodity Exchange Act or pass new legislation that clarifies how the government should handle sports event contracts.

If prediction markets gain clearer legal backing, traditional sportsbook operators such as DraftKings and FanDuel are open to launching their own versions. FanDuel parent Flutter already offers the sports prediction market platform Betfair abroad.

How do prediction markets make money?

The main source of revenue for exchanges and brokerages is the fees they charge on each trade. This is less lucrative on a per-wager basis than the sportsbook model. However, if it scales to a higher volume than sportsbooks, it could become lucrative.

Right now, Kalshi, Crypto.com and Robinhood have the advantage of reaching U.S. citizens sportsbook operators cannot. The companies are live in all 50 states—even those where mobile sports betting is illegal outside of tribal land—and are available to people 18 years old and up rather than 21 and up.

Polymarket, popular internationally, is not yet available in the U.S. but could eventually come to the states. It has declined to publicly comment on its plans.

Prediction market platforms in the U.S. do not pay the state gambling taxes sportsbook operators do, because they have not been legally defined as gambling, which is among the reasons states are trying to shut them down. Meanwhile, tribal groups with exclusive rights to offer gambling in states like California are concerned prediction markets entering their territories will upend their economies.

Prediction market exchanges vs. brokers

Within the industry, there are two distinct business models: Some own the exchange that executes trades, and some are only brokers that embed another company’s exchange into their platform, while tacking on extra trading fees of their own.

Kalshi and Crypto.com both own an exchange and act as brokers. This means they can facilitate trades within their own platform and let other financial technology companies use their product. Kalshi’s exchange is embedded in the Robinhood app, which acts as a brokerage and has different business goals for prediction markets. Mansour, Kalshi’s CEO, has said he wants to expand the number of brokers his company partners with.

Polymarket is a broker that uses an independent cryptocurrency exchange called Polygon to execute trades.

During the final week of June, Polymarket and Kalshi said they had completed new funding rounds that valued them at $1 billion and $2 billion, respectively. Robinhood, which offers a broader suite of financial products, including stock trading, has market cap of more than $70 billion. News of its foray into prediction markets has helped its stock price gain more than 100% in the first half of 2025.