Prediction markets: A virtual time machine. Here's News Defused's guide to trading the future and avoiding the traps

The basics

A prediction market lists event contracts tied to a specific outcome: an election result, an interest-rate decision, a sports match, or an awards category. In the simplest form, a contract settles at $1 if the outcome happens and $0 if it does not. If “Yes” trades at $0.63, many people read that as roughly a 63% chance.

That shortcut is useful, but it is not guaranteed to be a perfect probability. Research finds prices can be informative and sometimes biased, especially when liquidity is thin.

How prices are formed

Prices move through supply and demand. As new information arrives, buyers and sellers meet at a new level. Polymarket says the probability it shows is derived from the order book, usually the midpoint of the bid-ask spread. If the spread is wide, the displayed number can be noisy, even if it looks precise.

Order books versus automated market makers

Platforms usually use one of two plumbing models.

Order books match traders who post bids and offers at specific prices, like shares. This supports limit orders and makes liquidity visible.

Automated market makers (AMMs) quote prices algorithmically from liquidity pools. They keep markets tradeable when few people show up, but large orders can cause slippage, meaning you pay a worse price as the trade moves the market.

Polymarket documents a central limit order book model, which helps explain why spreads and depth matter so much to the headline “chance”.

Resolution, disputes, and why wording wins

Settlement is where prediction markets are most likely to surprise you. Every market needs a resolution source and a definition tight enough to survive real-world ambiguity.

In early January 2026, Polymarket faced backlash after declining to settle markets about whether the United States (US) would “invade” Venezuela in the way some traders expected, citing its contract definition. The lesson is blunt: the contract text matters more than the headline.

Platforms and regulation, in plain English

There is no single rulebook.

Kalshi describes itself as a US Commodity Futures Trading Commission (CFTC) regulated exchange and sells event contracts. It has also been in disputes with state regulators over whether some contracts resemble sports betting, including a recent Tennessee case.

Polymarket is crypto-based, uses USD Coin (USDC), and has faced US enforcement. In 2022, the CFTC ordered it to pay a $1.4 million penalty and wind down non-compliant markets.

PredictIt has operated under a CFTC no-action framework tied to research-style limits, and its status has been contested in court.

These differences affect who can use each platform, what markets are listed, and what happens if a result is disputed.

Why prediction markets are booming

They make uncertainty shareable. A single number is easier to circulate than a model, and it updates constantly. They also reward fast interpretation, so traders compete to react first.

They have become content too. Polymarket’s odds were integrated into the Golden Globes broadcast, and reporting said it correctly called 26 of 28 winners, a mainstream showcase for market-style forecasting.

Where they get it right, and where they fail hard

They work best when outcomes are public and rules are clear. They struggle when secrecy dominates or definitions are fuzzy. The 2025 papal conclave is a case study: reporting showed markets giving the eventual pope very low odds shortly before the decision, reflecting how little verifiable information traders had.

They can also attract integrity problems. An Associated Press report about a large payout tied to the capture of Nicolás Maduro highlighted the risk of trades that look uncomfortably well-timed, and the scrutiny that follows.

A checklist before you trade

• Read the resolution criteria first.
• Check liquidity and the bid-ask spread.
• Assume uncertainty remains. A 70% contract still fails three times out of 10.
• Size positions so a loss does not hurt you.

Used carefully, prediction markets are a useful signal about collective belief. Used carelessly, they are just a fast way to buy false certainty.