Prediction markets explained: how event contracts work, the rules and the risks

“Will the Fed cut rates next month?” “Will it rain in New York tomorrow?” “Who will win the election?” On prediction markets, people put money on questions like these, and the prices that result have become a widely quoted way to read the odds. Some of these markets are regulated US exchanges; others operate offshore, outside US regulation.

This guide explains how event contracts work, what the US regulator says about them, the rules being debated in 2026 and the risks to know before you trade.

What a prediction market is

The CFTC, which oversees US derivatives markets, describes prediction markets as offering products to help the public forecast, plan for, hedge and even harness perceptions of future events. The products are usually called event contracts, and the CFTC says they’ve existed in US regulated markets for more than two decades.

Event contracts are typically structured as swaps: financial contracts whose value comes from an underlying event’s outcome.

How an event contract works

Most are yes-or-no contracts with a fixed payout, usually $1, and an expiration, either a set time or the end of the event. The CFTC gives an example:

• A contract asks: “Will it rain tomorrow?”
• “Yes” trades at 70 cents and “no” at 30 cents, reflecting the market’s expectation.
• If you buy “yes” at 70 cents and it rains, the contract settles at $1 and you make 30 cents profit.
• If it doesn’t rain, you lose your 70 cents.

Other designs combine several yes-or-no contracts, offer multiple-choice outcomes, or pay out partially across ranges. The CFTC notes that more complex contracts may attract fewer traders and so be less liquid. Fees and taxes can also reduce your return.

Why people use them

The CFTC lists two main uses:

• Hedging: offsetting a real-world risk, such as a farmer buying a contract on a sudden freeze.
• Speculating: seeking profits by taking risks.

It adds that combining many people’s predictions can sometimes forecast outcomes better than polling or other methods, which is why prediction market prices are increasingly cited by the media and analysts.

A short history

According to the CFTC:

• 1988: the Iowa Electronic Market, the first modern prediction market, is created at the University of Iowa as an academic program.
• 1992: CFTC staff let it operate as a not-for-profit research and education tool.
• 2004: the CFTC approves the first designated contract market offering binary options.
• 2010: the Dodd-Frank Act gives the CFTC authority to prohibit certain types of event contracts.

How fast they’ve grown

The CFTC’s June 2026 proposal gives a sense of the boom:

• Historically, roughly five event contracts were listed a year. That rose to more than 220 in 2021, and over 8,000 were trading in May 2026.
• On one of the largest prediction markets, the daily average number of event contracts listed rose from about 1,600 in April 2025 to 162,000 in April 2026.
• Total trading volume across CFTC-registered prediction markets exceeded $25 billion in 2025, still small compared with the roughly $31 trillion notional value of the futures markets the CFTC regulates.
• Contracts now cover everything from the economy and politics to the weather, entertainment awards, public health and scientific discoveries.

What regulation means for you

The CFTC lists protections that apply on CFTC-regulated platforms:

• exchanges and intermediaries must pass a stringent application process and periodic examinations;
• exchanges must follow rules designed to prevent market manipulation and insider trading;
• regulated exchanges and brokers don’t take a side of your trade;
• you can usually trade in and out of a position before settlement;
• the National Futures Association adds another layer of rules for brokers.

The CFTC says federally regulated prediction markets can operate in all 50 states under federal law. Some states have disputed this, and the CFTC has defended its position in court.

The legal fight over what can be listed

The Dodd-Frank Act gave the CFTC what it calls the “Special Rule”: it may determine that event contracts are contrary to the public interest if they involve:

1. activity that is unlawful under federal or state law;
2. terrorism;
3. assassination;
4. war;
5. gaming; or
6. other similar activity the CFTC specifies by rule.

Contracts it bars on that basis can’t be listed or cleared on a registered exchange. Applying the rule has proved difficult, as the CFTC’s own history shows:

Rules being debated in 2026

• March 2026: the CFTC issued an advance notice of proposed rulemaking, asking for public comment on the rules that apply to prediction markets and the types of event contracts that may be prohibited as contrary to the public interest.
• June 2026: it proposed rules setting out factors for deciding when event contracts are contrary to the public interest, including a definition of “gaming”. Comments closed on 27 July 2026.

The proposed definition says gaming is any activity that participants typically engage in for recreation or to entertain others, that is governed by rules, and whose measurable outcomes depend on the participants’ luck, skill or athletic ability. The CFTC says it intends this to cover what are games in common parlance: sports, athletic competitions and recreational games, including games of chance. It rejected a broader definition based on wagering, because almost every event contract involves risking money on an outcome. Even under the proposal, a contract that involves gaming isn’t banned automatically: the CFTC would still have to determine that it’s contrary to the public interest, using the factors it proposed.

These are proposals and consultations; final rules may differ. Check the CFTC’s website for the current position.

Crypto-based prediction platforms

Some prediction platforms run on blockchains, and ethereum.org lists prediction markets among the uses of Ethereum. What matters is whether the platform is registered with the CFTC for US customers. The CFTC’s advice:

• Only trade with CFTC-registered entities.
• Avoid unregulated or offshore exchanges, which fall outside the CFTC’s jurisdiction. You may have little or no protection with unregistered entities operating outside the US.
• Use only official websites and apps: fake apps sometimes slip into app stores.

See how to check a platform is registered and fake crypto apps and phishing.

The risks

The CFTC’s own do’s and don’ts:

• Review the contract rules, including how settlement is decided and by whom.
• Understand the risks, and monitor open positions.
• Understand fees and how they affect returns.
• Only trade with risk capital: money you can afford to lose after living expenses and savings.
• Be alert to gimmicks that encourage you to risk more than you intended.
• Be cautious of promises of big payoffs, free money, celebrity endorsements, glowing reviews or tips from people you’ve just met online. These are red flags of a scam trading website.

If you have a problem, the CFTC says you can complain to your broker, the exchange, the NFA and the CFTC at CFTC.gov/complaint.

For related reading, see crypto influencers and paid promotions and crypto pump-and-dump schemes.