Basics · lesson 01 of 09
What is a prediction market?
A market where you trade contracts that pay out if an event happens — so the price becomes a probability.
In one minute
- A prediction market trades contracts that pay a fixed $1 if a stated event happens and nothing if it does not, which makes the price of the contract a probability.
- You trade against other participants rather than against a house, so nobody is obliged to quote you a price — and you can post one of your own instead of accepting theirs.
- The contract is its resolution criteria, not its headline. Two markets on what looks like the same event can settle differently.
The contract, not the bet
A binary event contract has exactly two possible values at expiry: $1 if the stated event happened, $0 if it did not. Nothing in between, and nothing above. That cap is what makes the instrument legible. If a contract can only ever be worth a dollar, then whatever people are willing to pay for it now is a statement about how likely they think the dollar is.
Buy a contract at 68¢ and you have committed 68¢ to receive 100¢ if you are right. Your maximum profit is 32¢ per contract and your maximum loss is the 68¢ you paid. Both numbers are fixed at the moment you trade, which is unusual — most instruments only tell you your downside after the fact.
The other side of that trade is another participant, not the venue. Somebody sold you the contract at 68¢ because they were willing to take 68¢ now against a 32¢ profit if the event does not happen. The venue matched you and took a fee or a spread for doing so; it has no position and no interest in which of you is right. That is the structural difference from a sportsbook, where the house is your counterparty and sets the price it is prepared to offer.
A $100 position at 68¢
- Contracts bought at 68¢
- 147
- Payout if it resolves YES
- $147
- Profit before fees
- $47
- Loss if it resolves NO
- $100
Reading a price as a probability
Because the contract pays $1 or $0, the price in cents maps directly onto a percentage: 68¢ is a 68% implied probability, 12¢ is 12%, 91¢ is 91%. There is no conversion to learn and no house margin baked into the quote the way there is in fixed odds.
That mapping is clean for a single quoted price. It gets slightly dirty in practice, because a market does not quote one price — it quotes a bid and an ask, and the two do not straddle the truth symmetrically. If YES trades at 64¢ and NO trades at 40¢, the two add to 104¢ rather than 100¢, and the extra 4¢ is the round-trip cost of using the market. The honest reading divides that out: 64 ÷ (64 + 40) = 61.5%, not 64%.
Four points of overstatement sounds academic until you compare two venues. A raw YES of 64¢ on one and 62¢ on another looks like a two-point disagreement; once each side’s overround is removed the gap can be a fraction of that, or it can point the other way. Any comparison worth making happens after the division, never before.
Why the price carries information
A poll asks people what they think. A market asks people what they are willing to lose money over, which is a different question and usually a better-behaved one. Somebody who believes an outcome is 80% likely and sees it priced at 60¢ has a direct incentive to buy until the price stops looking cheap, and in doing so they move the price toward their belief. The quote is the point at which the marginal buyer and the marginal seller stop disagreeing.
That mechanism is not magic and it is not uniform. It works to the extent that there is money and attention on the market: a contract with two participants and a wide spread aggregates almost nothing, whatever its price says. This is why liquidity matters more than it looks like it should, and why a thin market’s price should be read as one person’s opinion rather than as a forecast.
It is also why a play-money price is a different kind of object. Participants there are competing for standing rather than for money, which is still an incentive but not the same one — and no trade converts a play-money position into cash, so the two cannot be compared as though they were the same currency.
How a market resolves
Every contract names a resolution source and the criteria that source has to satisfy: an official announcement, a published statistic, a named body’s certification. When the criteria are met, the contract settles — winning contracts are credited $1 each and losing ones become worthless.
Who performs that step depends on the venue. A regulated exchange resolves under its own published rulebook, with a settlement source named in the contract specification and an internal process for handling ambiguity. An on-chain market resolves through an oracle: a proposed outcome is published, a window opens in which anyone can dispute it, and an unchallenged proposal becomes the answer. Polymarket uses UMA’s optimistic oracle for this.
Either way, the risk that matters is not usually “will the event happen” but “does the wording cover what actually happened”. A contract asking whether a rate cut occurs by a date can turn on which announcement counts. Read the criteria before the headline, every time — that text is the thing you are buying.
Converting to odds you already know
| Contract price | Implied probability | Decimal | American |
|---|---|---|---|
| 10¢ | 10% | 10.00 | +900 |
| 25¢ | 25% | 4.00 | +300 |
| 50¢ | 50% | 2.00 | +100 |
| 68¢ | 68% | 1.47 | −213 |
| 80¢ | 80% | 1.25 | −400 |
| 95¢ | 95% | 1.05 | −1900 |
See it live on Kalshi
CFTC-regulated event contract exchange
Common questions
Is a prediction market the same as gambling?+
Economically the two overlap heavily: you commit money on an uncertain outcome and lose it if you are wrong. Legally they are treated very differently depending on where you are and what venue you use — the same contract can be a regulated derivative in one jurisdiction and a wager in another. The distinction is a legal one rather than a mathematical one, and it is not settled everywhere. Nothing here is legal advice.
Do I have to hold a contract until the event happens?+
No. Contracts trade continuously until they settle, so you can sell a position back into the market at whatever it is worth then. That is a separate transaction priced by the order book, not by the eventual outcome — you might sell at a profit and then watch the event go the other way, or the reverse.
What is the most I can lose on one contract?+
What you paid for it. A contract bought at 68¢ can fall to zero and no further; there is no margin call and no obligation beyond the purchase price. Across a whole position the arithmetic is the same: the amount at risk is the amount committed.