What Are Prediction Markets, And Are They Actually Investing?

A prediction market is an online platform where people buy and sell contracts tied to the outcome of a future event, like an election, game, or economic report. Each contract pays $1 if you're right and $0 if you're wrong. Because you're wagering on a yes-or-no outcome rather than owning a productive asset, most experts consider it closer to gambling than investing.

You may have seen these platforms show up in apps and websites where people bet on whether a candidate will win, a team will cover, or a jobs report will land above a certain number. Trading volume has climbed fast, and a lot of that growth has come from younger adults. If you've wondered whether putting money into one is a smart financial move or just betting with extra steps, the distinction matters more for your money than it might first appear.

Prediction markets go by a few other names, including event derivatives, information markets, decision markets, and idea futures, and sometimes even betting markets. Whatever the label, the mechanics are the same, and so are the risks. Below, we'll walk through how they work, where they land on the line between investing and gambling, what the rules look like, and what tends to serve your money better over the long run.

How prediction markets work

On a prediction market, you trade contracts tied to a specific question with a yes-or-no answer. Will a particular team win on Sunday? Will a jobs report come in above a set number? Each contract is built to be worth $1 if the event happens and $0 if it doesn't.

The price of a contract sits somewhere between 0 and 100 cents, and it moves as people buy and sell. That price doubles as a probability. If a “yes” contract is trading at 30 cents, the market is collectively saying there's roughly a 30% chance the event happens. Buy it at 30 cents, and you make about 70 cents if you're right and lose your 30 cents if you're wrong.

If that sounds like a traditional bet, it is. The price is just another way of showing the odds: instead of quoting odds and a payout, the market quotes a price between 0 and $1, and what you can win is the difference between what you paid and the $1 payout.

These contracts are usually called event contracts, and sometimes binary options, because the outcome is binary: it either happens or it doesn't. There's no in-between and no partial credit.

One feature the platforms emphasize is that you're often trading with other people, not against a bookmaker setting the odds. As we'll see, though, it doesn't turn the activity into investing.

Are prediction markets gambling or investing?

Prediction markets sit in a gray area, but most experts consider them closer to gambling than investing. The reason comes down to what you actually own and how money gets made.

When you invest, you buy a piece of an asset: a share of a business, or an exchange-traded fund that holds hundreds or thousands of businesses. Those assets can sell products, earn profits, and potentially grow in value over time. The wealth comes from that underlying growth, which is why a diversified portfolio can produce gains for many people at once.

A prediction-market contract is different. There's no business behind it and nothing producing value. It's a wager on an outcome, and it's roughly zero-sum, where for every dollar one trader wins, another trader loses a dollar, minus the platform's cut. According to the CFA Institute, that distinction of owning a productive asset with a positive long-term expected return versus making a short-term bet on an event, is one of the clearest lines between investing and gambling.

Public opinion lands in a similar place. According to a poll from the American Institute for Boys and Men, 61% of U.S. adults said buying event contracts on prediction markets is closer to gambling, while just 8% called it closer to investing.

What about the idea that “you're not betting against the house”? It's a fair point. On many platforms, you're trading with other participants rather than against a casino or sportsbook with a built-in edge, and prices can be sharp because real money is on the line. Trading against other people instead of a bookmaker also doesn't change the core math. The pool of money is still divided among winners and losers, the platform still takes a cut, and there's still no productive asset underneath creating new value. A fairer fight is still a wager, not an investment. For more on where that line falls, see the difference between trading and investing.

Why most people lose money on prediction markets

Most people who bet on outcomes lose money over time, and prediction markets are no exception. Three forces work against you.

• First, the math. Because the activity is roughly zero-sum, the average participant is already looking at a break-even result before costs, and the platform's cut pushes that average into the red. Add in the most skilled and informed traders taking the better side of many trades, and the typical participant can fall behind.
• Second, behavior. These platforms are fast, social, and designed to keep you engaged. Chasing a loss with a bigger bet is a well-documented pattern, and it tends to deepen losses rather than recover them.
• Third, the broader track record of online betting. In a study of more than 700,000 online gamblers by researchers at the University of California, San Diego, about 96% lost money over the period studied.
   

Prediction markets aren't identical to a sportsbook, but they share the same basic structure: Short-term wagers on uncertain outcomes, where the odds and the costs favor the platform and the sharpest players, not the average person.

Are prediction markets legal?

The legal status of prediction markets in the U.S. is unsettled and actively being fought over. At a high level, the Commodity Futures Trading Commission (CFTC), the federal agency that oversees derivatives, has taken the position that event contracts traded on its registered exchanges are “swaps” under the Commodity Exchange Act. That would place them under federal oversight and, the agency argues, above state gambling laws.

A number of states disagree. Several have moved to treat the platforms as unlicensed gambling, and courts have split, with some siding with the platforms and others with the states. The question is still working its way through the legal system, so the rules can vary by where you live and can change.

For the average person, whether a given platform is currently allowed to operate where you live tells you nothing about whether it's a sound place for your savings. You can read more about the regulatory picture at the CFTC's prediction markets resource.

Do prediction markets actually predict the future?

Often, yes, and this is the strongest argument in their favor. When people put real money behind their opinions, the market price tends to settle on the crowd's best collective estimate of how likely something is. That price can be a genuinely useful forecast, sometimes sharper than experts or polls. The idea that a large group of motivated guessers can land close to the truth is sometimes called the wisdom of the crowd, and it's the main reason prediction markets exist as a forecasting tool.

But being good at forecasting doesn't make a prediction market a good place for your money. Two things get in the way.

First, an accurate probability still isn't a sure thing. If the market correctly says there's a 70% chance of an outcome, you'll still lose about 3 times out of 10 betting on it.

Second, and more important, a correct forecast doesn't create any value. When the event resolves, the same pool of money simply moves from the people who guessed wrong to the people who guessed right, minus the platform's cut.

Now, what makes investing different? It’s different because your money can grow when the businesses you own are growing. A prediction market can tell you what's likely to happen, but it has no engine underneath it to build potential wealth over time, no matter how sharp its predictions are.

What to consider doing with your money instead

If your goal is to build potential wealth over time, long-term, diversified investing has a track record that outcome-betting can't match. Instead of betting on a single event, you own a slice of many companies and let two things work for you: The long-run growth potential of those businesses and the power of compound interest, where your earnings earn returns and those returns earn their own returns.

The contrast shows up in the numbers. Historically, the S&P 500 has returned about 10% a year on average over the long run, based on data for the index going back to the 1920s. Past performance never guarantees future results, and it’s normal for markets to rise and fall over time. That’s actually why having a diversified portfolio is key. When you invest in companies across different sectors and sizes, your portfolio can handle those market movements and keep you staying invested for longer. It's built to grow for everyone who stays invested, not to move a fixed pot of money from losers to winners.

None of this means events betting can't be entertaining. If you enjoy it, the healthiest way to treat it is as fun money and allocate a small portion of your portfolio for bigger risks. That way, you still have a small amount you're prepared to bet with, while still having a solid, diversified base that can potentially grow over time. That's the spirit behind the Acorns Pledge, our commitment to long-term investing over speculation.

Get started with long-term investing with Acorns Invest.

Frequently asked questions

Are prediction markets gambling?

Most experts consider prediction markets closer to gambling than investing, because you're wagering on a yes-or-no outcome rather than owning a productive asset. The activity is roughly zero-sum, meaning one trader's gain is another's loss minus the platform's cut, and there's no underlying business creating value over time. In a poll by the American Institute for Boys and Men, 61% of U.S. adults said it's closer to gambling, versus 8% who called it closer to investing.

How do prediction markets work?

On a prediction market, you buy and sell event contracts tied to a yes-or-no question, and each contract pays $1 if you're right and $0 if you're wrong. A contract's price, somewhere between 0 and 100 cents, reflects the market's estimate of how likely the event is, so a “yes” contract at 30 cents implies about a 30% chance. You profit if you buy low and the outcome breaks your way, and you lose your stake if it doesn't.

Are prediction markets legal in the U.S.?

The legal status is unsettled and varies by state. The CFTC has taken the position that event contracts traded on its registered exchanges fall under federal oversight as “swaps,” while several states argue the platforms are unlicensed gambling, and courts have split on the issue. Because it's still being litigated, the rules can differ by where you live and can change.

What's the difference between a prediction market and investing?

When you invest, you own a productive asset, such as shares of companies or a diversified fund, that can potentially grow in value over time. While past performance can’t predict future results, the market has historically produced positive returns over the long run. A prediction-market contract owns nothing. It's a short-term wager on an event with a roughly zero-sum payoff. That's why one can build wealth broadly over time while the other mostly moves money from losers to winners.

What should I do with my money instead?

For long-term goals, a diversified, expert-built portfolio gives your money a chance to potentially grow through market returns and compounding, without betting on any single outcome. If you still want to try prediction markets for fun, treat it as a small amount you can afford to lose, and keep it separate from your savings and emergency money.