Sports Prediction Markets and Event Trading Explained

Sports prediction markets are platforms where users trade on the outcomes of sporting events using contracts that pay based on whether an event occurs.

Unlike online sports betting, which is regulated at the state level and is only legal in some states, prediction markets operate nationwide under federal oversight from the Commodity Futures Trading Commission (CFTC).

In other words, sports prediction markets like Kalshi and Crypto.com serve customers in all 50 states.

How Sports Prediction Markets Work

Sports prediction markets function like financial exchanges: users trade contracts that represent yes/no outcomes on specific events, such as a team winning a game or an athlete exceeding a projected stat total.

Each contract has a price between $0 and $1, reflecting current market sentiment on the likelihood of the event occurring.

For example:

• A contract predicting Team A will win a game is trading at $0.65 per contract
• A user buys 100 contracts at that price, spending $65

If the user keeps the contracts until expiry (the end of the game), there are two possible outcomes:

• Team A wins: Each contract expires at a value of $1, yielding a profit of $0.35 per contract; the user nets a $35 profit
• Team A loses: Each contract expires at $0, resulting in a loss of $0.65 per contract; the user loses $65

Alternatively, the user may elect to close the position early by selling his contracts on the exchange before expiry. The price he receives reflects current market sentiment on the likelihood of Team A winning.

For example:

• Overall market sentiment has grown more favorable toward Team A, and contracts are now trading at $0.75. If the user sells his 100 contracts now, he’ll secure a profit of $0.10 per contract for a net win of $10.
• Market sentiment has shifted against Team A, and contracts are now trading at $0.40. If the user sells his contracts now, he will have a net loss of $0.15 per contract for a total loss of $15.

What Are Sports Event Contracts?

Sports event contracts are trading instruments that function like financial derivatives. Their prices fluctuate based on traders’ collective beliefs about the probability of an event occurring.

For example, a contract for Team A to win the game might trade at $0.60, implying a 60% chance of that outcome.

Simultaneously, contracts for Team B to win the game would trade for around $0.40, implying a 40% chance.

Sports event contracts resemble binary options with two defining characteristics: they offer binary payouts based on events with binary outcomes.

Binary Payouts Explained

“Binary payouts” means contracts expire at either $1.00 or $0.00, and nothing in between. If you hold sports event contracts until the underlying event concludes, you’ll either receive $1.00 per contract or nothing.

Users can buy and sell contracts at any price during trading, but contracts always expire at either full value or zero at the conclusion of the event.

Note: Contracts at some sports prediction exchanges expire at either $100 or $0, but there’s no functional difference. Whether you hold two hundred contracts worth $1.00 each or two contracts worth $100 each, the result is the same: you’ll receive either $200 or nothing at expiry.

Binary Outcomes Explained

“Binary potential outcomes” means contracts are based on events with clear yes or no answers:

• Will Team A win the game?
• Will Player X rush for at least 100.5 yards?

For example, prediction markets don’t offer contracts that state “which team will win the Super Bowl.” That’s not a binary event because there are many potential outcomes.

Instead, a proper Super Bowl prediction contract would state “Team X to win the Super Bowl.” That outcome has a clear yes/no answer.

In practice, a Super Bowl prediction market offers yes/no contracts for each remaining team:

Most Prominent Sports Prediction Markets

Three major trading platforms offer CFTC-authorized sports event contract markets:

1. Crypto.com Sports
2. Kalshi
3. Robinhood (in partnership with Kalshi)

Prediction Markets vs. Online Sportsbooks

Prediction markets and online sportsbooks both offer fans the opportunity to win money predicting the outcomes of sporting events, but the similarities end there.

Feature	Prediction Markets	Online Sportsbooks
Counterparty	Other market users (peer-to-peer)	The sportsbook operator (the “house)
Pricing Model	Dynamic, market-determined prices (ranging from $0 to $1)	Fixed odds (e.g., -110, +200, etc.)
Fee Structure	Flat trading fees or percentage-based commissions	Built-in house edge (the vigorish)
Settlement	Contracts resolve at $1 if the event occurs	Payout based on the fixed odds at the time of the wager
Trading Mechanics	Can enter/exit positions dynamically	Typically, a singular belt held until the event’s resolution
Regulatory Framework	Federally regulated as derivatives under the CFTC and Commodity Exchange Act (CEA)	Subject to state-level gambling laws, licensing requirements, and prohibitions
Market Breadth	Any verifiable future event with a yes/no outcome (sports, politics, etc.)	Primarily sports; limited novelty and entertainment wagers
Market Depth	Limited; primarily league championships and game winners	Extensive; moneylines, spreads, totals, team/player props, alt lines, parlays, etc.

Prediction Markets vs. Betting Exchanges

Prediction markets and betting exchanges have much in common, including:

• Peer-to-peer Wagering: Predictions placed against other users
• Backing and Laying: Users may back (bet an outcome will happen) and lay (bet an outcome will not happen)
• Fee Structure: Platforms impose trading fees or commissions; users do not compete against the house’s built-in edge
• Dynamic Odds: Market sentiment dictates payout odds at any time

However, sports prediction markets and betting exchanges operate under different regulatory models and have distinct characteristics in their underlying mechanics and the scopes of their offerings:

Feature	Prediction Markets	Betting Exchanges
Contract Structure	“Event contracts” with binary payouts ($1 or $0)	Traditional sports bets (moneylines, totals, etc.) with variable payouts
Price Display	Contracts trade at prices from $0 to $1	Traditional decimal or fractional odds
Trading Mechanics	Like financial trading; buying/selling shares of outcomes through a centralized order book	More like traditional betting except peer-to-peer backing and laying; platform matches individual wagers
Liquidity	Highly liquid nationwide markets due to federal regulation	Liquidity typically restricted to within state lines due to Wire Act and state-level gambling laws
Regulatory Framework	Federally regulated as derivatives under the CFTC and Commodity Exchange Act (CEA)	Regulated as gambling by federal and state-level laws
Legal Status	Legal at the federal level; available nationwide; legal states contested by gambling commissions in some states	Legal only in states that permit online sports betting and where regulators have approved exchange betting

Are Sports Prediction Markets Legal?

The legality of sports prediction markets is a subject of ongoing debate because they are regulated differently than traditional sports betting and serve customers in all fifty states.

Sports betting is regulated at the state level, subject to a patchwork of varying state gambling laws, licensing conditions, and consumer protection laws.

In contrast, sports prediction markets operate under a federal framework overseen by the Commodity Futures Trading Commission (CFTC).

The CFTC regulates financial derivatives, including event contracts, and has approved platforms like Kalshi and Crypto.com as Designated Contract Markets (DCMs), allowing them to offer event contracts nationwide.

However, federal approval does not exempt sports prediction markets from scrutiny under state gambling laws, leading to persistent legal challenges.

Legal Questions Remain

The primary legal debate revolves around jurisdiction:

• Does the Commodity Futures Trading Commission have sole regulatory jurisdiction over sports prediction markets, effectively preempting state authority?
• Or do state-level gambling regulators also have regulatory authority over these activities?

Resolving that debate may also hinge on how sports event contracts are classified:

• Financial instruments/derivatives: If so, they fall under exclusive CFTC jurisdiction, permitting nationwide operation. Proponents argue this classification conforms with the Commodity Exchange Act and preempts state law.
• Gambling/sports betting: If so, they are subject to state-level gambling laws and may also violate the Federal Wire Act.

State Actions Against Sports Prediction Trading Markets

Numerous states have sent cease-and-desist orders to operators like Kalshi, Robinhood, and Crypto.com, accusing them of offering unauthorized online gambling.

The expanding list of states that have issued such orders includes Arizona, Illinois, Maryland, Montana, Nevada, New Jersey, and Ohio.

Additional states have launched investigations into sports prediction markets and asked the CFTC to intervene.

For example, the Michigan Gaming Control Board (MGCB) submitted a formal complaint to the CFTC regarding platforms offering sporting event contracts.

The MGCB’s letter outlined numerous concerns, particularly that sports prediction markets are not subject to:

• Licensing requirements and ongoing regulatory oversight
• Mandatory responsible gambling protocols, such as membership in Michigan’s statewide self-exclusion program
• Consumer protection regulations
• Sporting event integrity and monitoring
• State taxes and licensing fees

Kalshi’s Responses to State Actions

Kalshi has been especially proactive in its legal defense against state-level challenges.

Most notably, Kalshi has filed lawsuits in federal courts against regulators in states like Nevada, New Jersey, and Maryland.

Kalshi contends that, as a Designated Contract Market under the CFTC, its operations fall under federal jurisdiction exclusively and are therefore exempt from state gambling laws.

Kalshi has won critical but potentially fleeting legal victories in some of these cases. These victories include preliminary injunctions against cease-and-desist orders in Nevada and New Jersey, which have allowed Kalshi to continue operating in those states while legal challenges proceed.

Although federal courts have provided temporary relief to platforms like Kalshi, the broader question of whether state gambling laws apply to sports event trading remains unresolved.

Sports prediction markets face substantial opposition from vested and well-funded interests. Opponents include state regulators, licensed sportsbook brands, tribal gambling operators, sports leagues, and anti-gambling activists.

Furthermore, a potential outcome of the ongoing litigation is that CFTC-registered prediction markets retain the right to offer certain types of event contracts, they may ultimately lose the right to offer contracts specifically related to sports events.

Do Sports Prediction Markets Support Responsible Gambling?

Regulated sports prediction markets are not subject to traditional responsible gambling regulations. However, some operators voluntarily offer common responsible gambling safeguards.

For example, Kalshi offers these “Responsible Risk Management” tools:

• Trading Break
• Voluntary Opt-Out
• Personalized Funding Cap

However, critics (particularly state regulators and problem gambling advocates) argue that sports trading platforms offer gambling-like experiences without:

• State licensing or oversight
• Mandatory consumer protection and responsible gambling standards
• Access to state-run self-exclusion programs that span multiple operators

How Prediction Markets Led to Nationwide “Sports Betting”

Traditionally, prediction markets primarily involved contracts related to political and economic events like elections, interest rate changes, and macroeconomic indicators.

The Iowa Electronic Markets (IEM) is one of the oldest prediction markets still in operation. The IEM is the quintessential example of a “traditional” prediction market because it is operated by the University of Iowa and offers contracts based on politics/economics.

Researchers and academics find prediction markets of particular interest because of their unique characteristics:

• Crowdsourced Predictions: Prediction markets leverage aggregate the beliefs of many individuals. In some cases, the “wisdom of the crowd” has produced more accurate forecasts than experts and polls.
• Financial Incentives: Every prediction market participant has a financial incentive to make accurate predictions because their money is at stake.
• Price as Probability: The current market price of a prediction contract represents the market’s collective belief about the probability of an event occurring.

Recently, prediction markets like Crypto.com and Kalshi introduced prediction contracts based on the outcomes of sporting events.

The introduction of sports event contracts instantly broadened the appeal of prediction markets to include sports fans, especially those in states without legal online sports betting.

Sports Prediction Markets FAQ