A prediction market is a trading platform where participants buy and sell contracts based on the projected outcomes of specific events. Participants can wager on diverse topics such as economics, pop culture, politics, technology, and even the weather.

Investors select markets that align with their interests or expertise and place bets using simple “yes” or “no” contracts. For example, an investor might wager on whether a new version of Chat-GPT will be released in the coming year, whether Taylor Swift will win a Grammy, or how high gas prices will reach by a certain date. Each contract focuses solely on whether or not these events will occur.

Prediction markets compile the collective opinions of participants to set probabilities and pricing for the contract. Each trader’s bet helps shape the market consensus, which is reflected in the contract prices. Contract prices fluctuate in real time, offering up-to-date insights into public opinions and emerging trends. This makes prediction markets a valuable tool for those looking to understand shifts in society or market reactions to new developments.

Prediction Markets vs. Traditional Financial Markets

Prediction markets are fundamentally different from traditional financial markets, as they focus solely on the likelihood of specific events occurring rather than on economic indicators or corporate performance. 

Key Differences

Focus: Traditional markets involve trading assets like stocks and commodities, which are influenced by a multitude of economic factors. Prediction markets, however, deal exclusively with contracts on specific event outcomes.

Market Dynamics: Traditional markets can be complex and influenced by a variety of economic and financial factors  Prediction markets, however, are simple and straightforward, centered only on the occurrence or non-occurrence of particular events.

Risk and Volatility: While all markets have inherent risks, the uncertainties of prediction markets are strictly tied to specific events. This differs significantly from the broader market risks in traditional financial markets, which can be influenced by global economic shifts, monetary policy changes, and geopolitical events.

Price and Probability

Prices in prediction markets such as Kalshi range from $0.01 to $0.99. Since market prices are formed by the traders' predictions, prices will change if people shift their views on the likelihood of that outcome. 

EXAMPLE:  If a contract to predict whether a movie titled XYZ will win Best Picture is trading at $0.60, this price suggests that the majority believe there is a 60% chance that XYZ will win the Oscar. However, if developments occur that could increase the film's chances of winning, such as a higher number of award nominations, people will start paying more for the “yes” contracts, changing the price and the odds.

Prediction markets are typically binary and $1 denominated. Since these criteria are clearly defined upfront, participants go into the trades knowing that when the market closes, the $1 will be given to whoever guessed correctly. Kalshi.com’s simple payout structure makes it easy for traders to understand market prices in terms of probabilities.

How to Participate

Contracts always come in pairs, so platforms like Kalshi match participants with another user looking for the opposite contract on the same market. One trader will bet on a "yes" contract and the other on a "no" contract, wagering a total of $1.

The amount traders will pay is determined by participants within the same market. Traders choose their favorite market, then select their side (yes or no), the price they are willing to wager, and the number of contracts they want to buy. 

EXAMPLE: Steve enters an aviation-related market where the current "yes" contract rate is $0.75. He will be matched with Bob, who has wagered $0.25 for a "no" contract in the same market. If the aviation event occurs, the market resolves to "yes,” and Steve receives the $1.00. This amount is comprised of Steve’s original contract rate of $0.75 plus the $0.25 from Bob’s wager ($0.75 + $0.25 = $1.00). The opposite would occur if the market had resolved to "no": Steve would relinquish their $0.75, which is awarded to Bob. 

Why Engage with Prediction Markets?

Prediction markets offer a compelling platform for expressing viewpoints on future events in monetary terms. They are ideal for those interested in making informed predictions on a wide range of topics, from politics to pop culture. Their simplicity and the direct link between predictions and payouts make them attractive to novices and experienced traders.

Kalshi operates as a fully cash-collateralized market, where the only collateral, or asset used to secure an agreement, is the cash you have deposited into your account. Market participants will not incur any debt with Kalshi, regardless of the market outcomes. 

Conclusion

Prediction markets offer traders a unique opportunity to leverage their understanding of future events for potential profit. With an infinite potential for topics, traders can choose markets that align with their interests and expertise. Market prices are formed by the collective actions of the traders and reflect the perceived likelihood of these outcomes. 

As prediction markets continue to develop, they are set to play a more crucial role in the financial landscape. Real-time data can provide insights to traders, policymakers, researchers, and strategists who aim to understand public expectations about future events. This could open up novel trading possibilities that traditional financial markets can not provide. 

For experienced investors or casual onlookers just starting to trade, platforms like Kalshi offer a user-friendly and engaging approach to participating in prediction markets. The goal extends beyond simply forecasting events to grasping how market expectations evolve and how opinions change over time.

Although prediction markets streamline the trading process, achieving success requires informed decision-making, an understanding market dynamics, and, occasionally, a little luck.

Want to learn more? Visit kalshi.com/learn for more course topics, tips, and trading strategies.