What Are Prediction Markets – And How Do They Work?

Will the Bank of Canada hike its overnight rate this year? Where might the price of crude head today? Investors often ponder these types of questions, but soon, people may be able to make bets on the outcomes.

Prediction markets, once on the fringes of traditional finance, have exploded in popularity in the last few years, particularly in the United States with the rise of platforms like Polymarket and Kalshi. Now, these markets are having a moment in Canada after regulators gave two (so far, as of mid-April 2026) Canadian investing platforms the green light to offer these kinds of trades.¹

But just because prediction markets are becoming more mainstream and use familiar investing terms like “trading” and “contracts” doesn’t mean they’re for everyone. Critics argue that what these platforms offer is closer to gambling than sound investing. So, what are prediction markets – and what should Canadians understand before jumping in? Here’s what to know.

What are prediction markets, exactly?

Put simply, prediction markets are platforms that let people bet on the outcomes of real-world events. Though prediction markets have existed for decades in different forms, until recently they’ve mostly focused on election outcomes. Today’s platforms cover a wide range of topics – yes, election results, but also sports scores, economic indicators like jobs reports, and pop culture moments like the next Super Bowl halftime performer. Beyond betting, prediction markets are also viewed as forecasting tools that reflect real-time public sentiment.²

You may have already heard about some of these platforms. Polymarket launched in 2020 and became federally regulated in the U.S. in 2025, while Kalshi, which debuted in 2021 as the first regulated predictions market in America, teamed up with Rotten Tomatoes earlier this year to provide real-time Oscar prediction data.

In Canada, prediction markets have largely been under the radar until recently, when two companies cleared regulatory hurdles to enter prediction markets with limitations (no betting on political events or sports).

How do prediction markets work?

Prediction markets facilitate betting directly between users. This “peer-to-peer” model differs from traditional gambling, where bets are placed against the “house.” Many of the major prediction-market platforms are decentralized, operating on blockchain technology, and they accept cryptocurrency deposits, making bets harder to track.

In prediction markets, people buy and sell binary or “yes/no” contracts, meaning there are payoffs based on whether a specific event happens or not. Say the question is whether it will snow in 30 days. You believe it will and buy “yes” contracts. If you’re right and it does snow in 30 days, you will receive a payout, net of fees (if applicable). The payout is generally a fixed amount (typically $1 per contract). If the event doesn’t happen, the “yes” contracts become worthless, and you lose your stake.

The price of the contracts reflects the current belief in the market about the likelihood of the event happening. For example, if 80 per cent of people think it will snow in 30 days, the “yes” position would cost $0.80 per contract, while the “no” position would cost $0.20. No matter which position you buy, you get $1 per contract if you are right. Prediction markets don’t create any wealth: they are zero-sum, meaning that money moves from the loser to the winner, net of any fees.

Prediction market platforms are designed to make buying and selling event contracts simple and efficient. However, this asset class is still relatively new, and regulators are still developing the guardrails to protect those who choose to participate.

Who profits from prediction markets? Consider the findings of a study released in early April 2026. Researchers analyzed more than 70 million trades made on Polymarket from 2022 to 2025, encompassing 1.4 million users and US$20 billion in volume. They found that about 71 per cent of Polymarket users lose money. Nearly 60 per cent of winnings were pocketed by the top 0.1 per cent of users, and 84 per cent of winnings went to the top 1 per cent, a tiny group of sophisticated traders and market makers. As the researchers noted, “Polymarket investors are, on average, trading against efficient prices they cannot profit from, ultimately transferring wealth to a small number of sophisticated traders who capture the vast majority of platform profits.”³

Are prediction markets legal in Canada?

The rules around prediction markets are a bit complicated. In 2017, the Canadian Securities Administrators, the umbrella organization of provincial and territorial securities regulators, banned trading of binary options shorter than 30 days trading due to fraud concerns.⁴

Now, investment dealers that want to provide access to event contracts – in Canada or on foreign-regulated prediction markets – must apply to the Canadian Investment Regulatory Organization (CIRO) for approval. To date, two CIRO members have gotten the go-ahead to sell certain types of event contracts with binary (yes/no) payouts, but with strict limitations. Unlike their U.S. counterparts, these platforms can’t offer contracts based on elections or political events. Additionally, contracts must have a minimum term of 30 days.

In a joint statement released in early April 2026, the CSA and CIRO also noted “While these CIRO members may facilitate Canadian client access to event contracts, traded on non-Canadian markets, to date, no prediction market has been recognized as an exchange or registered as a dealer (or exempted from those requirements) by the CSA.”⁵

Provincial and territorial authorities, which oversee their own securities laws, can take action if laws are broken. In 2025, Ontario regulators banned Polymarket for two years for offering investors illegal binary contracts through its global platforms.⁶

Who places bets on prediction markets?

While many people may be talking about prediction markets these days, a recent poll found that only three per cent of Americans have used one in the past six months. So, who actually bets on these platforms?⁷

Prediction markets have been mostly popular among youth, and particularly young men. The same poll found eight per cent of men aged 18 to 24 used a prediction market in the past six months and were more likely to use prediction markets, sportsbooks or daily fantasy sports apps than the general public.

The allure of quick profits for young people may not be all that surprising. Traditional paths to wealth, like securing a good job or buying a home, are becoming more elusive, and many young people feel financially squeezed.⁸

What’s the difference between prediction markets and investing?

While investing and prediction markets both involve making decisions based on future outcomes, they are fundamentally different.

Prediction markets are bets on specific outcomes. You either win or lose. Investing involves buying shares of a company that has sales, earnings, customers, expansion plans – metrics you can quantify, learn about and make educated guesses as to where the fundamentals might go in the future.

Stock markets have a history of positive returns over long periods of time. For instance, S&P 500 data shows a nearly 14 per cent total annualized return over the last 10 years.⁹ Between 1928 and 2025, 75 per cent of individual years are positive, according to historical data.¹⁰

Also, traditional financial markets have an established regulatory framework, whereas the regulation of prediction markets is emerging and less clear, adding additional risk for users.

Prediction market benefits and risks

Polymarket, Kalshi and other platforms have made it easier for users to participate in event contracts.¹¹ In a press release published in December 2025, Kalshi touted prediction markets as the “democratization of market participation” and a way to “cut through the noise [of public information] by aggregating real-time expectations into a single, transparent signal, accessible to anyone.” Prediction markets have often been faster and more accurate than analysts and conventional polling methods at reflecting public opinion.¹²

But regulatory and legal uncertainties remain, and there are several other risks to consider when it comes to prediction markets. Here are some of them.

• Speculation: Bets are made on event outcomes you can’t decisively know in advance.
• Insider trading: Some critics argue that individuals with access to non-public information could place bets based on that advantage. In financial markets, this is known as insider trading and is illegal.¹³ This concern was recently highlighted when an anonymous Polymarket user made over US$400,000 on the U.S. capture of Venezuelan President Nicolás Maduro.¹⁴
• Fraud/scams risk: Because prediction market regulations are evolving, they may not be subject to the same rigorous protections as traditional financial products. This creates an environment where scams can flourish, adding risk that users could be deceived into fake prediction platforms or having their funds stolen.¹⁵
• Addiction risks: As with any type of betting, there’s a risk of addiction. Young people are particularly vulnerable.¹⁶
• Reduction in investments: Time will tell if prediction-market participants make bets at the expense of other financial goals, but a 2024 study found that households that participated in sports betting saw their net deposits to brokerage accounts fall by 14 per cent, with the authors finding “the causal effect of $1 of online sports deposits is a reduction in net investment of just under $1.”¹⁷

What are the tax implications of prediction markets?

Under Income Tax Act, most types of income received by Canadian residents are taxable, unless specifically exempt. The taxability of prediction-market winnings depends on the frequency and nature of the activity. If the activity is casual betting, amounts received unexpectedly, such as windfalls, are generally non-taxable. However, for more frequent, systematic betting which constitutes a source of income (i.e. carrying on a business), 100 per cent of the profits may be taxed as business income. Failing to report income to the CRA is illegal and may result in penalties and other consequences.¹⁸ 

The bottom line

Prediction markets have chalked up some regulatory wins and inserted themselves into the cultural conversation. But while these markets can provide a glimpse into public sentiment, they also come with real financial and behavioural risks – especially for young people who may be most susceptible.