Are Prediction Markets Considered Gambling?

What Counts As Gambling in the US?

In the US, gambling is defined by each state and not at the federal level. As such, each state has the power to set its own rules. Despite the variation in laws, the framework has 3 core elements: consideration, chance, and prize. If all 3 are present, then it’s considered to be gambling, and these elements can be described as:

• Consideration - You must risk or bet something of value, most commonly money.
• Chance - The outcome must be mostly determined by chance, not skill.
• Prize - You receive something of value (i.e., money) for being the winner.

Let’s Look at How Prediction Markets Are Determined

Prediction markets allow traders to buy and sell event contracts based on real-world outcomes, and are not considered gambling for the very same reason why stock markets aren’t. There is no random chance, no fixed odds set by the ‘house’, and there’s a potential to get consistent returns if you are good at analysing data. As you can already begin to see, prediction markets and gambling are completely different, right at the very core.

Key Difference: Why Prediction Markets Aren’t Considered Gambling

Both prediction markets and gambling have similarities in the sense that you are potentially turning a profit based on an outcome. However, there’s a core difference. In a casino or sportsbook, you place a bet that is locked in on set odds and wait for a resolution. However, in a prediction market, you can buy, sell, and trade event contracts right up until the event resolves. As contracts are bought and sold, the prices and implied probabilities change. Plus, as you can sell the contracts, you can leave at any time, which isn’t possible with gambling.

Both are structured completely differently. Prediction markets are peer-to-peer, allowing users to trade with each other, with the prices and probabilities fluctuating consistently. Gambling is far more centralized, and all wagers are placed against the ‘house’ that has total control over the odds.

Here are some other differences that you should weigh up:

1. Odds and Pricing

A casino and sportsbook will create the odds using a risk management strategy to ensure they always turn a profit. However, contracts on prediction markets are priced based on the market activity and traders' opinions. For example, a $0.65 contract price suggests a belief that there’s a 65% chance of the outcome occurring. As more contracts are bought, sold, and traded, the prices fluctuate in real-time.

2. House Edge

Both casinos and sportsbooks have a built-in house edge, which always favors the ‘house’. Even the most seasoned pros are at a disadvantage. On the other hand, prediction markets simply don’t have a house edge. Instead, traders will trade against each other.

Comparison: Prediction Markets Vs. Gambling

Here’s a quick look at how both systems directly compare, highlighting many differences:

Why There’s Confusion with Prediction Markets

Even though prediction markets are structured differently from casinos and sportsbooks, they do share some characteristics. This is where some of the confusion has originated:

• Consideration - Traders essentially risk the contract price when buying event contracts.
• Outcome is uncertain - Whether you are trading a contract on an electoral candidate or the price of Bitcoin, the outcome is uncertain.
• Monetary outcome - If your contract settles, you will get a monetary payout of $1.

Pros and Cons: Are Prediction Markets Considered Gambling?

Since the rise of prediction markets, there has been a divide between those who believe it is the same as gambling and those who understand the differences and what sets it apart. Before you jump into joining the best prediction market sites, let’s take a look at the pros and cons of the arguments for classifying them as gambling:

Pros and Cons

• Regulated as financial derivatives
• Not treated as betting sites
• Peer-to-peer trading

• Often confused with gambling

Conclusion: The Importance of Knowing the Difference

Ultimately, both prediction markets and gambling can look similar from afar, however they are built differently with very different purposes. With gambling, you are betting money on an outcome against the house, which always has the advantage. Prediction markets are peer-to-peer trading that is market-driven and doesn’t require you to hold your contracts until the resolution. Understanding these differences will help you to choose which aligns with your preferences. Now you know exactly how both work, why not tap the promotional banners on this page to discover the best sites that work for you?

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Prediction Markets Considered Gambling FAQs

Trade Responsibly

Prediction markets involve financial risk, and outcomes are never guaranteed. In light of this, trading should always be controlled and enjoyable. Keep your activity in check by following responsible trading practices such as:

Set a Budget:

Only trade money you can afford to lose and stop when your budget is reached.

Don't Chase Losses:

Avoid increasing trade size or frequency to recover losses.

Trade with a Clear Head:

Don't trade when stressed, tired, emotional, or under the influence.

Set Time Limits:

Take breaks and avoid letting trading interfere with daily life.

Know Your Stuff:

Learn how contracts, pricing, fees, and settlement work before trading.

Use Platform Controls:

Use spending limits, account history, or self-exclusion tools where available.

For guidance on responsible trading and risk awareness, the following free official resources are available:

SEC OIEA

FINRA

To make sure you get accurate and helpful information, this guide has been edited by Ryan Leaver as part of our fact-checking process.