Event Contracts

An event contract is a contract that can be bought and sold on an exchange. It poses a yes-no question about a future event. For example: Will the inflation rate in December be above three percent? Whoever buys the contract is betting on yes. If the event occurs, they receive a fixed payout, usually one dollar. If it doesn’t occur, the contract becomes worthless and the stake is lost.

The price before resolution always lies somewhere between zero and one dollar. If the contract currently costs 65 cents, buyers and sellers consider the event fairly likely. The price can therefore be read directly as a probability: 65 cents corresponds to an estimated chance of 65 percent.

Why prices work as forecasts

Surveys ask people for their opinion without a wrong answer costing anything. In a market, it’s different. Whoever is wrong loses real money. This consequence forces participants to estimate honestly instead of voicing wishful thinking.

There is also a second effect. Whoever has information that others don’t yet have can profit from it. So they trade, and their trading shifts the price. In this way, scattered knowledge held by many individual people gradually seeps into a single number. Economists call this price formation through distributed knowledge.

But the system isn’t perfect. In US elections, prediction markets have already been significantly off. When trading volume is low, a single large bet can temporarily distort the price. And markets systematically overstate very unlikely events: contracts with a true chance of two percent often cost five or six cents.

From purchase to payout

The process begins with a precisely formulated question. The exchange determines in advance which data source decides the outcome, for example an official statistics agency. This rule is more important than it sounds. Without a clear source, there would be disputes over the payout after every event.

Then buyers and sellers meet in an electronic order book, a list of all open buy and sell offers. If two offers match, a trade takes place. Unlike with a sports betting provider, there is no house standing on the other side. You trade against other participants, and the exchange only collects a fee.

You don’t have to wait until the end. Whoever bought at 40 cents and later sells the contract at 70 cents has earned 30 cents, regardless of how the event turns out. On the closing day, the contract is settled: yes-holders receive one dollar, no-holders receive nothing. The sum of the yes-price and the no-price therefore always adds up to approximately one dollar.

Kalshi, Polymarket, and the dispute with regulators

The best-known providers are called Kalshi and Polymarket. Kalshi is officially licensed in the US and is supervised by the financial regulator CFTC. Polymarket runs on a blockchain, a public digital ledger, and for a long time was only usable outside the US. Both reached trading volumes in the billions around the 2024 US election.

In news articles, these prices now regularly appear as forecasts. Phrases like “the market sees the chance of a rate cut at 80 percent” almost always refer to such contracts. Companies also use them for hedging. An event organizer, for example, can hedge against rain on the festival weekend.

Legally, much remains disputed. Critics see it as disguised gambling, especially with bets on elections and sports results. In Germany and the EU, such markets are currently barely accessible to private investors. Anyone reading these prices should also not confuse one thing: they show what traders expect, not what will actually happen.