Prediction Markets vs. Betting Exchanges

Greg Kajewski
5 days ago
10 min read

Prediction markets and betting exchanges are reshaping how people bet, offering alternatives to traditional sportsbooks. Here's what you need to know:

Prediction Markets: Operate like stock markets where users buy and sell shares tied to event probabilities. Share prices reflect the likelihood of outcomes (e.g., $0.75 = 75% chance). These platforms are known for their accuracy, especially close to event conclusions.
Betting Exchanges: Peer-to-peer platforms where users can "back" (bet for) or "lay" (bet against) outcomes. They offer better odds and no "house edge", with commissions only on winning bets.

Quick Comparison

Feature	Prediction Markets	Betting Exchanges
Mechanism	Contract-based trading	Peer-to-peer betting
Price/Odds Setting	Market-driven probabilities	User-set odds
Fees	4-5% trading fee	1-2% commission on wins
Focus	Politics, economics, sports, etc.	Primarily sports events
User Goals	Forecasting accuracy, profit	Direct profit, entertainment

Choose prediction markets if you're into forecasting and diverse events like politics. Opt for betting exchanges if you want better odds and flexibility in sports betting. Both offer unique tools and opportunities for smarter betting.

Is this the FUTURE of Sports Betting? Betting Exchanges Explained

Core Functions and Mechanics

Prediction markets and betting exchanges each have their own unique ways of handling bets and determining outcomes. Let’s break down how these two systems operate.

Prediction Markets: Trading Event Contracts

Think of prediction markets as stock exchanges, but instead of stocks, users trade binary contracts. These contracts pay out $1 if the outcome is a "yes." The price of a contract reflects the market's estimated probability of that outcome. Two main mechanisms keep these markets running smoothly:

Continuous double-auction system: Traders place buy and sell orders that are matched in real time.
Automated market makers (AMMs): Algorithms set prices and ensure liquidity, even when there aren't enough traders actively placing orders.

"Having run markets both with and without Hanson's automated-market maker [LMSR], we say with confidence that it makes a huge difference to the success of the market. Because it maintains buy and sell orders at a wide range of prices, it provides a steady source of liquidity that would otherwise be lacking. This allows traders to interact with the system in an easy and intuitive manner rather than having to worry about placing booked orders at certain prices and waiting for other traders to match those orders."

This combination of systems ensures prediction markets stay active and accessible, even during periods of low trading activity.

Betting Exchanges: Peer-to-Peer Betting

Betting exchanges, on the other hand, work more like a marketplace where users bet directly against one another. Participants can either:

Back an outcome (betting that it will happen), or
Lay an outcome (betting that it won’t happen).

The exchange itself doesn’t take a position like a traditional bookmaker. Instead, it earns revenue by charging a commission on winning bets. This peer-to-peer setup removes the "house edge" found in traditional betting systems, giving users more control over the odds and their bets.

Key Differences Table

Here’s a quick comparison of how prediction markets and betting exchanges differ in their core mechanics:

Feature	Prediction Markets	Betting Exchanges
Trading Mechanism	Contract-based binary outcomes	Direct bettor matching
Price Determination	Market-driven probabilities	User-set odds
Settlement	Automatic payout based on outcome	Winner receives matched bet
Fee Structure	4-5% trading fee	Commission on winning bets
Position Types	Buy/Sell contracts	Back/Lay bets
Market Efficiency	~90% accuracy one month before events	Determined by user activity

Interestingly, prediction markets have shown an impressive ability to forecast outcomes. For example, some platforms boast over 94% accuracy within the final four hours before an event concludes. These differences in mechanics not only shape how the systems operate but also influence user behavior and profit opportunities, which we’ll explore further in the next sections.

User Behavior and Profit Potential

Prediction Market User Goals

Prediction markets draw in users who are motivated by two main factors: the challenge of forecasting accurately and the potential for profit. These platforms are particularly appealing to individuals who enjoy leveraging their predictive skills while contributing to a collective pool of knowledge. Many users closely monitor and refine their forecasting abilities, treating accuracy as a key measure of their success.

"It's not just a spiced-up poll; it really is one of the best ways of aggregating humanity's opinion on something in general, because when money is at stake, you know, people tend to get serious about predicting things." - Stephen Grugett, Co-founder of Manifold Markets

A prime example of the scale these markets can achieve occurred during the 2024 U.S. elections, where Polymarket recorded $2.7 billion in bets placed on various candidates. This highlights the immense participation prediction markets can attract during major events.

Betting Exchange Success Rates

Betting exchanges stand out for offering significantly higher success rates compared to traditional betting platforms. Their peer-to-peer structure eliminates the typical "house edge", giving users better odds and a stronger shot at profitability. The differences are striking when you compare key metrics:

Success Metric	Betting Exchanges	Prediction Markets
User Profitability Rate	40%	2%
Average Earnings Per Bet	5-10% higher	Standard
Commission Structure	1-2% on wins only	5-10%
Winning Restrictions	None	Often limited

The absence of a house margin in betting exchanges makes users 20 times more likely to turn a profit compared to those using traditional sportsbooks. This is largely due to the ability to set custom odds and avoid the built-in fees that sportsbooks rely on. These advantages naturally create unique incentive structures, as highlighted below.

Profit and Incentive Comparison

Prediction markets and betting exchanges cater to different user motivations and offer distinct profit opportunities. Here's how they compare:

Feature	Prediction Markets	Betting Exchanges
Primary User Goals	Accuracy rewards, Information aggregation	Direct profit, Entertainment
Market Coverage	Politics, economics, sports, social events	Primarily sports events
Trading Flexibility	Can sell before event conclusion	Ability to back and lay bets
Risk Management	Complex hedging options	Direct position management
Social Elements	Community reputation, accuracy tracking	Performance rankings, social sharing
Fee Impact	1-2% trading fee	2-5% commission on wins

To succeed in prediction markets, experts suggest focusing on events with quick resolutions - ideally those that wrap up within a few days. This approach minimizes exposure to market volatility and allows for faster reinvestment of funds.

On the other hand, professional traders are drawn to betting exchanges for their flexibility and the absence of restrictions on winning. Features like the ability to back and lay bets open up advanced strategies such as arbitrage betting, where profits can be secured by covering multiple outcomes. While betting exchanges excel at serving users focused on sports, prediction markets appeal to those interested in broader areas like politics and economics. This diversity in user goals and behaviors shapes how these platforms design their tools and features, which will be discussed in the next section.

Prediction Market Tools

Prediction markets come equipped with tools designed to provide deep insights into potential outcomes. These platforms often feature real-time dashboards that track price movements, trading volumes, and trend indicators. For example, Polymarket reported an impressive $360 million in trading volume in July 2024.

Some standout features include:

Oracle systems that ensure accurate and reliable market resolutions
The ability to create custom markets tailored to unique events
Dynamic pricing mechanisms that adjust in real time based on probability shifts
Position management tools to support various trading strategies

Betting exchanges, on the other hand, emphasize community and performance tracking over analytics. These platforms are designed to foster engagement and help users make data-driven decisions. They provide tracking tools that allow bettors to measure their performance and refine their strategies:

Tracking Feature	Purpose
ROI Charts	Evaluate return on investment across different sports
Win Percentage	Track success rates by league and specific bet types
Streak Tracking	Monitor performance trends over 7-day and 30-day periods
Conference Breakdowns	Analyze performance within specific sports conferences

Feature Comparison Table

Here’s a side-by-side comparison of the main features offered by prediction markets and betting exchanges:

Feature Category	Prediction Markets	Betting Exchanges
Trading Interface	Price-based contract trading	Direct peer-to-peer matching
Market Creation	User-generated markets allowed	Curated event selection
Fee Structure	4-5% trading fee	No-vig model (peer-to-peer betting)
Analysis Tools	Probability forecasting tools	Sports-specific analytics
Social Elements	Gamified engagement features	Integrated performance tracking
Risk Management	Complex hedging options	Direct position management
Market Coverage	Politics, economics, sports, and social events	Primarily sports events

Each platform type caters to distinct user needs. Prediction markets encourage research and discussion by gamifying the forecasting process, while betting exchanges focus on creating transparent, efficient markets where users can directly engage with one another. Both approaches prioritize improving user experience and equipping participants with tools for smarter decision-making.

Legal Status and Applications

Rules and Market Access

In the United States, prediction markets and betting exchanges operate under different legal frameworks. Prediction markets are overseen by the Commodity Futures Trading Commission (CFTC), while betting exchanges can be regulated at the state level in some states, much like traditional sports betting.

In April 2025, KalshiEx LLC filed a lawsuit against Nevada and New Jersey gaming officials, arguing that federal law should take precedence over state regulations. A Kalshi representative explained:

"The CFTC has sole authority in these matters. By attempting to impose their jurisdiction on Kalshi, state regulators threaten the entire regulatory scheme and authority of the CFTC, which was explicitly granted by Congress in the Commodities Exchange Act and regulates trillions of dollars in commodities markets across gold, oil, agricultural futures, and more."

These regulatory differences directly influence how these platforms are used.

Common Use Cases

In 2024, Americans bet $148 billion on sports, marking a 24% increase from the prior year. The scope of activity on these platforms often reflects their regulatory focus:

Prediction Markets:

Handle a wide range of event types beyond sports.
Facilitated the trading of 500 million Presidential Election contracts on Robinhood during 2024.
Generated hundreds of millions in sports-related trading volume by March 2025.

Betting Exchanges:

Primarily cater to sports events.
Operate only in states where they are licensed.
Incorporate measures to ensure consumer protection.

Alexandra Roth, NBA Vice President and Assistant General Counsel, highlighted the importance of safeguarding public trust:

"Protecting the integrity of NBA basketball and preserving public confidence in our league and in our sport is our highest priority."

Currently, at least six states - Illinois, Maryland, Montana, Nevada, New Jersey, and Ohio - have issued cease-and-desist letters to prediction markets. These legal challenges could significantly impact the future of the industry in the U.S. market.

Making Your Choice

Now that we've covered the mechanics and user behaviors, let's dive into how to pick the platform that aligns with your betting strategy.

When weighing prediction markets against betting exchanges, your decision should reflect your personal goals and comfort with risk. Betting exchanges, for instance, stand out for their higher potential for profitability - users on these platforms have a 40% chance of being profitable, compared to just 2% on traditional sportsbooks.

Here’s a quick comparison to help you decide:

Feature	Best For	Key Advantage
Prediction Markets	Market analysts, event forecasters	90% accuracy one month before events
Betting Exchanges	Active sports bettors, value seekers	No house edge, user-controlled odds
BettorEdge	Social bettors, community-focused traders	Enhanced community engagement and lower fees

Among betting exchanges, BettorEdge leads the pack. It has processed over $100 million in market orders and serves a community of more than 30,000 active users. What sets BettorEdge apart is its peer-to-peer approach:

"BettorEdge works differently than traditional sports betting. Instead of betting against a sportsbook or 'The House,' we match you up with other BettorEdge users."

For sports bettors, betting exchanges come with several perks:

Lower Fees: Typical fees are less than 1–2%, much lower than the 10% vig charged by sportsbooks.
Market Control: You can set your own odds and even sell positions before an event concludes.
Higher Liquidity: Access deeper markets with a broader range of betting options.
Community Features: Share strategies and follow successful bettors for insights.

If you're new to peer-to-peer betting, starting with a betting exchange might be a smart move. These platforms often focus on sports markets and provide strong community support to help you build effective strategies.

Professor Eric Zitzewitz of Dartmouth highlights the efficiency of such markets:

"Financial markets are generally pretty efficient, and the evidence suggests that the same is true of prediction markets. There's no virtue-signaling in an anonymous market when you're betting, and what you're seeing with the market is some average of all of those different opinions, weighted by their willingness to put their money where their mouth is."

Whether you prioritize community interaction or prefer to focus on market speculation, the right platform will depend on your unique betting style and appetite for risk.

FAQs

What’s the difference between prediction markets and betting exchanges when it comes to user experience and profitability?

Prediction Markets vs. Betting Exchanges

When it comes to betting, prediction markets and betting exchanges offer two distinct methods, each with its own perks tailored to different types of bettors.

Prediction markets function like a stock market for future events. Users buy and sell contracts based on how likely they think an event is to happen. The odds shift dynamically as the market's sentiment changes, and one of their standout features is lower fees - usually around 1-2%, much less than the higher cuts traditional sportsbooks often take. Another advantage? You can cash out before the event concludes, making it a flexible option for those who prioritize simplicity and cost-saving.

Betting exchanges, on the other hand, take a peer-to-peer approach. Instead of betting against a bookmaker, users bet directly against one another and even set their own odds. This model often results in better odds since there’s no bookmaker taking a margin. However, it comes with a learning curve. Navigating betting exchanges requires a stronger grasp of trading principles, which can make them feel a bit more complex.

While both systems rely on market-driven pricing to boost profitability, prediction markets are often favored by those who want a straightforward, user-friendly way to bet. Betting exchanges, meanwhile, are a go-to for those who enjoy the challenge of a more hands-on approach.

How do prediction markets ensure accurate forecasts, and what role do automated market makers play?

Prediction markets excel at producing accurate forecasts by tapping into the combined knowledge of participants who have a financial stake in the results. These markets are designed to adjust dynamically as new information comes in, offering a real-time snapshot of sentiment and probabilities.

A crucial component of this system is automated market makers (AMMs). AMMs ensure steady liquidity, allowing participants to buy or sell shares at any time. By using algorithms, they adjust prices based on supply and demand, which helps stabilize the market and integrate the latest data into predictions. Together, the insights from participants and the liquidity provided by AMMs create a highly effective forecasting system.

What legal factors should I consider before using prediction markets or betting exchanges in the United States?

In the United States, whether prediction markets and betting exchanges are legal depends on a mix of federal and state laws. On the federal level, regulations like the Wire Act and the Illegal Gambling Business Act come into play, particularly if the activity is classified as gambling. Additionally, the Commodity Futures Trading Commission (CFTC) monitors event contracts and can impose restrictions if these contracts are seen as conflicting with public interest.

State laws add another layer of complexity. While some states permit these platforms under specific guidelines, others completely ban them. For instance, in certain states, gaming commissions must approve such activities for them to operate legally. Since these laws can shift over time, staying updated on both federal and state regulations is crucial before getting involved.