Contract Basics
Prediction market contracts work like binary bets. Each contract pays exactly $1 if the specified event happens and $0 if it doesn't. The current price tells you what the market thinks the probability is. A contract trading at 65 cents means the market assigns a 65% chance to that outcome.
You can buy YES contracts if you think an event is more likely than the current price suggests, or NO contracts if you think it's less likely. These prices should add up to roughly $1, though small gaps exist due to transaction costs and market inefficiencies.
Say there's a contract on whether the Federal Reserve will cut interest rates at their next meeting. If YES contracts trade at 72 cents, the market thinks there's a 72% chance of a rate cut. If you believe the chance is actually 85%, you'd want to buy YES contracts. Your potential profit would be 28 cents per contract if you're right (you pay 72 cents, get $1 back).
Open interest measures how many contracts are currently outstanding. Higher open interest usually means more reliable pricing because more money is at stake. A market with $50,000 in open interest will typically have tighter spreads and more accurate prices than one with $5,000.
Understanding Contract Specifications
Every contract has specific terms that define exactly what counts as a "yes" outcome. These details matter more than you might think. A contract titled "Will Bitcoin reach $100,000 in 2024?" might seem straightforward, but the fine print could specify which exchange's price counts, what timezone determines the deadline, or whether the price needs to close above $100,000 or just touch it intraday.
Resolution sources are predetermined. Common sources include official government announcements, specific news outlets, or data from particular websites. Some platforms use multiple sources and resolve based on consensus. Others designate a single authoritative source.
Reading resolution criteria before trading isn't optional. Traders regularly get burned by assuming they understand the terms without checking. A contract about election results might resolve based on electoral college votes rather than popular vote totals. A sports betting contract might resolve based on official league statistics rather than what you see on ESPN.
Order Types and Market Mechanics
The bid-ask spread shows the gap between what buyers want to pay and what sellers want to receive. If YES contracts have a bid of 67 cents and an ask of 69 cents, you can sell immediately at 67 cents or buy immediately at 69 cents. The 2-cent spread represents the cost of trading right now.
Market makers place limit orders that sit in the order book, providing liquidity. They might place a bid at 66 cents and an ask at 70 cents, hoping to profit from the 4-cent spread. Takers use market orders to trade immediately against these existing orders.
Most platforms charge lower fees to makers because they improve market quality. Makers might pay 1-2% fees while takers pay 3-5%. This fee structure encourages people to place limit orders rather than always demanding immediate execution.
Slippage occurs when large orders move prices. If you want to buy 1,000 YES contracts but only 300 are available at the current ask price, your order will walk up the order book, paying higher prices for the remaining contracts. Blockcircle's momentum trading engine helps identify when large orders might be creating temporary price dislocations.
Liquidity Considerations
Thin markets create problems. When only small amounts are available at each price level, your trades can significantly move prices. This makes it harder to enter and exit positions at favorable prices.
Time of day affects liquidity. Markets tend to be most active during US business hours and around major news events. Trading during off-hours often means wider spreads and less favorable execution.
Platform differences matter too. Polymarket typically has the highest liquidity for political events, while Kalshi excels for economic indicators and regulated events. Some traders arbitrage between platforms when price differences exceed transaction costs.
Resolution and Settlement
Resolution determines who gets paid. This process varies by platform and event type. Political contracts might resolve within hours of official results, while some economic indicators take days or weeks for final data.
Disputed resolutions happen occasionally. Platforms typically have appeal processes, but these can take time. Some traders factor resolution risk into their strategies, especially for ambiguously worded contracts or events where the outcome might be contested.
Early resolution occurs when outcomes become certain before the official deadline. If a candidate drops out of a race, contracts about their chances might resolve immediately rather than waiting until election day.
Settlement timing affects your capital allocation. Money tied up in contracts that won't resolve for months can't be deployed elsewhere. This opportunity cost should factor into your trading decisions.
Common Resolution Issues
Ambiguous wording causes most disputes. Contracts about "significant" events or "major" announcements leave room for interpretation. Better contracts specify exact numerical thresholds or objective criteria.
Source reliability matters. If a contract resolves based on a particular website's data, what happens if that site goes down or changes its methodology? Robust contracts specify backup sources or alternative resolution methods.
Timezone confusion creates problems for time-sensitive contracts. A contract about whether something happens "by December 31st" needs to specify which timezone determines the deadline.
Strategic Concepts
Expected value calculations drive profitable trading. If you estimate a 75% chance of an outcome but can buy YES contracts at 65 cents, your expected value is positive: (0.75 × $1) + (0.25 × $0) - $0.65 = $0.10 per contract.
Edge represents your advantage over the market. Having edge doesn't guarantee profits on individual trades, but it should generate profits over many trades. The key is accurately estimating your edge without overconfidence.
Position sizing determines how much to risk on each trade. The Kelly criterion provides a mathematical framework: bet a fraction of your bankroll equal to your edge divided by the odds. If you have a 10% edge on even odds, Kelly suggests betting 10% of your bankroll.
Most traders use fractional Kelly, betting perhaps 25-50% of the full Kelly amount to reduce volatility. Full Kelly maximizes long-term growth but creates wild swings that many people can't psychologically handle.
Portfolio Management
Diversification across uncorrelated events reduces risk. Betting everything on election outcomes exposes you to systematic political polling errors. Mixing political, economic, and sports contracts provides better risk distribution.
Correlation matters more than you might expect. Contracts about different aspects of the same underlying event often move together. Multiple contracts about Federal Reserve decisions will likely correlate highly.
Bankroll management prevents ruin. Even with positive expected value, bad runs happen. Keeping enough capital in reserve ensures you can continue trading through rough patches. Blockcircle's whale finder helps identify when large traders might be moving markets, potentially creating short-term opportunities.
Calibration tracking improves your estimates over time. Keep records of your probability estimates and actual outcomes. Well-calibrated traders see roughly 70% of events they assign 70% probability actually occur.
Platform-Specific Features
Different platforms offer varying tools and contract types. Kalshi focuses on regulated events with CFTC oversight. Polymarket offers broader event coverage but operates differently from a regulatory perspective. Understanding each platform's strengths helps you choose where to trade specific contract types.
Fee structures vary significantly. Some platforms charge percentage-based fees on profits, others charge flat fees per contract, and some use maker-taker models. These differences affect your net returns, especially for frequent trading strategies.
Withdrawal and deposit methods differ too. Some platforms integrate with traditional banking, others require cryptocurrency. Processing times and fees for moving money in and out should factor into your platform choice.
API access enables automated trading strategies. If you plan to trade algorithmically or want to integrate prediction market data with other analysis tools, API availability and quality matter. Blockcircle's prediction markets mispricing engine helps identify potential opportunities across multiple platforms.
Learning this terminology takes time, but understanding these concepts will help you navigate prediction markets more effectively. Start small, track your performance, and gradually develop your own systematic approach to identifying and sizing opportunities.