Online gambling is seemingly everywhere, but there’s a new way to make predictions that opens up betting in areas where the practice is still illegal.

Prediction markets allow users to bet on the outcome of nearly anything, and it’s an exchange between users on either side of an outcome, rather than placing a bet at a casino or a bookmaker.

This form of betting is in a legal grey area for most of Canada, but it is legal in the United States, so it opens the door for bettors in the 12 states where online sports gambling is still illegal.

The industry is gaining steam with billions in weekly transactions and it is now signing major sponsorship deals with sports leagues.

Here’s what you need to know about these markets, how they work and why they are so controversial.

Prediction markets offer yes/no options to nearly any outcome in sports, politics or popular culture that you can think of, including the results of the New York City mayoral election, the World Series winner or even how many times “Robotaxi” is said during Tesla Inc.’s earnings call.

Essentially, bettors are buying a share tied to the outcome of an event. Prices range from zero to $1, with the correct outcome paying out the remainder of the dollar.

For example, as of Thursday afternoon, shares of “Yes” for the Toronto Blue Jays to win the World Series were selling for 32 cents on the prediction market platform Polymarket, which implies that 68 per cent of bettors are choosing “No.”

If the Blue Jays end up winning the World Series, those who chose “Yes” will be paid a full dollar for every share they bought, implying a profit of 68 cents per share. Those who choose “No” will receive nothing because each of their shares is sent to the winners.

Prediction markets are often considered more accurate than traditional polling in part because users have a financial incentive to pick who they actually think will win an election.

During the 2024 presidential election, polls had the race for the presidency between Donald Trump and Kamala Harris at pretty much a coin flip, but Polymarket had odds of Trump winning at 58 per cent.

There are two major players in this space: Blockratize Inc.-owned Polymarket and Kalshi Inc.

In October, Intercontinental Exchange Inc., the New York Stock Exchange’s parent company, announced it would invest up to US$2 billion in Polymarket, a move that valued the platform at US$8 billion.

Kalshi earlier this month secured funding that valued its platform at US$5 billion, more than double its valuation from four months ago.

There is a potential third major player, DraftKings Inc., about to enter the space as well.

DraftKings, known for online sports gambling, announced this week it would purchase Railbird Exchange Inc., a prediction market platform, to create a soon-to-be-released app called DraftKings Predictions, which would open its services up to people in all 50 U.S. states.

DraftKings, however, said it would not immediately offer prediction contracts on sports.

Prediction market popularity in the U.S. has grown under the Trump administration and the shift to a more relaxed regulatory environment.

Last week, notional volume hit US$2 billion on Polymarket and Kalshi for the first time, surpassing a previous peak during the 2024 U.S. presidential election, according to Dune Analytics AS.

On Oct. 22, the National Hockey League became the first major sports league to sign a partnership deal with both Polymarket and Kalshi.

With payouts that often reflect those on gambling websites, several U.S. state regulators have alleged these platforms violate state gambling laws.

But Polymarket and Kalshi have both argued — successfully — that they are not sportsbooks at all, but financial exchanges.

Kalshi received the green light from the U.S. Commodity Futures Trading Commission (CFTC) to operate in that country in May, while Polymarket received the go-ahead in September, so both can now operate in all 50 U.S. states under federal commodities rules.

Several U.S. state gambling regulators have filed motions against the markets, saying they are no different than online gambling and should be treated as such.

In April, the Maryland Lottery and Gaming Control Commission issued a cease-and-desist letter to Kalshi that said “the purchase of the contract is indistinguishable from the act of placing a sports wager.”

But judges in New Jersey and Nevada have ruled in favour of Kalshi, allowing it to continue offering contracts in those states.

Canadian regulations imply that binary trading within 30 days of an event is illegal, though there has been little enforcement.

In 2017, the Canadian Securities Administrators (CSA) made it illegal to “advertise, offer, sell or otherwise trade binary options shorter than 30 days with any individual.”

At the time, CSA chair Louis Morisset called binary option contracts “the leading type of investment fraud facing Canadians today.”

He said the CSA’s ban put it among the leaders in fighting back against binary options fraud.

“It conveys a clear message that these products are unsuitable for individuals because of their risky characteristics and that their trading is illegal,” he said.

However, Ontario is the only province to have taken action to enforce the ban.

In April, the Ontario Securities Commission levied a two-year market ban and a fine against current and former operators of Polymarket for offering short-term binary options to Ontarians.

Canada is listed as a restricted jurisdiction under Kalshi’s terms of service, though Polymarket’s terms of service only lists Ontario as restricted.

Both Polymarket and Kalshi have faced accusations that their platforms are open to manipulation.

In August 2023, the NBA, NFL and MLB sent a letter to the CTFC that said the lack of regulation on predictive markets would hurt the integrity of their respective sports.

“The NFL remains concerned, in light of several outstanding questions, that if sports wagering contracts were to be permitted, they potentially could negatively impact the integrity of, and consumer confidence, in our game,” Jonathan Nabavi, vice-president of public policy and government affairs at the NFL, said in the letter.

There have also been political consequences in these markets as well.

Prediction markets are sometimes praised for being more reliable than traditional polling, but there have been concerns about foreign interference.

In 2024, four Polymarket accounts bet US$30 million on Donald Trump to win the U.S. election, which skewed the odds on the platform in Trump’s favour.

Polymarket later said the accounts belonged to a single French national with “extensive trading experience” and that there was no evidence of manipulation.

The election also drew accusations of “wash trading” on the platforms in Trump’s favour. This is where a single user would buy and sell the same asset to artificially boost activity.

• Email: bcousins@postmedia.com