Hypnosis is an effective intervention with proven efficacy that is employed in clinical settings and for investigating various cognitive processes. Despite their practical success, no consensus exists regarding the mechanisms underlying well-established hypnotic phenomena. Here, we suggest a new framework called the Simulation-Adaptation Theory of Hypnosis (SATH). SATH expands the predictive coding framework by focusing on (a) redundancy elimination in generative models using intrinsically generated prediction errors, (b) adaptation due to amplified or prolonged neural activity, and (c) using internally generated predictions as a venue for learning new associations. The core of our treatise is that simulating proprioceptive, interoceptive, and exteroceptive signals, along with the top-down attenuation of the precision of sensory prediction errors due to neural adaptation, can explain objective and subjective hypnotic phenomena. Based on these postulations, we offer mechanistic explanations for critical categories of direct verbal suggestions, including (1) direct-ideomotor, (2) challenge-ideomotor, (3) perceptual, and (4) cognitive suggestions. Notably, we argue that besides explaining objective responses, SATH accounts for the subjective effects of suggestions, i.e., the change in the sense of agency and reality. Finally, we discuss individual differences in hypnotizability and how SATH accommodates them. We believe that SATH is exhaustive and parsimonious in its scope, can explain a wide range of hypnotic phenomena without contradiction, and provides a host of testable predictions for future research.