Since accurately forecasting a Donald Trump win in the 2024 election—well before most polls and political commentators caught on—prediction markets have experienced remarkable growth.
In the months leading up to the election, monthly trading activity surged to $4.3 billion. The momentum did not stop there. By March of this year, trading volumes had climbed even higher, reaching an impressive $10.6 billion.
As platforms such as Polymarket and Kalshi attracted larger audiences, however, they also found themselves under increasing scrutiny. Questions began to emerge about suspicious wagers tied to events ranging from the content of upcoming MrBeast videos to developments surrounding the Iran conflict.
According to Karoline Thomsen, a researcher specializing in international law and relations at the University of New South Wales, prediction markets can be highly effective at collecting and reflecting valuable information from a wide range of participants. Yet the same systems may also create opportunities for the misuse of privileged knowledge.
“With Polymarket, there is also the possibility of bets being placed based on insider information,” Thomsen explains. “When that happens, the activity shifts away from genuine forecasting. Instead of predicting future outcomes, individuals may be revealing—or signaling to others—what they already know is likely to occur.”
What prediction markets do in theory
According to economist Robin Hanson, the key idea behind prediction markets is that people reveal their true beliefs when they place bets on outcomes, rather than giving pollsters the answers they think are expected. These markets combine information from many individuals and translate the crowd’s collective judgment about a future event into a market price.
Unlike conventional bookmakers that determine the odds and earn profits from the betting margin, prediction markets operate by trading Yes or No shares, with prices constantly shifting as public sentiment and expectations change.This works pretty well, with Polymarket claiming an average of 90% correct predictions, from a month out, on resolved markets.
Elisabeth Diana, communications head for Kalshi, explains prediction markets are a valuable public service.
“Around 70% of people on Kalshi actually just come to see the odds, to see the forecasts. They don’t trade,” she tells Magazine.”I mean, the value is enormous. They see it as a source of truth.”
In theory, prediction markets work best when traders rely on publicly available information that is not yet widely recognized. A well-known example is the Pentagon Pizza Report, which tracks increased pizza orders around the Pentagon as a sign that staff may be working late, potentially indicating a major event is unfolding.
Diana offers a similar example: “If you sat outside a Walmart and monitored customer traffic every day for several weeks, you could gain a clearer understanding of the company’s performance. That information is gathered through observation and is completely legal.”
When does information cross the line to become ‘inside information’
The line is crossed into insider trading when a person uses material nonpublic information for financial gain.
“As a general rule, if you are allowed to share information publicly, you can usually trade based on it. If you are prohibited from disclosing that information, then trading on it is not allowed,” Diana explains.
For instance, if you were a dancer hired by Bad Bunny for the Super Bowl and placed a bet based on knowledge of his opening song, that would qualify as insider trading because the information came through your employment.
On the other hand, if you were outside the stadium and happened to hear Bad Bunny rehearsing a particular song, placing a bet based on that observation would be acceptable.
“That’s legitimate because the information is publicly accessible. Anyone could have heard it,” she says.
Insider trading on the war(s)
The challenge is that prediction markets have dramatically increased the number of people who may have access to valuable inside information. In the past, insider trading was largely associated with CEOs, executives, and board members. Today, however, individuals ranging from search engine developers to members of prestigious award committees may face financial incentives to act on privileged knowledge. These concerns are not merely theoretical, as unusual last-minute bets have been linked to events such as the 2025 Nobel Peace Prize and Google’s 2025 Year in Search rankings.
Prediction markets can also create situations where a single individual has the power to influence the outcome. Coinbase CEO Brian Armstrong once addressed this issue by deliberately mentioning every phrase that speculators had wagered he might use during an earnings call.
Even more troubling are allegations involving the misuse of classified information during times of conflict.
On January 3, just hours before US troops were reportedly deployed to Venezuela, a newly created Polymarket account placed a successful wager on the event and earned roughly $400,000. Before the US strike on Iran, another suspicious account reportedly made around $553,000. Authorities have also taken legal action in some cases. An Israeli Defense Forces reservist and a civilian were charged with using classified information related to Israel’s April 2024 operations against Iran to place bets on Polymarket.
Earlier this month, Congressman Eugene Vindman urged Polymarket CEO Shayne Coplan to preserve all records connected to national security-related wagers, including IP addresses and metadata.
“The use of sensitive or classified information to profit from military-related bets threatens national security and puts service members at risk. It is unethical, dishonest, and deeply harmful,” Vindman stated, adding that prediction markets may also create incentives for military decision-makers to pursue actions that could benefit them financially.
“Furthermore, substantial wagers placed on these markets before military operations can reveal potential U.S. plans to foreign adversaries, weakening operational security. Such disclosures may put troops at greater risk and undermine the success of important military missions.”Kalshi bans insider trading, verifies all users
Kalshi has specific prohibitions against insider trading. AI systems scan the platform looking for irregularities. But the real blocker is the fact that all users are KYC verified.
“We do KYC checks, we do anti-money laundering checks,” she says. “If there is an issue with someone, we know who they are and we can reach out to them because we have their contact information. On sites like Polymarket, there is no KYC. So there is no verification. So people are doing this sort of in the shadows.”
There are two versions of Polymarket, however. The US version of Polymarket operates under CFTC oversight and requires mandatory KYC verification to trade.
The international version operates without strict permission requirements and offers a high level of privacy, leading critics to argue that it provides a convenient environment for insider traders to remain anonymous.
“The platform is essentially built to maximize anonymity,” says Thomsen. “There is no requirement for identity verification, and transactions are conducted using cryptocurrency, which operates across borders. Many users also rely on VPNs. If you look at some of the usernames on the platform, most are so generic that they could easily pass as passwords for a moderately secure database.”
Polymarket International is restricted or prohibited in 33 countries, including the United States and Australia. However, users can often bypass these geographic restrictions through VPN services. Given the limitations of both national and international regulations, Thomsen believes platforms should take greater responsibility on their own.
“At the current stage of international cooperation, self-regulation by the platforms would likely be the most effective approach. That said, I would strongly support a broader international discussion on the issue,” she says.
Kalshi and Polymarket take action on insider trading
Kalshi recently introduced new restrictions that prohibit political candidates from betting on their own campaigns and prevent athletes, coaches, and other participants in professional or college sports from trading on markets connected to the competitions in which they are involved.
In February, the platform suspended prominent Democratic donor Stephen Cloobeck after he placed bets on his friend, Eric Swalwell, winning California’s gubernatorial race. Earlier, Cloobeck had also wagered on his own chances of victory before withdrawing from the contest.
Shortly after this article was originally published, Kalshi announced three separate five-year suspensions for candidates in Minnesota, Virginia, and Texas who had reportedly bet on their own election campaigns.
That same month, the platform imposed a two-year suspension on a video editor working for YouTuber MrBeast over alleged insider trading and referred the matter to federal authorities. The editor’s account had been flagged after achieving an unusually high success rate on markets related to MrBeast.
Polymarket has likewise updated its policies, stating that users are prohibited from trading on contracts when they possess confidential information or have the ability to influence the outcome of an event.
One Polymarket account, operating under the name “ricosuave666,” reportedly earned $155,000 from wagers linked to Israel’s June 2025 strikes on Iran and later returned in January to place additional bets. Analysts flagged the account for suspicious activity, leading to its removal. However, because the platform allows anonymous participation, the individual behind the account could theoretically create another profile.
Polymarket declined requests for an interview and chose not to provide comments regarding these issues.
Different ways of approaching prediction markets
Could a different approach to prediction market design help limit the appeal of insider trading?
The developers behind functionSPACE believe so. The project, which is currently being built as open-source infrastructure, will enable anyone to create prediction markets and related applications without requiring permission.
Rather than relying on simple yes-or-no outcomes, functionSPACE allows participants to trade on the probability of various results. Users can place estimates along a curve, reflecting different levels of confidence in their predictions. Rewards are then distributed based on how closely those estimates match the actual outcome.
According to CEO Tom Chalmers, this model helps reduce the incentives associated with insider trading. Instead of a system where only those who correctly predict the final result receive significant rewards, multiple participants can benefit by making forecasts that are closer to the truth.
“Different economic models for prediction markets can alter these incentives by allowing participants to take positions across a spectrum of outcomes rather than forcing them into rigid, all-or-nothing choices. In this framework, the advantage held by an insider is balanced against a broader range of nuanced predictions, reducing the impact of extreme positions.”
As the project is still in development, it’s too early to say if this particular approach will change incentives in practice. But perhaps better math and game theory could be effective where the regulators cannot.
Subscribe
The most engaging reads in blockchain. Delivered once a
week.
Andrew Fenton
Andrew Fenton is a writer and editor at [Cointelegraph](https://cointelegraph.com?utm_source=chatgpt.com) with more than 25 years of experience in journalism and has been reporting on the cryptocurrency industry since 2018. He spent ten years with News Corp Australia, beginning as a film journalist for The Advertiser in Adelaide before moving to Melbourne as deputy editor and entertainment writer for the nationally syndicated entertainment supplements Hit and Switched On, which appeared in publications including Herald Sun, The Daily Telegraph, and The Courier-Mail.
Throughout his career, he has interviewed numerous high-profile figures, including Leonardo DiCaprio, Cameron Diaz, Jackie Chan, Robin Williams, Gerard Butler, Metallica, and Pearl Jam.
Before joining News Corp Australia, he worked for Melbourne Weekly Magazine and The Melbourne Times, where he received the FCN Best Feature Story award on two occasions. His freelance writing has appeared in outlets such as CNN International, Independent Reserve, Escape, and Adventure.com, and he has also contributed to 3AW and Triple J.
Andrew earned a Journalism degree from RMIT University and a Bachelor of Letters from University of Melbourne. According to Cointelegraph’s disclosure policy, he holds positions exceeding $1,000 in several cryptocurrencies, including Ethereum, Bitcoin, VeChain (VET), Synthetix (SNX), Chainlink (LINK), Aave (AAVE), Uniswap (UNI), Bounce Token (AUCTION), Sky (SKY), OriginTrail (TRAC), THORChain (RUNE), Cosmos (ATOM), Optimism (OP), Near Protocol (NEAR), and Fetch.ai (FET).
0 Comments