What are prediction markets? How they work and why they are under scrutiny

Prediction markets, platforms that allow users to wager on future events, are facing growing scrutiny as suspicious trading activity raises concerns about insider information. The spotlight intensified after a US Army special forces soldier involved in a mission targeting Venezuelan President Nicolas Maduro was charged with using classified intelligence to place bets tied to the operation. Here’s a closer look at how these platforms work and why they are drawing attention.

What are prediction markets?

Prediction markets such as Polymarket and Kalshi function similarly to gambling platforms, but instead of focusing on sports, users bet on real-world events. These can range from political outcomes and global events to weather forecasts and even social media activity. For example, users might bet on when Keir Starmer could leave office, how frequently Elon Musk might post online, or temperature trends in cities like Paris. Participants profit if their predictions are correct, while platforms earn revenue by charging transaction fees. With millions of users, these markets now handle billions of dollars in wagers across topics like elections, tariffs, and oil prices.

Also Read: Shocking! Kash Patel was arrested twice before FBI role. Details from 2005 letter resurface amid new allegations

Are these markets legal?

Globally, prediction markets are largely legal. However, the situation is more complex in the United States. Polymarket had been unavailable domestically for years but recently resumed limited operations. Meanwhile, Kalshi operates under regulation by the Commodity Futures Trading Commission, offering a wider selection of markets to American users. Some users bypass restrictions by using VPNs to access international platforms. Unlike traditional bookmakers, these platforms argue they function as exchanges, facilitating “trades” rather than setting odds.

Can they predict real-world events?

Possibly. Research suggests that collective forecasting, often referred to as “the wisdom of crowds”, can outperform individual experts. As a result, prediction market data can offer insights into likely outcomes in politics, economics, and global affairs.

What are the risks?

Concerns have grown over the potential misuse of insider information. In the latest case, a US soldier allegedly earned over $400,000 by betting on outcomes tied to a military operation in Venezuela. Similar concerns arose before major events like the American-Israeli strikes on Iran and the Oscars, where unusual betting patterns correctly anticipated outcomes. An analysis by The New York Times found a surge in bets predicting a US strike on Iran shortly before it occurred, raising suspicions of privileged information being used.

Regulatory backlash grows

In response, several US states have moved to restrict or ban prediction markets. Both Polymarket and Kalshi say they are strengthening safeguards. Kalshi recently banned political candidates from betting on their own races. The White House has also warned staff against using insider knowledge to place bets tied to geopolitical events.

A concept with a long history

While prediction markets are gaining traction today, the concept is not new. The Iowa Electronic Markets, launched in 1988, is an early example focused on political forecasting. In 2003, the Pentagon explored launching a platform to predict events such as terrorist attacks. However, the idea faced strong backlash and was quickly abandoned.