Prediction markets, which allow people to bet on a wide range of future events, have come under new scrutiny in recent months as suspicious trades have come to light.
On Thursday, U.S. Army special forces soldier involved in the capture of President Nicolás Maduro of Venezuela was charged with using classified information to bet on events related to the mission.
Here’s a primer on this growing phenomenon.
What are prediction markets?
Prediction markets, like Polymarket or Kalshi, are essentially gambling sites. But instead of focusing on a specific area like sports, bettors wager on current events, serious or frivolous. They might bet on when Prime Minister Keir Starmer of Britain will leave office, how many social media messages Elon Musk will send next month or how hot it will be in Paris on a given day.
If they are right, they win money from those who made incorrect predictions. The platforms themselves can generate revenue by charging a fee on each bet.
Polymarket and Kalshi have millions of users betting billions of dollars on thousands of different markets, including election results, tariff rates and oil prices.
The markets can appeal to people who like gambling, people who follow current events and people with strong opinions. They may also be appealing to people willing to use insider information to acquire large amounts of money.
Are these markets legal?
In most parts of the world, yes.
It’s trickier in the United States: Polymarket was not available in the country for several years, but in the last few months has started taking bets on some markets.
Kalshi, which, like other U.S.-based prediction market platforms, is regulated by the Commodity Futures Trading Commission, offers a broader array of markets to American customers.
(People in the United States who want to bet more widely on the international sites often use a virtual private network, or VPN, to mask their location and access more betting options.)
Prediction markets are available even in states that have restrictive gambling laws. This is because prediction markets are not considered to be like bookmakers — setting odds and paying out winnings and pocketing losing wagers. Instead, the platforms contend that they are more like a commodity exchange, facilitating “trades” and merely taking a cut.
Can the markets help predict events?
Maybe. Studies have shown that large groups of people perform better at making predictions than individual experts, a phenomenon often called “the wisdom of crowds.”
That means that looking at prediction market data could be useful in forecasting future events related to politics, business, foreign affairs or even weather.
So, what could go wrong?
Before Thursday’s indictment of the American soldier — who made more than $400,000 by betting on outcomes related to the U.S. military’s operation in Venezuela, according to federal prosecutors — there had been a number of mysterious bets that raised eyebrows to say the least.
Before some big events like the American-Israeli attack on Iran or the Oscars, large numbers of bets came into the prediction markets, most of them correctly predicting what was about to happen. Maybe these people were lucky, or extremely savvy. But suspicion was also raised that they might have had privileged, inside information, and used it for their bets — much as some investors might use insider information to illegally make money in the stock market.
A New York Times analysis of Polymarket data showed hundreds of bets on one day last June predicting that the United States would strike Iran within a day. The Times found that such bets had previously been quite unusual.
The United States did attack Iran, and those bettors profited handsomely.
Has there been any blowback to these cases?
Some U.S. states have recently taken steps to explicitly ban prediction markets.
Both Polymarket and Kalshi have also said they are tightening their safeguards against insider trading. Kalshi this week banned three political candidates, saying they tried to trade on their own races.
The White House warned staff members this month not to use insider information on the war with Iran to bet on prediction or other financial markets.
How long have these markets been around?
While prediction markets have taken off in the last few years, they have been around longer. The pioneering Iowa Electronic Markets, for example, which facilitates political bets, dates to 1988.
In 2003, the Pentagon planned an online market in which bettors could predict terrorist attacks, assassinations and other seismic political events, hoping it could provide useful data.
The plan drew an outcry from lawmakers who found it ghoulish that people might profit on terrible events, and the plan was quickly scrapped.
Source:
www.nytimes.com
