The growth of prediction markets and the associated risks

Punters can place bets on political and economic events through prediction markets

They have a practical purpose, but there might be a more concerning issue.

What are markets for predictions?

Online peer-to-peer exchanges known as "prediction markets" allow users to wager money on a wide range of topics, including everything from the likelihood of a full US ground invasion of Iran to the color of tie Donald Trump will wear on a given day. Over the past two years, the popularity of the two largest websites, Polymarket and Kalshi, has skyrocketed due to a much more lax approach by US federal regulators.

Trading volumes on the two sites increased from £16 billion to £50 billion in 2025, and they are expected to be significantly higher this year. Trading volumes on the two major platforms surged to £24.2 billion last month, up from £1.8 billion a year earlier, according to analytics company The Block, which was quoted by The Wall Street Journal. Trump Sr.'s media company is developing its own website, Truth Predicts, and Donald Trump Jr. is an advisor and investor in Polymarket. In the meantime, a number of US states are suing the companies for allegedly facilitating illicit gambling.

Do prediction markets pose a risk?

It is clear that people can profit from insider information and/or try to influence events by placing bets on events that may or may not occur. The first person accused of insider trading on prediction markets was a US soldier last month. Gannon Ken Van Dyke is accused of making about 13 wagers totaling £33,034 on positions like "US Forces in Venezuela" and "Maduro out" using classified information.

BFIA problems nowadays. The websites assert that they play a significant, broader role in price and information discovery; in fact, the Federal Reserve, in a recent paper, found that Kalshi's market participants were quite successful in forecasting changes in GDP and interest rates. According to Polymarket, it frequently outperforms experts by "aggregating wisdom from informed users." However, if those users are overly "informed," it puts the other players at a disadvantage. In the coming months and years, the question of how "informed" a user is allowed to be before engaging in illegal activity will undoubtedly come up in court numerous times.

Van Dyke Gannon Ken.

Gannon Ken Van Dyke is accused of making about 13 wagers totaling £33,034 on positions like "US Forces in Venezuela" and "Maduro out" using classified information.

Are prediction markets permitted in the United Kingdom?

Theoretically, UK authorities consider Polymarket and Kalshi to be unlicensed gambling websites that are inaccessible to users in the UK. In reality, there are ways for people who want to wager (including VPNs and cryptowallets). Twenty distinct markets pertaining to the UK's municipal and devolved government elections, including mayoral elections, were available on the website this week. It appears likely that the "informed users" in question are based in the UK, unless a large number of Americans have acquired an unlikely level of expertise in local politics in Britain.

In practice, how do prediction markets operate?

Prediction markets involve peer-to-peer betting (or "trading" for those who consider themselves pros) instead of betting against a bookmaker, which is similar to the idea behind sports-betting exchanges. Unlike traditional bookmakers, Polymarket and its rivals don't set the odds; instead, they facilitate a peer-to-peer exchange in which all wagers are binary Yes/No and are subject to a fee.

As of this writing, Polymarket is providing a market for the highest temperature that will occur in London on May 7. The market of interested bettors believes that there is a 39 percent chance that a high temperature of 16C will occur, as indicated by the price of 39 cents. If you wager "yes" and win, you will receive a dollar and have earned 61 cents for every 39 cents you stumped up.

Can you switch places?

Yes, you can sell out of winning or losing positions before the event is over, and the majority of users do just that. Let's say you purchase Yes at 45% and it rises to 55% as more people believe it is more likely. You can cash out early and earn a 10-cent profit. This is a crucial point regarding insider market manipulation and abuse: you only need to shift market sentiment and cash out in order to profit. You don't even need to win your prediction. For instance, on April 9, the official temperature at Charles de Gaulle Airport abruptly increased and then decreased. Suspected sensor tampering was the cause of the spikes, which also happened to coincide with questionable bets on Polymarket involving hundreds of thousands of dollars.

Polymarket is a US cryptocurrency prediction market platform.

Do prediction markets make corruption easier?

It seems to be. Over half of "long-shot" bets on military action made on Polymarketdefined as wagers of £2,500 or more at odds of 35 percent or lessare successful, according to analysis by the non-profit research and advocacy group Anti-Corruption Data Collective. Compared to just 25% in politics and 14% in all long-shot markets, the average win rate of 52% is suspiciously high. 150 people made trades totaling at least £1,000 the day before the US attacked Iran on February 28 in anticipation of an impending strike.

According to Sam Freedman on Substack, insider trading is not the only risk. "The more lucrative these markets become, the more predictions about the future will affect decision-making and behavior," and as false information intended to manipulate markets spreads, public trust will decline.

Do you want to have a punt?

For some amusement, perhaps. Most likely not for financial gain. According to the Wall Street Journal, 70% of users lose money on Polymarket, and only 0.1% of accounts receive 67% of all profits. While a small number of highly skilled professionals, including trading firms with access to enormous streams of data, eat lunch, casual traders are losing money. A "

Charles Martineau, a professor at Toronto, conducted a separate analysis and found similar outcomes. According to his paper, the top 1% of Polymarket customers make three-quarters of the profits, while 69% of customers lose money. According to the company's own statistics, 74% of accounts on Kalshi were unprofitable during the previous month, indicating that the vast majority of users lose money there as well. I hope you can overcome those odds.