Prediction Markets: The House Always Knows
How Insider Trading Is Breaking Prediction Markets’ Biggest Promise
To proponents of prediction markets, the promise of market integrity — or market honesty — comes from a very simple principle: enough skin in the game. There are some in the market integrity community who will claim that any amount of money can be enough to maintain honesty. Others point to the billions of dollars now being transacted in prediction markets every week and contend that must be enough.
So here is the core promise of Prediction Markets and why they are potentially so powerful. It is a crowdsourced model that puts the money of people’s bets behind their predictions on what they believe will happen.
Scandals at two of the largest prediction markets have been playing out for the last five months or so. The integrity issues, which have already led to criminal charges and spawned a slew of legislative proposals and CFTC actions, have forced the billions of dollars worth of trades per week that are occurring on the platforms of Kalshi and Polymarket to grapple with a fundamental question: Can these markets be trusted?
Flushdraw readers familiar with the history of online gaming will recognize the plot summary above: a new market opens up for wagering on all sorts of topics, becomes extremely popular very quickly, and then integrity scandals in the bets begin to reveal the market cannot handle its own success. Either the industry sorts itself out or Congress steps in to clean up the mess.
What Are Prediction Markets, and Why Do They Matter?
First we need to cover the basics of what Prediction Markets are and then we can dive into the first major integrity scandal that hit Prediction Markets.
Prediction markets are trading platforms for contracts that have a yes or no answer. These contracts are typically priced in cents with a 100 cent value being equal to a $1 payout when the event stated in the contract’s title does occur. Users on the platforms then trade within markets for events that will occur in the future — for example the Fed holding a raise in interest rates for a specific month and time, a stock splitting, an election, etc. Since contracts can be sold prior to an event’s occurrence date, the price a user paid for a contract will reflect in cents how likely they believed the event would occur.
Currently there are two leading platforms that operate Prediction Markets: Kalshi and Polymarket. Kalshi is a CFTC Designated Contract Market (DCM) which was granted the license in 2020. The platform operates similarly to the Chicago Mercantile Exchange in that users can trade prediction markets on the platform. Polymarket on the other hand is a crypto-based platform that was initially launched on the Polygon blockchain and has operated offshore until recently when it acquired a smaller CFTC-regulated US exchange which allows the platform’s domestic users to participate. The platform only trades in the stablecoin USDC.
At its highest point, the total volume of all prediction markets around the world hit an estimated $162 billion in notional value, with 758 million individual trades. In 2025, Kalshi alone hit $23.8 billion in notional value — growth of 1,100% over the prior year. Combined, Kalshi and Polymarket hit a total of $44 billion in trades last year. Bernstein projects the markets to reach $1 trillion in annual volume by 2030.
The vast majority of trades executed on prediction markets are sports wagers, representing around 87% of the contracts opened on the exchanges in the prior year, according to CRS research released earlier this year. The NHL recently became the first of the four major professional sports leagues to have contracts for its events traded on the two leading US platforms, with those licenses granted in October 2025. The MLB became the second major professional sports league to allow its contracts to be traded on the exchanges. The NFL and NBA have refused to grant such licenses on the grounds of integrity.
That integrity question is now center stage.
The Maduro Trade: A $400,000 Red Flag
The first integrity scandal, which would have a huge impact on the integrity of prediction markets, occurred late in the year 2025.
On December 26, a Polymarket account was created and that very same day the trader started buying up ‘Yes’ contracts for ‘Will Nicolás Maduro be out of office by January 31, 2026?’ for roughly 5-8 cents on the dollar. Over the following 6 days the trader continued to add more ‘Yes’ contracts to his portfolio at prices ranging from 5-7 cents on the dollar, as the market continued to reflect its collective view that Maduro would be out of office by the end of January at less than 8% probability. As of January 2nd, the trader had acquired around $33,934 worth of ‘Yes’ contracts. His last trade was buying $22,200 worth of ‘Yes’ contracts at 6.6 cents on the dollar at 9:58pm EST.
Less than 6 hours later, President Trump announced on Truth Social at 4:21am ET that US Army Delta Force had seized Venezuelan President Nicolás Maduro and his wife, Cilia Flores, in a covert operation codenamed ‘Operation Absolute Resolve.’ Maduro was charged with narco-terrorism as part of a sprawling DOJ indictment and subsequently pleaded not guilty.
In less than 6 hours, the mysterious trader closed all of his positions on the contracts related to the ouster of Maduro, collecting a net profit of $409,881. The fact that such a highly sensitive piece of insider profiting could be front-page news within 24 hours of its discovery by online sleuths and financial reporters is itself highly significant.
On April 23, 2026, the Department of Justice unsealed the indictment against Gannon Ken Van Dyke, 38, a Master Sergeant with the US Army Special Forces stationed at Fort Bragg, North Carolina. The indictment alleges that Van Dyke was involved in the planning and execution of Operation Absolute Resolve and used his position and the classified information he gained to bet on Polymarket contracts, earning a $409,881 profit. He faces charges of unlawful use of confidential government information for personal gain, theft of nonpublic government information, commodities fraud, wire fraud, and making an unlawful monetary transaction. The CFTC separately filed a civil complaint seeking restitution, disgorgement of profits, and civil monetary penalties.
Sergeant Van Dyke opened his Polymarket account under his personal email address. When the press started running stories about the suspicious trades in Maduro contracts around the end of January, Van Dyke attempted to delete his Polymarket account — but was unable to do so because he could no longer access the email address under which the account was opened. He also attempted to change the email address on his cryptocurrency exchange account in an apparent effort to cover his tracks.
“Prediction markets are not a haven for using misappropriated confidential or classified information for personal gain. Those entrusted to safeguard our nation’s secrets have a duty to protect them and our armed service members, and not to use that information for personal financial gain.” — US Attorney Jay Clayton, Southern District of New York
It is worth noting that Polymarket did identify suspicious behavior from this account, reported it to the Department of Justice, and cooperated with their investigation — marking the first time the US has used insider trading laws in connection with a prediction market.
The Iran Trades: A Pattern Emerges
Even before the indictment of Van Dyke was announced, an even larger and more shocking case of potential insider trading had emerged on Polymarket.
In late February 2026, the US and Israel conducted a surprise military operation against Iran, killing the country’s Supreme Leader, Ayatollah Ali Khamenei, as well as several senior Iranian military commanders. But in the days and hours before that assault, $529 million worth of trades were placed on Polymarket contracts betting on when the US would launch a military strike against Iran — the largest single-event betting pool in Polymarket’s history.
An in-depth analysis by financial data and analytics firm Bubblemaps SA uncovered 6 new accounts on Polymarket that correctly predicted the strikes, earning a combined profit of $1 million. The largest wallet had made an initial deposit of $61,000 and earned a return of $493,000. Another trader posting under the username ‘Magamyman’ earned $553,000 by correctly predicting the death of Ayatollah Khamenei prior to the strikes.
Unlike the Maduro trades, no charges have been filed in connection with the Iran trades. The CFTC confirmed it is investigating the activity. As with the Maduro trades, the events were of a low probability, high reward nature — exactly the kind of market most susceptible to abuse by individuals with inside information.
US President Trump, asked about the broader pattern of betting on world events, said: “You know the whole world, unfortunately, has become somewhat of a casino.”
Washington’s Response: A Legislative Pile-On
These are only the tip of the iceberg of scandals bringing Congressional legislation to regulate prediction markets.
In the roughly ten weeks between late March and mid-May 2026, four bills were introduced on Capitol Hill to regulate the burgeoning prediction markets industry. Bipartisan anxiety is apparent that a new haven for campaign finance corruption and misuse of confidential information has emerged.
The bills include: H.R. 7004 / S. 4188, the Public Integrity in Financial Prediction Markets Act of 2026, which would make it illegal for elected federal officials, all House and Senate employees, all political appointees, and all executive agency employees to trade event contracts on prediction markets. Senators John Curtis (R-UT) and Adam Schiff (D-CA) introduced the Prediction Markets Are Gambling Act on March 23, 2026, which would ban sports and casino-style game contracts on CFTC-registered exchanges. Senator Jeff Merkley (D-OR) and Representative Jamie Raskin (D-MD-08) introduced the STOP Corrupt Bets Act on March 26, 2026, banning contracts related to political elections, US government actions, sporting events, and military actions.
The US Senate also passed a resolution banning itself and all its staff from betting on any prediction market contracts. Representative Ritchie Torres introduced the Campaign Funds Integrity Act of 2026, which would impose up to 5 years in prison for using campaign funds to place wagers on prediction market contracts.
While much of the legislation introduced will likely die in committee, a number of measures have the potential to significantly impact prediction markets. Perhaps most significant is H.R. 7004 / S. 4188 which, for the first time, would make it generally unlawful for a wide class of individuals connected to the federal government to trade event contracts.
The CFTC Tries to Get Ahead of It
In late February, the CFTC released an advisory about two separate enforcement actions taken by the exchange Kalshi — against a political candidate who had traded on contracts for his own candidacy, and against a YouTube channel employee who had traded on contracts for his channel’s content. Both individuals were found to have engaged in insider trading and were subject to fines and platform bans.
In late March, the CFTC released an Advance Notice of Proposed Rulemaking (ANPR) regarding the regulation of prediction markets, seeking public comment for a period of 60 days. The CFTC also issued an advisory to all DCMs reminding them of their obligation to list only contracts not readily susceptible to manipulation and to conduct ongoing, real-time review of all market activity for signs of potential misconduct.
CFTC Chairman Michael S. Selig, in a May interview with Axios, declared that prediction markets and sportsbooks are ‘two separate things’ and that he plans to treat prediction markets as financial products subject to the full gamut of CFTC regulatory authority. But treating prediction markets as financial products does not address the core integrity problem — which depends on the simple proposition that all participants are trading on publicly available information.
The Integrity Problem of the Prediction Markets
Here is what distinguishes prediction market integrity from the usual financial market variety.
Insider trading in the financial markets has traditionally been seen as a problem of a single individual possessing material information about a single corporation — an impending earnings announcement, a merger, or the results of clinical trials. The laws and resulting enforcement activities have often been imperfect, but the framework is well established. In financial markets, such information is typically non-public only because it is corporate in nature and covered by confidential treatment as a protected corporate secret.
In contrast, when the event being bet on in a prediction market is a secret military operation — a raid on a foreign capital, an airstrike — the ‘material non-public information’ is not a corporate document but a classified government secret. Those with material information about a covert military operation are the soldiers planning it. Those with advance knowledge of a military strike on Iran are the officials in the Situation Room. No financial regulation was written with this scenario in mind.
Prediction markets, by their very nature, pose a particularly virulent form of insider trading risk. No financial product has ever been created and traded that had the characteristics of secret government information being relevant to its settlement. The new class of financial products has brought with it new trading problems and incentives that no financial exchange has ever dealt with before.
More problematic is the decentralized nature of these exchanges. Even though all activity on the platform is recorded on a publicly available blockchain, there is no ability to determine who is behind any given wallet — even for sophisticated actors. As already noted, one of Van Dyke’s biggest mistakes was registering his account using his personal email address. More sophisticated actors would be able to avoid detection far more easily.
Jonathan Wright, Professor of Economics at Johns Hopkins University, co-authored research on prediction markets and described their value: prediction markets are “only as good as the information that the participants bring to the market. For publicly available information, prediction markets are amongst the most accurate forecasters of economic events; for information that is not publicly available, the wisdom of the crowds is rapidly turned into less accurate predictions by individuals using information that they have gained from being an insider.”
What This Means for the Broader Gaming Industry
This is a problem for the entire gaming industry, not just prediction markets.
Prediction markets are coming under increasing scrutiny, with traditionally-based sportsbooks — DraftKings, FanDuel and BetMGM — trying to prevent them from offering betting on sports events. These sportsbooks argue that there is no meaningful difference between the two forms of betting and that only sportsbooks licensed and regulated at the state level, subject to the same taxation and consumer protection requirements as other gaming products, should be allowed to offer bets on the outcome of sporting events.
The CFTC has filed suit against the States of Arizona, Connecticut, and Illinois for their efforts to regulate and restrict the offering of sports contracts on prediction markets. A panel of the Third Circuit Court of Appeals recently determined that the CFTC does possess jurisdiction to regulate contracts on sports events offered on a DCM platform like Kalshi. New York State, which currently grosses in excess of $1.3 billion in mobile sports betting tax revenues for the 2025-26 fiscal year, views all prediction market contracts with suspicion. Until wagers on prediction markets are subject to tax in the same manner as wagers placed with licensed and regulated sportsbooks, there will be great pressure on gaming regulators throughout the state to find a way to tax the contracts as well.
Poker players looking for a chance to put their skills to work in event betting will find these markets genuinely interesting. Contracts offered in prediction markets are largely for events outside of the player’s control and are typically treated as having a fixed probability — but there is real promise for those with the skill to identify valuable contracts. The major question for any gambler, of course, is whether these markets can be beaten and, more importantly, whether they are safe to trade.
Where This Goes From Here
The Van Dyke case is historic — it is the first time a person has been charged with criminal insider trading in connection with activity on a prediction market in the United States. But more cases like this are likely to follow.
A larger structural issue remains. So long as there are large financial gains to be made from prediction contracts on events pertaining to classified government operations, an integrity problem will exist that cannot be solved through KYC verification and blockchain auditing alone. The two principal solutions are: (1) prohibit trading of contracts based on information not in the public domain, as many current bills propose; or (2) establish rules for such behavior and enforceable means of proving that a person has traded on information related to their own classified work.
While both solutions will be very difficult to implement, there is a prior framework to refer to — the one the US gaming industry has been building since the PASPA sports betting ban was lifted in 2018. The lesson there was that integrity monitoring, robust identification requirements, and clear federal-state regulatory frameworks don’t emerge overnight, but they do emerge when the money is large enough and the scandals are visible enough to force the issue.
Prediction markets have reached both thresholds.
Eric Sawyer is a writer for Flushdraw.net covering all things related to the US gaming industry, the latest in betting markets, and regulatory updates to the space as they happen.
Sources & References
- DOJ / CNBC — U.S. soldier arrested for Polymarket bets on Maduro capture (April 23, 2026) — https://www.cnbc.com/2026/04/23/doj-soldier-polymarket-bets-venezuela-maduro.html
- CNN Politics — US special forces soldier arrested after winning $400,000 on Maduro raid (April 23, 2026) — https://www.cnn.com/2026/04/23/politics/us-special-forces-soldier-arrested-maduro-raid-trade
- NPR — U.S. soldier charged with insider trading over Maduro’s ouster (April 23, 2026) — https://www.npr.org/2026/04/23/nx-s1-5797957/maduro-raid-charges-polymarket-insider
- Fortune — Feds charge Army soldier who made $400,000 from Polymarket bets (April 23, 2026) — https://fortune.com/2026/04/23/insider-trading-polymarket-soldier-venezuela/
- TechCrunch — Polymarket saw $529M traded on bets tied to bombing of Iran (March 1, 2026) — https://techcrunch.com/2026/03/01/polymarket-saw-529m-traded-on-bets-tied-to-bombing-of-iran/
- CoinDesk — Iran war becomes $50M betting frenzy on Polymarket (March 1, 2026) — https://www.coindesk.com/markets/2026/03/01/iran-war-becomes-usd50-million-betting-frenzy-on-polymarket
- NPR — Prediction market trader ‘Magamyman’ made $553,000 on death of Iran’s supreme leader (March 2026) — https://www.npr.org/2026/03/01/nx-s1-5731568/polymarket-trade-iran-supreme-leader-killing
- Axios — Congress is scrambling to regulate prediction markets (May 19, 2026) — https://www.axios.com/2026/05/19/prediction-market-kalshi-polymarket-bill-congress
- Axios — Prediction markets and sports betting are ‘two separate things,’ CFTC chair says (May 12, 2026) — https://www.axios.com/2026/05/12/prediction-markets-cftc-selig-regulation
- DLA Piper / Market Edge — The rise of prediction markets and the surrounding regulatory environment (April 30, 2026) — https://marketedge.dlapiper.com/2026/04/the-rise-of-prediction-markets-and-the-surrounding-regulatory-environment/
- gov CRS — Prediction Markets and Insider Trading Law (April 3, 2026) — https://www.congress.gov/crs-product/LSB11406
- gov CRS — Prediction Markets: Policy Issues for Congress (March 20, 2026) — https://www.congress.gov/crs-product/IF13187
- Christian Science Monitor — Congress eyes action on prediction markets amid corruption concerns (May 5, 2026) — https://www.csmonitor.com/Business/2026/0505/prediction-markets-congress-regulation-kalshi
- Gambling Insider — Prediction Market Statistics 2026: Market Size, Growth & Trends (February 9, 2026) — https://www.gamblinginsider.com/in-depth/110180/prediction-market-statistics
- CFTC — Advisory on insider trading and prediction markets (February 2026) — https://www.cftc.gov/PressRoom/PressReleases/9185-26
- org — Prediction Markets in April 2026: What States, Leagues, and Washington Want (April 2, 2026) — https://rg.org/news/gambling-industry/prediction-markets-face-their-biggest-us-test-in-2026
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