What Are Prediction Markets and Why Are They Growing?
Prediction markets have become a major topic in financial and political circles, drawing attention for their rapid growth and the controversies they spark. These platforms allow users to bet on the outcomes of real-world events such as elections, economic indicators, wars, and even entertainment awards. The basic idea is simple: users buy and sell contracts that pay out if a certain event happens. For example, if a contract on a presidential election is priced at 30 cents, it suggests a 30% chance that the event will occur. If the event happens, the contract pays out $1; if not, it expires worthless.
The popularity of prediction markets has surged in the past year, with platforms like Kalshi and Polymarket leading the way. According to recent studies, these markets have seen trading volumes soar from $2 billion to $23 billion in just over a year. This explosive growth is driven by a mix of curiosity, the thrill of betting, and the promise of quick profits. However, the rise of these markets has also raised serious questions about their impact on society, the risks they pose to users, and the need for stronger regulation.
Who Profits from Prediction Markets?
A recent working paper by researchers from HEC Montréal, University of Toronto, and ESSEC Business School analyzed more than 1.4 million users and $20 billion in trades on Polymarket between 2022 and 2025. The findings are striking: about 71% of users lose money, while a small group of skilled traders capture over 80% of all gains. In fact, the top 1% of users take home about 84% of profits, and the top 0.1% capture nearly 60%. This means that most participants lose money to a handful of sophisticated traders who often act as market makers, providing liquidity and exploiting mispriced contracts.
These successful traders are not just lucky. They tend to have a deep understanding of market dynamics and are skilled at identifying contracts that are mispriced. For example, they might buy a contract at 30 cents when they believe the true probability is closer to 45 cents, consistently exploiting these opportunities. However, some of their success can be attributed to luck, especially in a market where outcomes are uncertain and information is constantly changing.
On the other hand, losing traders often bet on long-shot outcomes and trade frequently. About 63% of average user trades are placed at extreme prices, where losses tend to be greatest. This pattern is similar to what is seen in traditional gambling, where the odds are stacked against most participants.
Regulatory Scrutiny and Legal Battles
The rapid expansion of prediction markets has caught the attention of lawmakers and regulators in the United States and beyond. In the U.S., platforms like Kalshi and Polymarket have faced growing scrutiny over concerns about insider trading, ethical issues, and the potential for manipulation. Congress has introduced at least eight bills since January aimed at regulating or restricting prediction markets, especially those involving sensitive topics like war, government actions, and political outcomes.
One of the main concerns is the risk of insider trading. Lawmakers worry that individuals with access to nonpublic information could use prediction markets to profit from their knowledge, undermining trust in government and the integrity of these platforms. There have been several high-profile cases, such as an anonymous trader making over $400,000 by betting on the arrest of Venezuelan President Nicolás Maduro just hours before it happened. These incidents have fueled calls for stricter regulation and enforcement.
At the state level, the response has been mixed. For example, Washington State Attorney General Nick Brown has filed a lawsuit to stop Kalshi from operating in the state, arguing that its activities constitute illegal gambling. Other states, like Arizona and Nevada, have also taken legal action against prediction market operators. The legal debate centers on whether these platforms should be regulated as gambling or as financial derivatives, with companies like Kalshi arguing that they fall under federal jurisdiction as markets overseen by the Commodity Futures Trading Commission (CFTC).
The CFTC has taken an active role in defending its authority over prediction markets, suing states that attempt to regulate them as illegal gambling operations. A recent New Jersey court ruling favored Kalshi’s position, stating that prediction markets are not subject to state jurisdiction but rather federal oversight. However, the outcome of ongoing legal battles remains uncertain, and the regulatory landscape is likely to evolve as these markets continue to grow.
Ethical and Social Concerns
The rise of prediction markets has sparked a broader debate about their impact on society. Critics argue that these platforms turn serious societal events—such as elections, wars, and public health crises—into speculative games for profit. This can have dangerous consequences, including the risk of manipulation, the spread of misinformation, and the erosion of public trust in democratic institutions.
One troubling example involved an Israeli journalist who faced death threats after reporting news that conflicted with bettors’ interests on a missile strike prediction market. Such incidents highlight the potential for prediction markets to influence not just financial outcomes, but also real-world events and public discourse.
There are also concerns about gambling addiction. Prediction markets combine the addictive feedback loops of social media with the excitement of casino-style wagering, making it easier for users—especially young men—to develop unhealthy gambling habits. Research from the Federal Reserve Bank of New York shows that states legalizing sports betting experience increases in consumer delinquencies, suggesting that easy access to betting platforms can lead to financial harm.
Another study found that for every dollar wagered on sports betting, net investment in stocks and other financial instruments drops by over two dollars. This suggests that consumers are diverting money away from building long-term wealth toward gambling losses, raising concerns about the broader economic impact of prediction markets.
Industry Response and Lobbying Efforts
In response to growing scrutiny, leading prediction market operators have ramped up their lobbying efforts in Washington. Kalshi spent $615,000 and Polymarket $360,000 on lobbying in 2025 alone, hiring experienced political operatives and opening offices in the capital. Both companies emphasize their compliance with U.S. law and stress the differences between their platforms. For example, Kalshi bans anonymous betting and requires user identification, while Polymarket operates a blockchain-based platform that allows for more transparency but also raises questions about user anonymity.
Both companies have faced criticism for allowing bets on sensitive issues, such as whether Iranian Supreme Leader Ali Khamenei would be out of power during the U.S.-Israeli conflict with Iran. In response, Kalshi refunded all fees related to death-related bets, citing federal regulations that ban wagers on death outcomes. Both platforms have also announced voluntary guardrails to tighten rules against insider trading activities.
Despite these efforts, the industry faces strong opposition from traditional casinos and sportsbooks, which view prediction markets as unlicensed gambling sites. Some states have issued cease-and-desist orders against these platforms, and the debate over their legal status is far from settled.
Calls for Reform and New Proposals
The debate over prediction markets has reached the highest levels of government. Former Chicago Mayor Rahm Emanuel recently proposed a 10% federal tax on online sports betting and prediction markets, aiming to generate $30 billion to $50 billion annually to fund innovation in science and technology. He also supports banning all federal employees from participating in prediction markets, arguing that betting against America’s progress is counterproductive.
In Congress, lawmakers like Senator Jeff Merkley and Representative Jamie Raskin have introduced bills to ban betting on elections, government actions, sports, and military events nationwide. Other proposals focus on prohibiting federal employees and lawmakers from trading prediction market contracts related to government policy or political outcomes if they possess material nonpublic information. These efforts are supported by advocacy groups like Citizens for Responsibility and Ethics in Washington (CREW), which argue that no public official should profit financially from their position or insider knowledge.
However, the path to meaningful reform is complicated by political divisions and the influence of powerful industry players. The Trump family, for example, has financial ties to both Kalshi and Polymarket, with Donald Trump Jr. serving as an investor and advisor. This connection complicates bipartisan support for regulation, as some Republicans may resist legislation that could curb profits from these platforms.
The Future of Prediction Markets
Despite the controversies, advocates of prediction markets argue that they provide valuable real-time information that can sometimes be more accurate than traditional news sources. They point to the efficiency of these markets in aggregating information and reflecting collective probabilities. For example, a contract priced at 70 cents tends to occur about 70% of the time, suggesting that the market as a whole is good at predicting outcomes.
However, experts caution that retail investors should not expect consistent profits from prediction markets. Unlike equity markets, where passive investing can yield returns over time, prediction markets are highly competitive and efficient, making it difficult for most participants to outperform the market. As Nicolas Harvie, a PhD student at the University of Toronto, notes, retail investors cannot expect guaranteed profits simply by participating.
In Canada, regulators have taken a cautious approach. Wealthsimple recently received approval to offer limited forecast contracts tied to economic indicators, financial markets, and climate trends—but not sports or elections. This marks an early step toward bringing prediction trading products into Canada’s retail investment space under strict limitations compared to U.S. offerings.
Conclusion: A Gamble with High Stakes
The rise of prediction markets represents a major shift in how people engage with real-world events, blending elements of finance, gambling, and social media. While these platforms offer new opportunities for information sharing and risk management, they also pose significant risks to users and society as a whole. The concentration of profits among a small elite, the potential for insider trading and manipulation, and the threat of gambling addiction all demand careful scrutiny and regulation.
As lawmakers, regulators, and industry leaders debate the future of prediction markets, the stakes could not be higher. The outcome will shape not only the financial fortunes of millions of users but also the integrity of democratic institutions and the health of the broader economy. For now, prediction markets remain a high-stakes gamble—one that society cannot afford to ignore.
