Three major questions about the booming prediction market

Author: Zhou, ChainCatcher

The prediction market continued to be hot in 2025. Kalshi and Polymarket achieved a combined trading volume of $1.44 billion in September, setting a record. Both platforms recently announced the completion of new rounds of financing: Polymarket raised $2 billion from the New York Stock Exchange's parent company (ICE), raising its valuation to $9 billion; Kalshi raised $300 million at a valuation of $5 billion. However, as the prediction market continues to explode in popularity, three major questions about it have surfaced on social media: Will it foster widespread insider trading? What is the regulatory stance of major governments toward prediction markets? Why is there a general lack of narrative prediction events in Chinese? This article addresses these questions. Does insider trading exploit retail investors? Capitalizing on knowledge is the magic of prediction markets, but the inherent nature of prediction events makes some types of prediction market trading susceptible to insider trading, especially when information such as award winners and economic data is publicly available to a small group of people before the event results are announced. On October 10, 2025, the day the Nobel Peace Prize was announced, a global controversy over insider trading emerged. As early as July, Polymarket launched a "2025 Nobel Peace Prize Winner" market, with total trading volume exceeding $21.4 million. Top candidates included Yulia Navalnaya, the widow of Russian opposition leader Alexei Navalny; former US President Trump (for his controversial role in brokering the Hamas-Israel ceasefire); environmental activist Greta Thunberg; and WikiLeaks founder Julian Assange. Maria Corina Machado's odds had previously been barely favored at 3-5%. About 11 hours before the results were announced, Machado's odds suddenly skyrocketed from 3.6% to over 70%, spiking trading volume and bringing in over $210,000 in total bets. At least three accounts placed heavy bets on Machado's victory, ultimately generating a combined profit of approximately $90,000. This incident directly triggered a heated debate about insider trading. One side argued that allowing insider trading could increase market accuracy to 92% because it accelerates information aggregation. Robin Hanson, an economist at George Mason University and one of the earliest proponents of prediction markets, has stated that allowing insider trading can improve the accuracy of odds. If the purpose of a prediction market is to obtain accurate information, then insider trading is definitely desirable. The other side emphasized that this was a clear leak of insider information and a fraudulent act, which would undoubtedly discourage ordinary investors from participating. This has also sparked discussions about regulation. Forbes staffers wrote that prediction markets fall somewhere between futures exchanges and gambling sites, and regulators treat them more like the latter. Insider trading laws enforced by the U.S. Securities and Exchange Commission (SEC) don't apply to prediction markets; these contracts are regulated by the Commodity Futures Trading Commission (CFTC). KPMG's 2025 report warned that using material non-public information to bet on event contracts can severely distort market integrity and easily trigger a cascading collapse in a regulatory vacuum. In prediction markets, participants—inside stakeholders, experts with deep knowledge of the field, and retail speculators—have vastly different levels of information. This information asymmetry determines who will win. What is the regulatory stance of major countries and regions toward prediction markets? The second major potential problem with prediction markets lies in their unclear legal status around the world. It combines characteristics of both gambling and financial derivatives, often falling into a gray area or even being directly restricted in different jurisdictions, posing certain regulatory risks. Currently, the United States is the only country that explicitly mentions and regulates prediction markets. The Commodity Futures Trading Commission (CFTC) classifies them as event contracts, requiring platforms to register as designated contract markets and strictly comply with the Commodity Exchange Act. In February 2025, the CFTC held a roundtable to discuss the regulatory framework for sports and event contracts, striving to strike a balance between innovation and retail customer protection. In May 2025, the CFTC dropped its appeal against Kalshi's political contracts, affirming their legality but imposing transparency and anti-manipulation requirements. Kalshi, under CFTC supervision, has obtained compliance licenses in all 50 states, while Polymarket, through its acquisition of Florida-based derivatives exchange QCX, has transformed itself into a regulated entity and is gradually expanding into the US market. Europe has adopted a more cautious approach. The European Securities and Markets Authority (ESMA) mentioned prediction markets in its 2025 Markets in Financial Instruments Directive II (MiFID II) rules, requiring investment firms to optimize their order execution policies. The Markets in Crypto-Assets Regulation (MiCA) further incorporates prediction markets into the licensing framework for crypto-asset service providers, placing particular emphasis on anti-money laundering compliance, demonstrating a regulatory stance that is both open and cautious. Crypto KOL @Phyrex_Ni pointed out that prediction markets and binary options are structurally very similar. Traditionally, binary options are derivative contracts in which investors make a bet on a specific underlying asset or event. If the prediction is correct, they receive a predetermined payout; if the prediction is incorrect, they lose their investment. Prediction markets employ a similar mechanism. Currently, most countries that do not explicitly regulate prediction markets tend to equate them with binary options and adopt a generally conservative approach. For example, the UK's Financial Conduct Authority (FCA) has directly banned retail binary options trading; the EU's European Securities and Markets Authority (ESMA) has prohibited binary options-related marketing; and many Asian countries even consider them gambling. This is one reason why prediction markets haven't yet taken off in the Chinese-speaking world. Overall, regulatory fragmentation exacerbates the risks of prediction markets. Most countries or regions focus on anti-money laundering and consumer protection, either directly banning such derivatives contracts or implementing strict entry licensing requirements. Why is there a lack of narrative markets in the Chinese-speaking world? Overseas, Polymarket has evolved from a trading product into an information-based social game. Users bet on events not just for profit, but also for a sense of participation, a sense of expression, and a sense of perspective, even using their positions to "bet on the future." Crypto KOL @MrRyanChi quipped, "American college students are already playing with Kalshi and Polymarket, but few in the Chinese-speaking world are exploring prediction markets." The current prediction market lacks a narrative for Chinese-speaking audiences. Besides regulatory issues, crypto KOL @hoidya_ pointed out that the root cause is a severe lack of liquidity. The core reason for this illiquidity lies in the difficulty market makers and bookmakers face in calculating their profits. In the traditional perpetual futures market, retail investors' expected returns (EV) are consistently negative. Market makers leverage their statistical advantages to generate profits through hedging and funding rate arbitrage, thus creating a reliable source of liquidity. For Chinese-language narratives, market makers dominated by Europe and the United States may lack sufficient statistical expertise, resource advantages, and cultural background. They themselves cannot guarantee positive expected returns in the long term. Without a quantifiable win rate, they cannot allocate risk exposure, and therefore will not proactively inject liquidity. KOL @Ru7Longcrypto pointed out that the Chinese community still views prediction markets through the lens of DeFi, focusing on TVL pools and payout mechanisms. This completely misses the point. She emphasized that the key to breaking through the market lies in content creation, not pool building. However, the regulatory environment in Chinese-speaking regions is strict, limiting the selection of topics related to public events. This is particularly true in mainland China, Hong Kong, and Singapore, where political and election-related topics are considered sensitive and subject to strict legal constraints. In contrast, in Europe and the United States, where topics like the US election are legally recognized under the framework of the Commodity Futures Trading Commission (CFTC), platforms have greater scope for topic selection. Therefore, another key to mainstreaming prediction markets in the Chinese-speaking world lies in building a localized database of practical questions. For example, topics like CZ's mention market, predictions for the winner of the food delivery war, pricing for Xiaomi's new car, Spring Festival travel rush numbers, purchase restrictions, and the Nezha movie box office are all highly popular in the Chinese-speaking world and have clear lottery results, making them more likely to attract interest and participation from Chinese investors. As this market rapidly gains popularity, many users are turning to BNB CHAIN, which boasts a dense Chinese user base and a more mature Asian content ecosystem. He Yi also publicly expressed his welcome for professional teams to launch prediction products on the BNB chain, and YZi Labs is willing to support them. Recently, several Chinese-led prediction market projects based on the BNB chain have seen significant marketing and promotional activity on Twitter. Conclusion: Overall, while this wave of prediction market enthusiasm may not be a bubble, it has spread too quickly, and the market needs some sobering reflection. While prediction markets have become mainstream, they remain controversial regarding compliance and insider trading. In Chinese-speaking regions, localized narratives are lacking, and liquidity issues need to be addressed, along with the development of content more suitable for the Chinese community. For ordinary investors, prediction markets offer a novel approach with immense potential and compelling narratives. For this reason, retail investors should focus on familiar content areas rather than simply placing bets.