A $400,000 reward following Maduro's arrest is drawing attention to prediction markets

Understanding Prediction Markets

Prediction markets enable individuals to place bets on a wide array of outcomes, ranging from sports matches to presidential elections—and more recently, even on events such as the potential ousting of Venezuela’s former President Nicolás Maduro.

This last example has brought renewed attention to the often opaque world of round-the-clock speculative trading. Just last week, an unidentified participant earned over $400,000 by wagering that Maduro would soon lose power.

Most of these bets were placed on the Polymarket platform just hours before former President Donald Trump revealed a surprise nighttime operation that resulted in Maduro’s capture. The timing and the trader’s limited activity on the platform have sparked online debate about possible insider trading. However, some believe the risk of detection is too high, and that previous rumors about Maduro’s fate could have influenced these bets.

Polymarket has not issued any public statements regarding the incident.

The Rise and Risks of Prediction Markets

In recent years, prediction markets have surged in popularity, allowing people to stake money on an ever-expanding list of future possibilities. While some traders have seen significant gains, losses are common, and the regulatory landscape in the U.S. treats these trades differently from traditional gambling, raising concerns about oversight and transparency.

Key Points to Know

• How Prediction Markets Operate

Prediction markets cover a vast range of subjects—from international conflicts and entertainment news to conspiracy theories. There has been a notable increase in bets on elections and sporting events. Some participants have even wagered large sums on speculative topics, such as a rumored but nonexistent “secret finale” for Netflix’s “Stranger Things,” potential government disclosures about extraterrestrial life, or the frequency of Elon Musk’s social media activity in a given month.

Within the industry, these bets are known as “event contracts,” typically structured as “yes” or “no” options. The price of each contract, which ranges from $0 to $1, reflects the collective market assessment of the probability that an event will occur, corresponding to a 0% to 100% chance.

As the perceived likelihood of an event increases, so does the contract’s price. Traders can choose to sell their contracts early to secure profits or minimize losses as market odds shift.

Supporters claim that financial stakes drive more accurate predictions. According to Koleman Strumpf, an economics professor at Wake Forest University, monitoring these platforms can provide valuable insights, as prediction markets have sometimes successfully anticipated election results, including those in the 2024 presidential race.

However, Strumpf cautions that prediction markets are not infallible and can make incorrect forecasts.

Transparency and Anonymity

The identities of those trading on these platforms are often obscured. While operators collect personal data for verification and payment purposes, most users participate under pseudonyms, making it difficult to determine who is profiting from specific event contracts. Some traders may be closely following developments, while others might simply be making random guesses.

Concerns and Criticisms

Critics highlight that the ease and constant availability of these markets can lead to frequent financial losses, particularly for individuals vulnerable to gambling problems. The environment also increases the risk of insider trading.

Major Platforms in the Prediction Market Space

Polymarket is recognized as the world’s largest prediction market, allowing users to fund contracts with cryptocurrency, debit or credit cards, and bank transfers. Its main rival, Kalshi, operates in a similar fashion and recently secured court approval to offer event contracts on political races and sports across the U.S. Kalshi began facilitating sports-related bets about a year ago.

Regulations differ internationally, but in the United States, prediction markets have expanded rapidly alongside evolving federal policies. The Biden administration took a tough stance, and after a 2022 agreement with the Commodity Futures Trading Commission (CFTC), Polymarket was prohibited from operating domestically.

That changed late last year under Trump’s administration, when Polymarket announced its return to the U.S. following regulatory approval. American users can now join a waitlist for the platform.

The market is becoming increasingly competitive. Major sports betting companies like DraftKings and FanDuel have recently launched their own prediction platforms. Robinhood is also expanding its offerings, and Truth Social, Trump’s social media platform, plans to introduce an in-app prediction market through a partnership with Crypto.com. Notably, Donald Trump Jr. serves as an advisor to both Polymarket and Kalshi.

“Event contracts are here to stay,” says Melinda Roth, a visiting associate professor at Washington and Lee University’s School of Law.

Regulatory Gaps and Legal Challenges

Because prediction markets are classified as sellers of event contracts, they fall under the jurisdiction of the CFTC, allowing them to bypass state-level gambling restrictions and sports betting bans.

“It’s a significant loophole,” notes Karl Lockhart, an assistant law professor at DePaul University. “Platforms only need to adhere to one set of federal regulations, rather than complying with each state’s rules.”

Sports betting is becoming increasingly prominent. While states like California and Texas still prohibit sports gambling, individuals can now bet on games, player trades, and more through event contracts.

Legal battles are mounting as more states and tribal authorities seek to halt these practices. Many legal experts anticipate that the issue will eventually reach the U.S. Supreme Court, especially as further federal regulation appears unlikely under the current administration.

Federal law prohibits event contracts related to gambling, war, terrorism, and assassinations, according to Roth. This places some prediction market activities in a legal gray area within the U.S. However, users may still access restricted contracts by traveling abroad or using alternative VPNs.

It remains uncertain whether the CFTC will address these challenges. The agency has already begun to scale back enforcement efforts and did not respond to requests for comment.

Despite overseeing trillions in the broader U.S. derivatives market, the CFTC is much smaller than the Securities and Exchange Commission. As prediction markets grow, the CFTC faces additional strain from workforce reductions and leadership turnover during Trump’s second term, with only one of five commissioner positions currently filled.

Meanwhile, some lawmakers are pushing for stricter measures to prevent insider trading in prediction markets, especially after suspicions arose over last week’s Maduro-related trades on Polymarket. On Friday, Democratic Representative Ritchie Torres introduced legislation aimed at restricting government employees from participating in politically sensitive event contracts.