60% Suspect Insider Trading. 61% Call It Gambling. The Fed Says Prediction Markets Are Valuable.

Sixty-one percent of Americans call prediction markets gambling. Sixty percent of the people who actually use them suspect insider trading. And the Federal Reserve just published a study calling them “valuable to both researchers and policymakers.” All three positions are defensible — and that is the problem. The Fed’s study examined macroeconomic contracts like inflation forecasts and interest rate bets, which represent roughly 10% of industry volume. The other 90% — the sports contracts that generate nearly all of the revenue, all of the regulatory conflict, and all of the public outrage — was never studied at all. A $44 billion industry is being defended with research that describes a fraction of what it actually sells.

The 90/10 Problem: What the Fed Actually Studied

In February 2026, three researchers — Anthony Diercks, a principal economist at the Federal Reserve Board, Jared Dean Katz of Northwestern, and Jonathan Wright of Johns Hopkins — published a working paper through the Fed’s official Finance and Economics Discussion Series. The paper, “Kalshi and the Rise of Macro Markets,” examined prediction market contracts on the federal funds rate, CPI, unemployment, and GDP. Its conclusion was unambiguous: prediction markets outperform or match traditional forecasting tools for macroeconomic indicators.

The fed funds rate contracts “perfectly matched the realized federal funds rate by the day of each meeting since 2022, a feat not achieved by either surveys or futures.” Headline CPI forecasts were a “statistically significant improvement” over the Bloomberg consensus. The paper called prediction markets “the only source of market-based forecasts” for GDP growth, core inflation, unemployment, and nonfarm payrolls — variables without liquid financial derivatives.

“Kalshi markets provide a high-frequency, continuously updated, distributionally rich benchmark that is valuable to both researchers and policymakers.”
— Diercks, Katz & Wright, Federal Reserve FEDS 2026-010

There is one problem with using this paper as a defense of the prediction market industry: the industry it describes barely exists. The macroeconomic contracts the Fed studied represent roughly 10% of Kalshi’s total volume. In December 2025, 98% of Kalshi’s trading activity was sports contracts — NFL game outcomes, NBA point spreads, Super Bowl prop bets. When the industry’s advocates cite the Fed’s findings as proof of prediction markets’ value, they are citing research about a product category that generates almost none of their revenue and attracts almost none of the regulatory scrutiny. The paper itself carries the standard Fed disclaimer: “The views expressed are those of the authors and do not indicate concurrence either by other members of the Board’s staff or by the Board of Governors.”

A separate study reinforces the gap between the theory and the reality. Researchers at CEPR analyzed over 300,000 Kalshi contracts and found a clear favourite-longshot bias, with average pre-fee returns of negative 20%. Their conclusion: “While they are clearly a useful tool for aggregating information, our results suggest that Kalshi’s prices should not be interpreted as unbiased probability estimates.” The industry that the Fed endorsed as a forecasting tool is, for 90% of its volume, a competitive battlefield between sportsbooks and prediction platforms fighting over the same sports bettors.

The AIBM/Ipsos poll, conducted among 2,363 adults, quantified the public verdict. Beyond the headline 61% who call prediction markets gambling, only 4% of Americans believe prediction markets are “good for society.” Just 21% are even familiar with what they are. Among those who do know, 91% view them as “financially risky,” and 59% say they should be regulated like online gambling. The polling data paints a picture of an industry that the vast majority of Americans either do not know about or do not trust.

The Insider Trading Feature

A Truist Securities survey of 482 active prediction market users found that over 60% have suspected insider trading — 31% frequently and 37% in at least one specific contract. A separate AIBM/Ipsos poll of the general public found that 61% of Americans are not confident prediction markets can prevent insider trading. Only 9% expressed confidence. Among people who actually use the platforms, 70% are not fully confident insider trading is being prevented.

The suspicion is not paranoia. In February 2026, Israeli authorities secured the first criminal charges in history for prediction market insider trading. A military reservist and a civilian were indicted for using classified IDF intelligence to place Polymarket bets during Operation ‘Am Kalavi’, Israel’s June 2025 war with Iran. The user “ricosuave666” correctly predicted four security events, earning over $152,300 — including $128,700 on a single bet. The IDF called it “a severe ethical failure and a clear crossing of a red line.” The case was investigated jointly by Shin Bet, the Defense Ministry, and Israel Police. It proved, in a courtroom, what users had long suspected about prediction markets and classified information.

But the Israel case was not an anomaly. When the U.S. announced Maduro’s capture on January 3, 2026, a user called “Burdensome-Mix” — whose account had been created just seven days earlier — had already placed $32,537 betting Maduro would be gone by month’s end, at odds of 5.5–7%. The payout: $436,760. At least four other accounts made similar bets, totaling $630,484 in combined profits. Blockchain analytics firm Chainalysis said the activity “did not appear to be fraudulent,” but Dennis Kelleher of Better Markets was blunt: “This particular bet has all the hallmarks of a trade based on inside information.”

Then came the Iran strikes of February 28, 2026. A trader called “Magamyman” made $553,000 betting on U.S. strikes against Iran, wagering $32,000 when the market priced the event at just 17%. The first trade came 71 minutes before the news went public. Bubblemaps, a blockchain analysis firm, flagged six freshly created wallets that collectively netted $1.2 million from the same event. Senator Chris Murphy didn’t equivocate.

“It’s insane this is legal. People around Trump are profiting off war and death.”
— Sen. Chris Murphy (D-CT)

What makes the insider trading debate genuinely unusual is that a significant faction of the prediction market world views it as a feature, not a bug. Polymarket CEO Shayne Coplan told 60 Minutes he thinks “people going and having an edge to the market is a good thing” and called insider trading “super cool.” George Mason economist Robin Hanson, a prediction market pioneer, argued: “If the point of prediction markets is to get accurate information on the prices, then you definitely want to allow insiders to trade.” The logic is that insider trading makes prices more accurate — which is true. The problem is that it also means every retail participant is on the other side of a trade against someone with information they cannot access. As AIBM’s Jonathan Cohen put it after his own poll found 70% of users lack confidence in market integrity: “That either means that we polled a bunch of people who are good at insider trading, or that everyone who’s using the platform just assumes that this is baked in.”

The Gambling Industry Civil War

The prediction market boom has fractured the gambling industry in a way that no external threat ever managed. In November 2025, DraftKings and FanDuel — the two companies that built American sports betting — quit the American Gaming Association and surrendered their Nevada gaming licenses. By December, DraftKings had launched prediction market products in 38 states through CME Group, and FanDuel followed with a nationwide prediction market rollout under the FanDuel Predicts brand. The companies that built legal sports betting decided the next chapter was prediction markets — even if it meant burning the regulatory framework they helped create.

The numbers explain why. During Super Bowl 60, Nevada’s sports betting handle was $133.8 million — its lowest in a decade. Meanwhile, a single Kalshi market on Bad Bunny’s halftime show first song drew $135.1 million. Total prediction market volume on Super Bowl-related contracts: $1.3 billion. The American Gaming Association estimates prediction markets have already diverted more than $500 million in sports betting tax revenues from state coffers.

“It is without a doubt sports betting, full stop.”
— Bill Hornbuckle, CEO, MGM Resorts

The political ironies compound. Mick Mulvaney — Donald Trump's former chief of staff — leads the coalition fighting prediction markets. Meanwhile, Trump's CFTC chairman, Michael Selig, is the industry's most powerful defender. Trump's son, Donald Jr., advises both Polymarket and Kalshi. His venture firm invested in Polymarket. Truth Social has announced plans for its own prediction market. The same administration is simultaneously defending and attacking the same industry, depending on which office you walk into.

The Retail Investor Trap

Strip away the policy debate and look at what happens to the people who actually use prediction markets. Research by IMDEA Networks Institute, analyzing over 86 million Polymarket transactions, found that only 0.51% of wallets have realized profits exceeding $1,000. The CEPR study of Kalshi found average pre-fee returns of negative 20%. For every retail trader who celebrates a winning bet, the vast majority are slowly losing money to a combination of fees, information asymmetry, and algorithmic traders with structural advantages.

These numbers should sound familiar. When the European Securities and Markets Authority banned binary options for retail consumers in July 2018, the evidence was that 74–89% of retail accounts lost money. The structural parallels between binary options and prediction markets are not subtle — both offer binary outcomes, short timeframes, fixed risk, and systematic retail losses. Taylor Wessing, a global law firm, noted in March 2026: "At first glance, these contracts appear to be very similar to well-known binary options." Even Wikipedia acknowledges that "the most common form of a prediction market is a binary option market."

The international consensus is increasingly clear. In February 2026, the UK Gambling Commission stated that prediction markets fall under gambling law. Director Brad Enright said their "core aspects are akin to what in the UK would be described as a 'Betting Exchange.'" France, Germany, Belgium, Portugal, Switzerland, Romania, the Netherlands, and Poland have all blocked Polymarket. The Netherlands threatened an €840,000 fine. Australia, New Zealand, and Argentina have all banned prediction market platforms. David Zeffman, a gaming law partner at CMS, put it simply: "Any other gambling jurisdiction would regard prediction markets as gambling." The United States is increasingly the outlier, not the model for how to regulate these products.

Arizona's Shot Across the Bow

On March 17, 2026, Arizona Attorney General Kris Mayes did something no regulator had done before: she filed criminal charges against a prediction market. Twenty misdemeanor counts — operating an illegal gambling business and election wagering — against Kalshi, including for accepting bets on the 2028 presidential race and the 2026 Arizona gubernatorial election. The charges followed a three-month undercover investigation in which state agents placed bets on the platform.

"Kalshi may brand itself as a 'prediction market,' but what it's actually doing is running an illegal gambling operation. No company gets to decide for itself which laws to follow."
— Kris Mayes, Arizona Attorney General

The significance of Arizona's criminal prosecution is not the charges themselves — they are misdemeanors. It is the playbook. Arizona bypassed the federal preemption argument entirely by filing in state criminal court, not federal civil court. The 38 other attorneys general who have already signed briefs opposing prediction markets now have a replicable template. Gaming law attorney Daniel Wallach called it "a true inflection point."

CFTC Chairman Michael Selig responded with characteristic aggression, calling the charges "a jurisdictional dispute and entirely inappropriate as a criminal prosecution." His message to states: "To those who seek to challenge our authority in this space, let me be clear: We will see you in court." But Selig is operating from a position of unusual structural weakness. He is currently the only confirmed commissioner on the five-seat CFTC. His background includes representing crypto clients at Willkie Farr & Gallagher and serving as chief counsel for the SEC Crypto Task Force. And his advisory committee includes executives from the very companies he is defending.

The week Arizona filed criminal charges, Kalshi raised $1 billion at a $22 billion valuation. The company is simultaneously being criminally prosecuted and valued higher than most of the regulated sportsbooks it competes with. Both things are happening at the same time, in the same country, about the same product.

The Race to the Supreme Court

The legal question has no middle ground. Either prediction markets are CFTC-regulated derivatives that preempt state gambling laws, or they are gambling products that states retain authority to prohibit. District courts have split cleanly. Ohio's Chief Judge Sarah Morrison denied Kalshi's injunction in March 2026, writing that swaps are "understood as a transaction involving financial instruments and measures that traditionally and directly affect commodity prices. Currency exchange rates, the weather and energy costs all do that: the number of points scored in the Huskies-Bobcats game does not." Tennessee's Judge Aleta Trauger reached the opposite conclusion a month earlier, granting Kalshi's injunction on the grounds that sports event contracts likely qualify as "swaps."

Kalshi's hiring of Neal Katyal — the most prolific Supreme Court advocate in private practice, who has argued over 50 cases before the Court — is the clearest signal that the company expects this fight to reach the highest court. Katyal's team at Milbank includes former CFTC Director Josh Sterling and former New Jersey Attorney General Gurbir Grewal. He has already taken over Kalshi's cases in Utah, Nevada, Ohio, Maryland, Connecticut, and Tennessee. His argument: "Mountains of authority confirm that the [federal law] preempts application of state law."

"The courts have always invoked a strong presumption against preemption, and to overcome that presumption, you need to have clear and manifest language. [Selig] will get a harsh Loper-Bright reality check."
— Daniel Wallach, Wallach Legal LLC

The Loper-Bright reference is significant. The Supreme Court's 2024 decision overturning Chevron deference means courts no longer defer to federal agencies' interpretations of ambiguous statutes. For the CFTC, this cuts both ways. If the Commodity Exchange Act's definition of "swap" is ambiguous enough to encompass sports bets on the Huskies-Bobcats game, courts are no longer obligated to accept that interpretation just because the agency says so. Six bills have been introduced in Congress — the BETS OFF Act, the Prediction Markets Security and Integrity Act, and others — but none appear likely to pass. The resolution, when it comes, will almost certainly arrive through the courts.

Why All Three Sides Are Right

Return to the opening numbers. Sixty-one percent of Americans call prediction markets gambling. For the sports contracts that dominate 90% of volume — NFL spreads, NBA totals, Super Bowl prop bets — they are functionally correct. Ohio's Chief Judge Morrison said it plainly: a football game is not a commodity. The UK Gambling Commission called these products a "Betting Exchange." The only major jurisdiction that disagrees is the United States, and even here, a majority of state attorneys general side with the public.

Sixty percent of users suspect insider trading. The evidence says they are right to worry. Israel has proven in court that classified intelligence was used to profit on Polymarket. The Maduro capture, the Iran strikes, the Google Year in Search — the pattern is consistent. Fresh accounts, suspiciously timed bets, enormous payouts. The prediction market industry's own philosophical position — that insider trading makes prices more accurate — does not change the fact that it makes the market unfair for every other participant. Kalshi has levied fines against its own users for self-dealing. The question is not whether insider trading occurs, but whether the absence of federal rules makes it structurally inevitable.

And the Federal Reserve is right too. Macroeconomic prediction markets do produce useful forecasting data. The fed funds rate contracts have outperformed futures. CPI forecasts have beaten the Bloomberg consensus. For researchers and policymakers, these markets fill a genuine gap. But this finding applies to a sliver of the industry that generates almost none of the revenue, attracts almost none of the users, and accounts for almost none of the controversy. The Fed's endorsement is being used to legitimize an industry that is 90% something the Fed never studied.

This is not a debate that will be resolved by evidence. The evidence supports all three positions simultaneously because all three positions describe different products under the same regulatory umbrella. It is a jurisdictional war, and the outcome will determine who pays taxes, who gets consumer protection, and who makes money. When 39 state attorneys general, a $22 billion startup, the Federal Reserve, a former Solicitor General, and the CEO of MGM Resorts are all looking at the same industry and seeing completely different things — the market is not confused. The market is simply too many things at once. And nobody has the authority to decide which one it actually is.

---

Sources

• Most Americans See Prediction Markets as More Like Gambling Than Investing — AIBM/Ipsos Poll, March 17, 2026
• Kalshi and the Rise of Macro Markets (FEDS 2026-010) — Federal Reserve Finance and Economics Discussion Series, February 2026
• Prediction Market Survey: Insider Trading and User Growth — Truist Securities Survey via Gambling Insider
• Americans View Prediction Markets Closer to Gambling — Ipsos Methodology and Results
• CFTC Enforcement Advisory (Press Release 9185-26) — Commodity Futures Trading Commission, February 25, 2026
• Arizona Attorney General Criminal Filing Against Kalshi — Arizona Attorney General's Office, March 17, 2026
• ESMA Binary Options Prohibition for Retail Investors — European Securities and Markets Authority, 2018
• UK Gambling Commission Statement on Prediction Markets — UK Gambling Commission, February 4, 2026