How to fix suspected insider trading on Polymarket and Kalshi

Ever since Polymarket correctly tipped a Donald Trump victory in 2024, months before the polls and pundits did, prediction markets have gone from strength to strength. 

Monthly trading volumes grew $4.3 billion in the lead up to the election, and have continued sharply upwards to $10.6 billion in March this year.

But allegations of shady insider bets, on everything from the content of MrBeast videos to the timing of the Iran war, began to dog both Polymarket and Kalshi as they became more popular.

Karoline Thomsen, international law and relations researcher at the University of New South Wales, says there is evidence that prediction markets can surface and aggregate useful information — but they can also incentivize insider trading.

“I think with Polymarket, what you also get are bets that lend themselves to people misusing insider information,” she says. “At that point, you’re not predicting what is going to happen, you are telling other people, or signaling to other people, what is going to happen. ” 

What prediction markets do in theory

The promise of prediction markets, as laid out by economist Robin Hanson, is that wagering on an outcome will reveal people’s actual beliefs — rather than saying the “right” things to pollsters — aggregate dispersed information and provide the crowd’s informed best guess about a future outcome expressed as a price. 

Unlike traditional bookies, who set the odds and the house takes the profits, prediction markets essentially trade in shares of Yes or No, allowing the odds to rise and fall along with sentiment.  

This works pretty well, with Polymarket claiming an average of 90% correct predictions, from a month out, on resolved markets.

Elisabeth Diana, communications head for Kalshi, explains prediction markets are a valuable public service.  

“Around 70% of people on Kalshi actually just come to see the odds, to see the forecasts. They don’t trade,” she tells Magazine.”I mean, the value is enormous. They see it as a source of truth.”

In an ideal world, prediction markets would be based on informed traders using public, but not widely known, knowledge. The Pentagon Pizza Report is a good example — it gives an indication of whether everyone at the Pentagon is working late, which raises the chance that something big is about to happen. 

Diana gives another example. “If you parked outside a Walmart and watched everyone come in and out every day for three weeks, you’d have a better sense of how Walmarts are doing. That’s not illegal information,” she says. 

When does information cross the line to become ‘inside information’

But it becomes insider trading when someone misuses “material nonpublic information.” 

“A lot of times, for example, if you’re permitted to share information publicly, you can trade on it. If you’re not permitted to disclose it, you can’t trade on it,” Diana says.

“For example…. if you’re a dancer employed by Bad Bunny at the Super Bowl and you traded on information about his first song, that is insider trading because you were employed.”

However, if you were standing outside the stadium and heard Bad Bunny rehearsing a song, betting on that information is fine.

“That is legitimate, because that is public. Anyone can do that.”

Insider trading on the war(s)

The trouble is that prediction markets have vastly expanded the pool of people that possess inside information. Insider trading used to be the preserve of CEOs and board members, but now everyone, from Google search developers to members of the Nobel Committee, face financial temptation. These aren’t random examples; there were suspicious last-minute bets on the 2025 Nobel Peace Prize and Google’s 2025 Year in Search rankings.

Prediction markets also create scenarios where a single actor can affect the outcome. Coinbase CEO Brian Armstrong famously read out the entire list of words that pundits had bet he might say during an earnings call. 

But it’s been the misuse of classified information in wartime that’s drawn the most concern.

On Jan. 3, in the hours before US troops were deployed to Venezuela, a newly created Polymarket account bet on that eventuality and picked up $400,000 in winnings. Ahead of the US attack on Iran, another suspicious account pocketed $553,000. There have even been arrests, with an Israeli Defense Forces reservist and a civilian charged for misusing classified information about Israel’s April 2024 strikes on Iran to place bets on Polymarket. 

Democrat congressman Eugene Vindman wrote to Polymarket CEO Shayne Coplan earlier this month to demand the platform preserve all records related to bets on national security, from IP addresses to metadata. 

“The use of sensitive or classified information to place bets on military actions endangers and undermines national security and risks the lives of our men and women in uniform. It is immoral, dishonest, vile, and traitorous,” he said, arguing prediction markets also incentivize military leaders to take actions that line their own pockets.

“Moreover, large bets placed on these markets in the lead-up to military action can signal U.S. intentions to adversaries, compromising operational security. This endangers the lives of the troops carrying out those missions and jeopardizes critical military objectives.”

Kalshi bans insider trading, verifies all users

Kalshi has specific prohibitions against insider trading. AI systems scan the platform looking for irregularities. But the real blocker is the fact that all users are KYC verified. 

“We do KYC checks, we do anti-money laundering checks,” she says. “If there is an issue with someone, we know who they are and we can reach out to them because we have their contact information. On sites like Polymarket, there is no KYC. So there is no verification. So people are doing this sort of in the shadows.”

There are two versions of Polymarket, however. The US version of Polymarket operates under CFTC oversight and requires mandatory KYC verification to trade.

The international version is permissionless and private, and critics argue this enables insider traders to remain anonymous. 

“The platform is sort of specifically designed to be extremely anonymous,” says Thomsen. “You don’t need identity verification. You bet in cryptocurrency because it spans so many places. There are a lot of users that use VPNs. If you take a look at some of the usernames on the site…. most of them could be used as a password for a moderately secured database.”

Polymarket International is blocked or banned in 33 countries, including the US and Australia, but a VPN can get past the geoblocks. As national and international law seem ineffectual, Thomsen suggests platforms need to take action voluntarily.

“I think at this stage of international cooperation, it would definitely be better to have the platforms regulate themselves. I certainly would welcome an international discussion on it,” she says.

Kalshi and Polymarket take action on insider trading

Kalshi recently announced it would ban political candidates from trading on their own campaigns and block anyone involved in college or professional sports from trading any markets related to the sports they play.

In February, the platform suspended major Democratic donor Stephen Cloobeck from betting on his friend, Eric Swalwell, winning the California governor’s race. Cloobeck had previously bet on his own chances of winning before he dropped out.

And, shortly after this story was first published, Kalshi announced it had just handed out three 5-year suspensions to candidates in Minnesota, Virginia and Texas for better on their own campaigns.

That month, Kalshi also suspended a video editor who worked for YouTuber MrBeast, for two years for alleged insider trading, and even alerted Federal authorities. The systems had flagged the editor’s “near perfect” success betting on markets related to MrBeast.

Polymarket has also rewritten its rules to state that users cannot trade on contracts where they might possess confidential information or could influence the outcome of an event.

A Polymarket account named “ricosuave666” made $155,000 betting on Israel’s June 2025 strikes on Iran, and then resurfaced in January to place new bets. It was flagged by analysts for suspicious activity and its account was deleted. However, in theory, there’s nothing to prevent the anonymous user behind it from opening a new account.

Polymarket declined to be interviewed for this story or to provide comments.

Different ways of approaching prediction markets

But could changing the underlying mechanics of prediction markets help reduce the incentives for insider trading?

The team behind functionSPACE believe it might. Currently in development, the open-source infrastructure will allow predictive markets and apps to be built permissionlessly on top. 

Instead of yes/no binary outcomes, the system lets people trade on the likelihood of different outcomes, including placing guesses on a curve to show how confident they are about different predictions. The markets resolve by paying users based on how close their guesses were.

CEO Tom Chalmers argues that functionSPACE reduces the “incentives for insider trading.” It’s no longer ‘winner takes all’ when you predict the right outcome, because many others share in the upside by being closer to the truth.

“Alternative economic structures for prediction markets change these dynamics…. where positions are taken in degrees of difference and not forced into extremes. Effectively this ‘unfair insider’ edge stands in contrast to a much more nuanced (and less extreme) divergence of positions.”    

As the project is still in development, it’s too early to say if this particular approach will change incentives in practice. But perhaps better math and game theory could be effective where the regulators cannot.

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Andrew Fenton

Andrew Fenton is a writer and editor at Cointelegraph with more than 25 years of experience in journalism and has been covering cryptocurrency since 2018. He spent a decade working for News Corp Australia, first as a film journalist with The Advertiser in Adelaide, then as deputy editor and entertainment writer in Melbourne for the nationally syndicated entertainment lift-outs Hit and Switched On, published in the Herald Sun, Daily Telegraph and Courier Mail. He interviewed stars including Leonardo DiCaprio, Cameron Diaz, Jackie Chan, Robin Williams, Gerard Butler, Metallica and Pearl Jam. Prior to that, he worked as a journalist with Melbourne Weekly Magazine and The Melbourne Times, where he won FCN Best Feature Story twice. His freelance work has been published by CNN International, Independent Reserve, Escape and Adventure.com, and he has worked for 3AW and Triple J. He holds a degree in Journalism from RMIT University and a Bachelor of Letters from the University of Melbourne. Andrew holds ETH, BTC, VET, SNX, LINK, AAVE, UNI, AUCTION, SKY, TRAC, RUNE, ATOM, OP, NEAR and FET above Cointelegraph’s disclosure threshold of $1,000.

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