The 3 Biggest Problems With Prediction Markets
This essay was distributed via my newsletter.
Did Cardi B “perform” at Super Bowl 2026? You might think I’m insane to say it, but it’s one of the biggest questions in finance and prediction markets right now.
Cardi B was clearly “present.” She danced a little. She vibed. Her lips moved. But she didn’t technically get on stage alongside Bad Bunny.
Does that constitute “performance”?
The reason that question matters is because prediction markets like Kalshi and Polymarket hosted event contracts about whether she would “perform”, which racked up over $50 million in combined trade volume.
Kalshi punted and settled bettors on the last traded price, effectively issuing partial cash earnings. Meanwhile, it appears that Polymarket concluded that she did “perform.” So if you bet that Cardi B would perform on Kalshi, you would have only recouped 26 cents per contract (based on the last traded price), whereas the same bet on Polymarket would have been a winner.
What a mess.
And this is only the tip of the prediction market iceberg, which has increasingly grown in popularity especially in terms of sports betting.
So if you participate in these markets, find yourself empowered to affect an “event contract”, or if you just want to be aware of the 3 biggest problems from my legal and financial perspective, let’s get into it.
The following should not be construed as legal or financial advice. It is intended for informational and educational purposes only.
1. Insider trading is rampant in prediction markets
Take a step back with me to 2010. Prior to that year, insider trading was almost entirely legal in futures markets (think corn, gold, etc.). Then the Dodd-Frank Act arrived following the financial crisis and suddenly futures became regulated in a similar way to securities like Apple stock.
And why am I talking about futures? Because prediction markets are futures bets. They usually take the form of a binary issue, or in software developer terms, a 1.00 or a 0.00.
Will Cardi B perform at Super Bowl 2026?
Will the Federal Reserve raise interest rates?
Will Donald Trump win the 2024 election?
These are known as “event contracts” and they are now regulated like other futures in the United States under the purview of the Commodity Futures Trading Commission (CFTC).
If you listen to the Kalshi CEO, Tarek Mansour, describe how they’re regulated in the interview I clipped above, he wears it like a badge of honor. As if the simple fact of being regulated means no misconduct occurs on your platform or in your market.
The problem for Kalshi and other prediction markets like Polymarket is that traditional futures regulations — including those for insider trading — don’t anticipate or account for the risks from these newer markets. The CFTC anticipated a farmer being able to trade on the knowledge of their “inside” crop. They didn’t really anticipate a dancer for Bad Bunny trading on “inside” information that belongs to the halftime show organizers.
Prior to prediction markets, something like the Super Bowl halftime set list was a trivial secret. You might prop bet it with your friends or at a casino’s sports book, but now this sort of thing attracts over $50 million in event contracts. Something as inconsequential as this set list has become a financial asset. And that’s just one of thousands, if not millions, of examples of possible event contracts in culture, sports, politics, and more.
It has democratized corruption. Previously you typically had to be a corporate insider (i.e., CEO, CFO, etc.) to commit insider trading. Now you can be a backup dancer, lighting technician, or janitor.
And unlike the farmer who is permitted to trade on the inside information of his crop (as it provides liquidity and price discovery for the market), the “insider” in an event contract provides ZERO value to the market. They are simply extracting a rent from lessor-informed bettors purely due to their position or job.
Under insider trading laws in futures we call this the “misappropriation theory” where it’s illegal to trade if you “misappropriate” information in breach of a duty to your employer or a counterparty.
What this means in plain English is that if you’re part of a team, you’re an agent, and you owe a duty to the team. The Bad Bunny dancer was given the setlist for the sole purpose of learning the choreography. He was not given it for financial gain on prediction markets.
The law views betting on that inside information as “theft” — you effectively stole the economic value of that secret setlist from your employer so you could profit individually. You didn’t predict the future better than other bettors; you traded on information that was supposed to stay private, thereby deceiving the person who gave it to you (Bad Bunny’s production team).
This should actually be a more slam dunk insider trading case than in the securities world where a prosecutor would have to jump through hoops to prove the person was a “corporate insider” or that some “personal benefit” was passed from a tipper to a tippee. This case should be comparatively easy.
The dancer had a duty to keep a secret and he broke that duty to make a buck. He wasn’t a bystander who overhead the setlist from the stadium parking lot.
So it will be interesting to see if the CFTC polices this behavior or not (note: NY Congressman Ritchie Torres introduced a bill to do just that).
Personally, I think they should because insider trading in prediction markets is not limited to this dancer.
It appears to be rampant.
A trader named Burdensome-Mix, for example, made a short-term bet of ~$30,000 that Nicolas Maduro would be captured just hours before it happened. They turned it into a profit of ~$430,000 in a matter of hours.
Kalshi and Polymarket, as the two primary prediction marketplaces, have imposed “insider” status on more people than they can track. They will tout their surveillance capabilities and policies, but there’s no way they can track every possible insider without significant market reform and updates to CFTC rules that account for these unique risks.
The securities world uses NDAs, deal teams, and information barriers to protect what’s called “material non-public information.” They have a lot of experience and a long history of bad actors. If Kalshi, Polymarket, and the CFTC are serious about policing prediction markets and maintaining market integrity and efficiency, they’ll draw on those lessons.
But I doubt they will until something big blows up. Perhaps in the moral hazard department.
2. The moral hazards of prediction markets
When I think about the moral hazards of prediction markets, the “Super Bowl Streaker” first comes to mind. One guy placed multiple prop bets through himself and friends that there would be a “fan on the field” during the Super Bowl in 2021.
The problem?
He bragged on a Florida radio station a few days later that he cleared roughly $375,000 doing it and had to pay the money back.
We also had a streaker in this past Super Bowl (notice how many bets are made at the Super Bowl!). He reportedly made similar bets predicting a “fan on the field”, but it’s unclear how much he made or whether he will keep it.
He shouldn’t because otherwise prediction markets will have green lit moral hazards.
Prediction markets should be about probability. They should test how well people can predict the future. But when the bettor is the one jumping the stadium fence, it no longer becomes a game of probability or prediction.
It turns into performance.
Because of the bettor’s performance, he’s guaranteed the probability to be 100%.
When the performance of an event can be controlled by the person who can profit from it, the market ceases to be about wisdom and starts to become all about manipulation.
And the road can get darker from here.
Consider other moral hazards like whether a congressional healthcare bill gets through committee. Whether one country will invade another. Whether someone like Maduro will be kidnapped or deposed.
If there’s an opportunity for the people who control the “performance” to profit by acting a certain way, this may supersede the value of the act itself. So instead of a politician working in the best interests of his or her constituents, they may be unduly influenced by the money they could make on Kalshi by killing their healthcare bill in committee.
Platforms like Kalshi will point to their Know Your Customer process and their Outcome Influencer policies as safeguards, but can they reasonably police the entirety of the prediction market world? Sure, they might be able to stop some of these moral hazards when people make dumb outsized bets close in time to an event occurring, but smarter insiders won’t do that.
The mere existence of these prediction markets have incentivized a new breed of bad actors to engage in moral hazards if they think they can make a quick buck. Which in turn requires more diligence, oversight, and surveillance, not just from regulators but from the platforms themselves.
But even if they can prevent moral hazards, most of the world is not binary.
3. The world is not binary, but prediction markets treat it as such
If you live in the world of tech, most of your life is consumed by 1s and 0s. But the real world, especially in art and entertainment, is more of a spectrum.
Most prediction market event contracts demand a yes or no answer. Did Cardi B perform or not?
The problem is they do not always define key terms like “perform.” Or if they do, they do it poorly.
For example, Kalshi’s rules said that “singing and dancing” counted as performance, but “background dancing” didn’t. Cardi B was moving her lips though. She was also dancing. Is that not singing and dancing even if she wasn’t on the main stage?
Prediction markets tried to turn Cardi B into a decimal point and she broke their math.
The reality is that no 1 or 0 can accurately and comprehensively capture the complexities of all world events. And the biggest problem here is who holds the referee whistle.
The platforms.
They are judge, jury, prosecutor, and executioner.
Traditional futures markets for commodities like oil are purely empirical. The price of oil is a mathematical fact from an exchange.
But in a prediction market, there is no equivalent mathematical fact in “performance.” A platform’s resolution committee or equivalent body has to weigh in. So the platform itself is effectively picking winners and losers based on their own subjective interpretations of world events.
This creates resolution risk. Which any smart prediction market trader must always price in if they put bets in an event contract that contains potentially subjective terms.
Or they could alternatively arbitrage the interpretation. Bet that Polymarket decides one way and Kalshi the other. The fact this actually happened over Cardi B — two different markets watching the same event — proves that the market failed its most basic job.
Price discovery.
So in reality, you’re not just betting on who appears alongside Bad Bunny. You’re betting on what a handful of lawyers (or some 20-somethings at Kalshi) that comprise some resolution committee, probably sitting in some Midtown Manhattan office, think of a short halftime show clip.
With the fate of $50 million in their hands.
This isn’t a “free” market based on empirical facts. It’s a market that can easily become a dictator if left too subjective.
In 1920, you needed to be a railroad tycoon to commit insider trading. In 2026, you just need to be a Bad Bunny backup dancer with a Kalshi account.
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