Iran War Leaves Unanswered Questions About Prediction Markets
Before the U.S. and Israel launched airstrikes on Iran on February 28, prediction traders were busy swinging into action.
Trades were made on the timing of the airstrikes. Buy ‘Yes’ if you think Tehran will be hit before February 28; click ‘No’ if you think it'll be hit after that date.
The U.S. hit Iran on February 28, and the 'Yes' traders cleaned up.
Popular event contracts targeting world news
Huge trades were then made on the removal of Iran’s Supreme Leader, Ayatollah Khamenei.
New accounts were again made on Polymarket, as well as Kalshi, Polymarket’s big rival in the global predictions market.
Ultimately, Kalshi boss, Tarek Mansour, reported the cancellation of the Khamenei market on his X account. He specified a ‘death carveout’ which would mean markets would not settle to 'Yes'.
“Death carveouts are important; as a federally regulated prediction market, we are required and feel it is important not to enable direct profiting from war, assassination, terrorism, or other violent outcomes,” he said.
Kalshi ended up reimbursing all fees and net trading losses. Traders who stood to win big were left disgruntled.
Undeterred, new accounts were again created on Polymarket in March, with trades made on no ceasefire being reached between Iran and the U.S. by March 31 — a winning trade, as it turned out.
Why are prediction markets different?
Users love prediction markets for their anonymity and blockchain-based platforms. Plus, the ability to trade in and out of positions makes Polymarket and Kalshi perfect for anyone who’s done their homework — or anyone with insider knowledge.
The key difference between prediction markets and regulated sportsbooks is the ability to buy event contracts focusing on politics. Largely prohibited at licensed sportsbooks, Kalshi and Polymarket have created markets on real-world outcomes, including the removal of foreign leaders or even the kidnapping of the Venezuelan president.
But the freedom to trade contracts for real-life events makes prediction platforms highly tempting to anyone with insider information.
Light touch and big trades
Congress has noticed the unusual trading patterns on prediction sites and is taking action. It has introduced nearly a dozen bills this year to prevent buying and selling shares on wars and elections, and to limit public officials' use of prediction markets.
The bills are unlikely to succeed, given the Trump administration’s current hold on power and its light-touch approach to prediction sites. There has been no proof to date of ‘insider dealing’ in war-related markets.
Rocky road ahead for regulated prediction markets
Prediction market platforms are not conventional sportsbooks, and several states are testing that in court.
After attempted clampdowns from states including New Jersey, Arizona, and Iowa, the Commodity Futures Trading Commission (CFTC) is fighting back. It is suing Arizona, Connecticut, and Illinois for attempting to regulate CFTC-licensed platforms like Kalshi.
The CFTC argues that event contracts fall under the Commodity Exchange Act, thereby placing them beyond the reach of state regulators.
However, with the ability to trade on anything, anytime, anywhere, and amid lingering suspicions of insider dealing, states will be doubling down on efforts to bring prediction market platforms into line.
