The Risks and Opportunities of Prediction Markets in Geopolitical Investing

Prediction markets have emerged as a powerful tool for aggregating information and forecasting geopolitical events, but they also expose regulatory blind spots and raise ethical concerns. Platforms like Polymarket, which operate on blockchain technology, have become a hub for trading on outcomes ranging from U.S. elections to international conflicts. However, the same mechanisms that enable these markets to aggregate collective intelligence also create vulnerabilities-particularly when insider-like bets exploit nonpublic information or distort market signals. For investors, understanding these dynamics is critical to navigating the risks and opportunities in a rapidly evolving landscape.

Regulatory Gaps and Insider-Like Bets

The Commodity Futures Trading Commission (CFTC) regulates prediction markets in the U.S., but its framework lacks explicit prohibitions on trading with material nonpublic information, unlike the Securities and Exchange Commission (SEC)'s strict insider trading rules according to reports. This legal gray area has led to high-profile cases where traders appear to profit from nonpublic insights. For example, in late 2024, three wallets on Polymarket made suspiciously timed bets on the capture of Venezuelan leader Nicolás Maduro, netting over $630,484 in profits just before the event occurred. Such cases have drawn scrutiny from lawmakers and regulators, who question whether these platforms can self-regulate effectively.

The absence of a unified regulatory framework has also led to state-level investigations. Nevada and Connecticut, for instance, have probed prediction markets under local gambling laws, highlighting the tension between innovation and consumer protection according to analysis. While platforms like Polymarket and Kalshi have implemented internal compliance systems, these measures often fall short of addressing systemic risks, such as the potential for coordinated manipulation or the exploitation of geopolitical uncertainty.

Aggregating Sensitive Information and On-Chain Signals

Despite these challenges, prediction markets offer unique value by aggregating real-time data on geopolitical events. Polymarket's blockchain-based infrastructure allows for transparent, programmable contracts that resolve based on smart contracts and community-driven mechanisms according to research. A 2025 study titled Beyond the Polls analyzed 11 million transactions on Polymarket and found that price trends in key U.S. swing states during the 2024 election preceded traditional polling shifts by up to 14 days, with a correlation of up to 0.988. This suggests that on-chain data can serve as an early warning system for investors, particularly in volatile environments.

Tools like Nansen and Glassnode further enhance this capability by detecting patterns in wallet activity and liquidity provision according to AI-driven analytics. For instance, AI-driven analytics can identify "Smart Money" behavior-such as large, sudden trades by high-net-worth wallets-that may signal insider knowledge or market manipulation. These insights are invaluable for investors seeking to hedge against geopolitical risks, such as sanctions, military conflicts, or diplomatic shifts.

Opportunities and Risks for Investors

The growing institutional adoption of prediction markets underscores their potential as a financial infrastructure layer. Platforms like Polymarket saw a 48x surge in trading volume during the 2024 U.S. election, with $3.3 billion in notional value traded. This growth has attracted major players, including Intercontinental Exchange (ICE), which invested $2 billion in Polymarket in October 2025. Such moves signal broader acceptance of prediction markets as a tool for managing risk and capitalizing on macroeconomic trends.

However, investors must remain cautious. Case studies reveal vulnerabilities in market integrity. For example, the "Israel strikes Gaza by...?" market on Polymarket was manipulated by social media narratives and panic selling, distorting outcomes. Similarly, the platform's double-counting of transaction volume-due to its hybrid order-book design-complicates accurate analysis. These issues highlight the need for robust due diligence and a nuanced understanding of on-chain metrics.

The Future of Geopolitical Investing

As prediction markets mature, their role in geopolitical investing will depend on balancing innovation with regulation. While platforms like Polymarket offer unprecedented transparency and liquidity, they also require clearer legal frameworks to prevent abuse. For investors, the key lies in leveraging on-chain analytics to detect early signals while mitigating risks from manipulation or regulatory shifts.

In the coming years, the integration of AI and machine learning into on-chain tools will likely enhance predictive accuracy, enabling investors to act on geopolitical trends before they dominate traditional media. Yet, as the Maduro case and others demonstrate, the line between information aggregation and insider trading remains blurred. Investors must navigate this landscape with both optimism and caution, recognizing that prediction markets are not just speculative playgrounds but evolving infrastructure for financial and geopolitical forecasting.