Prediction markets, neutral tools or risky financial products?

Criticism is being raised that cryptocurrency-based prediction markets are going beyond simple prediction tools and are turning into a means of financializing real-world instability. Ryan Kirkley, co-founder and CEO of Global Settlement Network, warned of the structural risks of the cryptocurrency prediction market in a recent article.

“Prediction markets are often packaged as neutral prediction tools, but the cryptocurrency version of prediction markets is no longer just about predictions,” Kirkley said. “It’s about financializing real-world instability.”

Social risks that increase global accessibility

Platforms like Polymarket allow you to bridge assets across various chains, including Ethereum, Solana, and Bitcoin. These deposits are converted to USDC.e on the Polygon network and traded and settled as tokenized claims on-chain.

Kirkley said, “It is an impressive market design that cryptocurrencies provide global accessibility, cross-chain funding, and low-friction settlement to these markets,” but added, “This is what makes social risks greater.”

Three structural risks

The first risk Kirkley presents is trading on insider information. Making war, political violence, social chaos, and institutional collapse into tradable cryptocurrency products provides new incentives for malicious actors. Rule 40.11 of the U.S. Commodity Futures Trading Commission (CFTC) prohibits contracts for events related to terrorism, assassination, and war, deeming them to be against the public interest.

The second risk is more serious. Prediction markets can reward not only those who simply have information about the outcome, but also those who can influence the outcome. Academic research has shown that information aggregation can break down when traders have external incentives or can take actions that influence underlying events.

Reuters recently reported that unusually well-timed bets in the market about airstrikes in Iran and the ouster of Ayatollah Ali Khamenei have led to ethics and insider trading investigations. Polymarket also removed bets on nuclear explosions after public backlash.

The third risk is inherent to cryptocurrency. The point is that these platforms are increasingly functioning not only as marketplaces but also as media engines. Axios reported in February that prediction market accounts are spreading false, misleading or out-of-context claims to millions of people on social media, turning market odds into viral narratives before the facts are established.

When did this trend start?

The history of prediction markets dates back to the Iowa Electronic Markets in the 1990s. Academics have long published research showing that prediction markets can produce predictions that outperform existing benchmarks.

However, in the 2020s, with the combination of cryptocurrency technology, the prediction market entered a new phase. Polymarket grew rapidly in the wake of the 2024 US presidential election, and its market size and influence rapidly expanded due to a structure that allows anyone around the world to participate. Accordingly, interest from regulatory authorities is increasing, and discussions on social responsibility are in full swing.

Future outlook [AI analysis]

Cryptocurrency prediction markets are likely to face a more stringent regulatory environment in the future. In particular, it is expected that the intervention of regulatory authorities in each country will be strengthened in contracts related to war, terrorism, and political violence.

However, rather than denying the usefulness of the prediction market itself, it is highly likely that a social consensus will be formed regarding the range of allowable events. Institutional investors should avoid the mistake of treating all markets as legitimate simply because they have liquidity.

As Kirkley pointed out, the cryptocurrency industry has substantial tasks to accomplish, including modernizing settlement, improving transparency, and increasing capital efficiency. It is expected that the key point in the future will be whether the prediction market can evolve into a form that is consistent with this sound development direction.