TL;DR: Prediction markets are expanding into crypto and other event contracts, but allegations of wash trading, concerns over market manipulation and fraud, as well as growing scrutiny from American regulators and lawmakers are raising questions about how these platforms are being run.
Key Takeways:
Prediction markets offered more controversy this week thanks to allegations of wash trading by market makers, but do regulators or elected officials care?
Prediction markets gave many customers their first exposure to digital assets during this summer’s FIFA World Cup; now the platforms are hoping these customers will enjoy betting on whether digital asset prices rise or fall.
On September 18, Vlad Tenev, CEO of the Robinhood (NASDAQ: HOOD) trading platform that added a prediction market to its app last year, appeared on CNBC’s Mad Money program. Challenged as to whether prediction markets were just making sports bets more widely available, Tenev suggested that while wagering on sports ‘events’ might currently be prediction markets’ bread & butter, betting on crypto price movement might be the next big thing.
“A lot of people look at it and say, well, this is just sports. It’s all sports. But we’re already seeing other categories like crypto taking a disproportionate share. And I think within a few years, sports will actually be in the minority.”
Robinhood offers a seemingly endless variety of crypto price markets, allowing you to bet on everything from the price of BTC at the end of 2026 to the price of the DOGE memecoin 15 minutes from now. Tenev says these markets allow you to “monetize an idea or an insight,” but are they also allowing prediction market platforms to manipulate perception of their trading volume?
The day after Tenev’s interview, a former quantitative trader named Benoit Dubosson (‘Beni’) posted that the Kalshi prediction market “fakes their crypto volume and I can prove it.”
Beni detailed how a perpetual futures contract on Kalshi tracking the price of the Ethereum network’s native token ETH, had open interest of $3.1 million but was enjoying 24-hour trading volume of nearly $539 million. Stranger still was that between 48-58% of Kalshi’s total ETH perp volume over a four-day period was made in trades of exactly $5,500.
As for the ‘why’ in this alleged wash trading scenario, Beni pointed to a recent application Kalshi filed with its U.S. regulator, the Commodity Futures Trading Commission (CFTC), that would offer rebates on trading fees to ‘Self-Clearing Members of Kalshi’ (what Beni called “market-makers selected by Kalshi”) to promote “volume and liquidity” on the platform.
Taker fees on crypto perps would be rebated down to 0.3 bps, while maker fees would be rebated so makers net 0.3 bps, meaning the fees could cancel each other out. Beni also cited a Bloomberg article from February reporting that market maker Jump Trading was taking small equity stakes in both Kalshi and its archrival Polymarket, which in Beni’s view meant Jump was “directly incentivized to make the ‘numbers’ look good.”
Other X users quickly chimed in with other examples of alleged wash trading on different Kalshi markets. Kalshi responded on September 22 with a blog post calling the wash trading allegations “misleading in some cases, and false in others,” adding that “we’ve seen no evidence of collusion or wash trades.”
But the Wall Street Journal soon took up this story, detailing how Kalshi traders “made almost one million trades in a single market since August that were in nearly identical amounts.” Those $5,500 trades accounted for over $5 billion in ETH perp volume in just the past month. The Journal identified Jump and Wintermute as two of the market makers involved in the transactions.
Kalshi co-founder Luana Lopes Lara told the Journal that the trades were just “what happens with any market that’s trying to kick-start a new product and activity. This is very normal.” But the Journal quoted a former CFTC enforcement attorney saying “normal market-making isn’t really what’s described in this type of conduct.”
The Journal also reported that the CFTC was “examining the trades,” although a CFTC spokesperson said they couldn’t comment “on whether an investigation is happening or not.” A Kalshi spokesperson said the company hasn’t heard from the CFTC “and don’t believe there is any formal examination.”
Members only
Some might see this as unfortunate timing, but Kalshi CEO Tarek Mansour and other prediction market execs had a closed-door meeting on Wednesday with Republican members of the Senate Banking Committee.
The CFTC, which regulates prediction markets (as ‘designated contract markets’), traditionally answers to the Senate Agriculture Committee, but Banking’s Republicans reportedly wanted to discuss the platforms’ desire to offer “securities-based” event markets.
In a Wednesday letter to GOP members, Banking’s 11 Dems—who weren’t invited to the meeting—called on their counterparts to “hold a public hearing on prediction markets” to determine “how these markets are impacting consumers and our financial system.”
The letter notes that prediction markets are seeking approval from the Securities and Exchange Commission (SEC) to offer “options tied to corporate earnings,” and Dems want a say in how this sausage is made.
The letter tartly notes that “experts warn that prediction markets are prone to encourage market manipulation and insider trading, and early research indicates that profits are highly concentrated in a small fraction of users, while the majority lose money.”
Mention markets: Here be dragons
Under current Chairman Michael Selig, the CFTC has largely taken a hands-off approach to most prediction market activities, even going to bat for them in multiple state and federal courts to defend the companies’ view that the sports betting they offer their customers isn’t sports betting.
But the CFTC offered some rare pushback this week, issuing an informal advisory regarding ‘mention markets,’ the event contracts that hinge on whether or not individuals say certain words in certain forums, attend or appear at certain events, etc.
In August, the CFTC announced a settlement with a former White House teleprompter operator who’d made $107,000 on Kalshi based on his advance knowledge of what President Trump would say in his speeches. The CFTC also reached a settlement with former Rep. George Santos (R-NY), who made over $17,000 on Kalshi betting on whether he’d show up to Trump’s 2026 State of the Union address.
The advisory is pretty tame, merely noting that mentioned markets come with a “heightened risk of manipulation” and suggesting that operators think really, really hard on whether or not a market might be too easily gamed by insiders.
Polymarket sees no evil
Permissive environments of this type have historically led to companies taking ever greater license, with ever greater fallout for consumers. On September 19, the Wall Street Journal did a deep dive on the rules that Polymarket was prepared to bend and/or break to ensure the company met its growth targets.
The article recounts a scenario from February, when Checkout.com, the company processing credit card transactions for Polymarket’s U.S.-facing site, alerted the company that fraudsters were linking stolen debit cards to Polymarket accounts and trying to withdraw the compromised accounts’ balances.
At one point, over 80% of the deposits the processor was handling for the site were being rejected as fraudulent. According to the Journal’s sources, when Polymarket’s compliance team raised the issue with CEO/founder Shayne Coplan, he told the team to ‘just keep growing and pay a fine if regulators ever find out.’
The deluge of fraudulent withdrawal attempts left the compliance staff struggling to meet legitimate customer expectations for timely responses to withdrawal requests. To speed up this process, Polymarket execs decided to eliminate rules requiring withdrawals to be processed via the same channel that made the deposit, despite staff warning that this could make money laundering easier.
While the rate of fraud eventually dipped, it stayed elevated for several months after February’s surge. In April, Polymarket’s U.S. compliance officer resigned after submitting a report on the fraud issues.
The Journal also cites other, more recent fraud attacks on Polymarket users who expressed annoyance at the platform’s slow response to their complaints about thousands of dollars going missing from their accounts.
Coplan reportedly has a goal of allowing users to list their own markets, something critics say is a recipe for market manipulation. Regardless, the company filed a trademark application this summer for ‘create your own market.’ What could possibly go wrong?
FAQs:
Why are prediction markets attracting attention in crypto?
Prediction market platforms are increasingly offering contracts tied to cryptocurrency prices, including markets based on the future prices of Bitcoin and Dogecoin. Robinhood CEO Vlad Tenev said crypto is already taking a significant share of prediction market activity and could eventually account for more activity than sports.
What are the wash trading allegations involving Kalshi?
A former quantitative trader alleged that Kalshi was artificially inflating trading volume on its Ethereum perpetual futures market. He pointed to unusually high trading volume relative to open interest and a large number of trades worth exactly $5,500. Kalshi rejected the allegations, saying they were misleading or false and that it had seen no evidence of collusion or wash trading.
Is the CFTC investigating Kalshi’s trading activity?
The Wall Street Journal reported that the CFTC was examining the trades, although a CFTC spokesperson said the agency could not confirm whether an investigation was taking place. Kalshi said it had not heard from the CFTC and did not believe there was a formal examination.
Why are U.S. lawmakers scrutinizing prediction markets?
Lawmakers are concerned about the potential impact of prediction markets on consumers and the financial system. They have also raised concerns about market manipulation, insider trading, and the concentration of profits among a small number of users. These concerns come as prediction market platforms seek approval to expand into securities-based event contracts.
What concerns have been raised about Polymarket?
The Wall Street Journal reported that Polymarket faced significant fraud involving stolen debit cards and fraudulent withdrawal attempts. The article also says the company changed its withdrawal procedures despite compliance staff warning that the change could make money laundering easier. Its U.S. compliance officer later resigned after submitting a report about the fraud issues.
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