Traditional sports betting allows insiders to exploit static odds. In a liquid prediction market, a large bet based on inside information immediately moves the odds, reflecting that knowledge in the price and eliminating the arbitrage opportunity for the insider.

Speculation is often maligned as mere gambling, but it is a critical component for price discovery, liquidity, and risk transfer in any healthy financial market. Without speculators, markets would be inefficient. Prediction markets are an explicit tool to harness this power for accurate forecasting.

Prediction markets like Polymarket operate in a regulatory gray area where traditional insider trading laws don't apply. This creates a loophole for employees to monetize confidential information (e.g., product release dates) through bets, effectively leaking corporate secrets and creating a new espionage risk for companies.

The true value of prediction markets lies beyond speculation. By requiring "skin in the game," they aggregate the wisdom of crowds into a reliable forecasting tool, creating a source of truth that is more accurate than traditional polling. The trading is the work that produces the information.

A more significant danger than insider trading is that individuals in power could actively manipulate real-world outcomes to ensure their bets on a prediction market pay out. This moves beyond leveraging information to actively corrupting decision-making for financial gain, akin to throwing a game in sports.

Unlike securities, there's a debate where some argue insider trading enhances prediction market accuracy, fulfilling their core purpose. This philosophical schism complicates regulation, as the "harm" is unclear, leaving platforms to self-police a practice some users actively defend as beneficial.

New legislation aims to ban government insiders from trading on prediction markets. However, the true edge isn't direct insider knowledge but "adjacent information"—piecing together public signals and cocktail party chatter. This mosaic-theory approach remains legal and is the core mechanism that makes these markets predictive.

Extreme conviction in prediction markets may not be just speculation. It could signal bets being placed by insiders with proprietary knowledge, such as developers working on AI models or administrators of the leaderboards themselves. This makes these markets a potential source of leaked alpha on who is truly ahead.

While praised for aggregating the 'wisdom of crowds,' prediction markets create massive, unregulated opportunities for insider trading. Foreign entities are also using these platforms to place large bets, potentially to manipulate public perception and influence political outcomes.