The prophecy of "Near the water tower first gets the moon": How the prediction market becomes a stage for information privilege

Supporters of prediction markets often say they are “truth discovery machines.” But a series of events is exposing this myth. Last year’s mysterious trade involving Venezuela’s president, and this year’s absurd controversy over Ukraine’s leader’s clothing, increasingly suggest that prediction markets are evolving into something else—a financial game where those “closest to the water” profit first.

When we discuss prediction markets, few are willing to confront a fundamental question: Are these platforms truly uncovering the truth, or are they monetizing information asymmetry? The answer may be more uncomfortable than we think.

How Insider Advantages Are More Valuable Than Analytical Skills

During the 2024 U.S. election, prediction platforms like Polymarket indeed outperformed polls and traditional media. This created an illusion: that the market’s accuracy was because it aggregated real signals.

But the story changed in the second half of last year. A new account bet $30,000 on Polymarket that Venezuela’s Nicolás Maduro would be ousted before the end of the month. At the time, the market assigned a very low probability to this—seemingly a foolish bet.

A few hours later, everything changed. U.S. authorities arrested Maduro and brought criminal charges in New York. The mysterious account immediately closed its position, earning over $400,000.

What’s unsettling isn’t just the huge profit, but the eerily precise timing. It’s as if this account had access to intelligence that others couldn’t get. When someone’s money bet wasn’t based on clever analysis but on knowing something the market didn’t, prediction markets shifted from tools of information aggregation to shadow trading platforms of power.

This is the brutal modern-day version of “the early bird catches the worm.” The closer to power you are, the more advantage you have in controlling information. On prediction markets, this advantage can be directly converted into real money.

Three Cases Revealing Governance Black Holes

Proponents argue that even with insider trading, markets will react faster, helping other traders. It sounds like a good self-correcting mechanism—insiders accelerate the truth.

But reality is far more complex. If prediction markets are accurate because they contain leaked military intelligence, secret government schedules, or high-level decision info, then these markets are no longer just information markets—they become clandestine shadow trading venues.

An even more absurd example comes from 2025. There was a market on Polymarket asking whether Ukrainian President Zelensky would wear a suit before July. It attracted hundreds of millions in trading volume.

Zelensky did appear publicly, wearing a designer jacket and trousers. Media and fashion experts called it a suit. But the market’s settlement decided “no.”

The reason: a few major players with significant governance power had huge exposure against that outcome. They used their influence to enforce a settlement aligned with their interests. The cost of corrupting the prediction market was less than the payout.

This exposes a fatal flaw in prediction market design: the assumption that accurate settlement depends on honest arbitration. When enough money is involved, honesty becomes a luxury.

When Incentives Turn into “Deception Encouragement”

Many see this as a failure of decentralized governance. But the real issue lies in the incentive mechanism itself.

The system operates exactly as designed: people’s gains depend on how costly lying is. When the rewards for lying outweigh the costs, deception becomes a rational choice. Prediction markets create such conditions—ambiguous language, huge bets, and a few powerful insiders.

Combine massive funds with vague settlement standards, and you create a perfect breeding ground for deception. Prediction markets don’t uncover the truth—they reach a “settlement”—a reality jointly shaped by power and money.

This isn’t accidental; it’s inevitable.

The Dangerous Acceleration from Marginal to Mainstream

Prediction markets have evolved from niche hobbies to serious asset classes on Wall Street. In 2025, Kalshi handled nearly $24 billion in trading volume. Polymarket’s valuation reached about $9 billion, attracting strategic investments from major institutions.

As scale grows, participants become more complex. Government officials, institutional investors, big data firms—these turn prediction markets from “tools for democratizing information” into “arenas for information power struggles.”

U.S. Representative Richie Torres has proposed legislation banning trading by government insiders. The reason is straightforward: such trades seem more like privileges of power than fair information discovery.

The True Identity of Prediction Markets

We need to strip away the facade of prediction markets.

They are simply places where people bet on outcomes that haven’t happened yet. If the event occurs as expected, they profit; if not, they lose. All other rhetoric is secondary.

They won’t become something sophisticated just because they have cleaner interfaces, clearer probabilities, run on blockchain, or attract academic interest. Your returns aren’t because of insight—they’re because you bet correctly.

Acknowledging this actually makes prediction markets more robust. Once you accept they are high-risk betting products rather than “epistemic engines,” disputes become just betting disagreements, not existential crises. This leads to clearer regulation and more ethical design.

Prediction markets do have value. They reveal signals faster than polls and offer honest ways to express beliefs under uncertainty. But only if we recognize their true nature—they are financial instruments linked to future events, not guardians of truth.

Before “the early bird catches the worm” becomes the norm, we must realize: when money can rewrite the definition of reality, prediction markets shift from truth-seeking tools to servants of power.