One account on the prediction market Polymarket placed bets an hour before news of US strikes on Iran became public and pocketed over $500,000.
A total of $529 million was traded on Polymarket around the timing of the US strikes on Iran, creating a major insider trading question.
Jonathan Cohen traces the rise of prediction markets back to the 2018 Supreme Court decision that legalized sports gambling, which he calls 'the gamblification of everything.'
Prediction markets operate in a legal gray zone by branding themselves as investment platforms rather than gambling platforms, a distinction that is increasingly hard to defend.
Cohen argues the line between gambling and investing can be tested by 'secondary utility', where buying stock funds a company's operations, but buying a prediction contract funds nothing.
By Cohen's secondary utility standard, most activity on prediction markets constitutes gambling with better branding.
The prediction market Kalshi halted markets tied to the death of Iran's Ayatollah, showing how quickly these platforms reach sensitive topics.
Polymarket pulled its nuclear detonation market after traders priced in a 24% chance of a nuclear weapon going off somewhere.
Cohen suspects Polymarket's retreat from sensitive markets is strategic, as the platform needs to stay in regulators' good graces before fully re-entering the US market.
Cohen identifies market manipulation as a greater long-term risk for prediction markets than insider trading, where bad actors engineer real-world events to profit from contracts.
Cohen cites a documented case where people were paid to throw objects onto WNBA courts while prediction market contracts on that exact outcome were trading simultaneously.
Cohen warns that a $15,000 bet on a foreign leader's ouster could drive a news cycle, a political crisis, or even an actual coup, meaning markets can incentivize events, not just reflect them.
Multiple US states are suing Kalshi over its sports event contracts, which make up 90% of its daily trading volume.
Cohen believes lawsuits against prediction markets will eventually aggregate and reach the Supreme Court.
The Iran strike trades have given lawmakers a more urgent argument for regulation, and Senator Chris Murphy is already drafting legislation.
Jonathan Cohen stated, 'When there are wars, people are going to want to gamble on wars as sick and twisted and weird and sort of undemocratic as that might feel.'
Cohen gave an example of market manipulation: 'My bet on will Edson get punched in the face within the next week — all of a sudden I have the ability to manipulate that market if I were to come down to New York and punch you in the face and then I can make a bunch of money.'
Investors initially priced a quick regime change in Iran, similar to Venezuela, but Iranian resistance has proven more resilient than expected.
The tougher-than-expected Iranian resistance has forced a market repricing of oil and equity risk.
Brent crude oil prices broke through $85 a barrel for the first time since 2024 due to the conflict.
Robert Armstrong of the Financial Times describes the current conflict scenario as a 'slightly worse best case scenario.'
Investors still hope for a resolution within weeks, not months, but the distribution of possible outcomes has widened.
The 10-year Treasury yield spiked as traders priced in inflation risk from the conflict.
European equities, which are more gas-dependent than US equities, fell by 3%.
The energy shock from the conflict hits regions asymmetrically; US consumers face higher gas prices, while Europe and Asia face full-blown inflation crises.
The United States is insulated from oil supply shocks because it produces as much oil as it consumes.
Mark Zandi of Moody's Analytics notes that every sustained $10 increase in crude oil translates to roughly a 25-cent-per-gallon increase at American gas stations.
Zandi states that while higher gas prices are real money for lower-income US households, the shock is survivable domestically.
Europe and Asia face existential energy math because they consume energy they do not produce, leaving them with no hedge against supply shocks.
Matthew Martin of Semafor reports that attacks on Qatari gas facilities have sent European natural gas prices up 40%.
US natural gas prices, measured by Henry Hub, rose only 6% compared to Europe's 40% spike.
Germany's industrial base is highly dependent on natural gas, making it particularly vulnerable to price spikes.
South Korea's KOSPI index plunged 7% on fears of energy supply disruptions.
Mark Zandi warns that persistent oil price inflation could force stocks and bonds to move in positive correlation, both falling as yields rise on inflation fears.
This positive correlation between stocks and bonds would destroy the diversification that normally cushions investment portfolios.
Zandi describes a scenario where bonds cannot rise when stocks fall due to inflationary oil price shocks as a 'stagflationary trap.'
Zandi cites a potential prolonged closure of the Strait of Hormuz as an example of an event that could trigger such an inflationary oil shock.