Author: Polyfactual
Compiled by Hu Tao, ChainCatcher
New Information Laundering in Prediction Markets: How Secrets Are Integrated into Investment Signals
In late February 2026, four anonymous wallets appeared on the Polymarket platform. These wallets had been created only days earlier and appeared remarkably confident. Over the following weeks, they placed more than 80 bets on specific mechanisms of a potential war between the U.S. and Iran, the timing of a first strike, the ousting of Iran’s Supreme Leader, and the announcement of a ceasefire. When Bubblemaps finally mapped this cluster of bets and linked the original four wallets to five additional ones, it was revealed that these nine connected accounts collectively won over $2.4 million in payouts, achieving an astonishing 98% win rate—even on many bets with low odds.
Now, this phenomenon has a name—or at least a category: information laundering. To understand why it is so destructive, one must first understand the nature of predicting market prices, because the mechanisms that make these markets function are the same ones that make them vulnerable to exploitation.
Setting aside the crypto wrapper, PM contracts are actually very simple. Each share pays $1 if the prediction is correct and nothing if it’s wrong. Since every binary question has only two possible outcomes, one "yes" share plus one "no" share always equals $1. Therefore, a "yes" share priced at $0.36 indicates the market believes there is a 36% probability the prediction will be correct.
Crucially, Polymarket does not set these prices—they originate from a trader order book (CLOB). Prices are determined by supply and demand between traders, and the displayed price sits at the midpoint of the bid-ask spread. This may be its brilliance. Under this model, prices are not opinions from bookmakers, but the collective expectations of all traders in the order book. When new information emerges—such as a strong jobs report or below-consensus CPI data—traders reprice, and the price adjusts accordingly. In effect, the market becomes a continuously updated probability estimate, and financial institutions are willing to pay for it. Organizations like Bloomberg, Reuters, and hedge funds now purchase real-time access to Polymarket’s data feed, viewing it as a faster indicator of market sentiment than traditional polls.
However, the trap is that a system designed to turn information into price cannot distinguish between public information and stolen information. The order book does not ask where your advantage comes from—it simply records what you bought.
At this point, the term “money laundering” is perfectly apt. In traditional money laundering, dirty cash flows in at one end, and clean, untraceable cash emerges at the other. In information laundering, confidential information flows in at one end, and market prices emerge at the other—untainted and free of any trace.
For example, suppose someone knows a strike will occur in 48 hours, and the market currently prices it at 15%. Their buying pressure will absorb all sell orders on the order book, pushing the mid-price higher—say, the contract price rises to 35%. To others, this appears as a routine repricing, as if a trader had made an accurate geopolitical call. The secret is cleverly disguised as a clear signal. When the strike happens, the YES contract price will rise to $1. A position bought at around $0.15 yields a return of approximately 6.7 times. The Maduro case months ago clearly demonstrated this scale: prosecutors alleged that this army sergeant turned a $34,000 bet into roughly $400,000.
The money laundering analogy also applies to obscuring the truth. Bubblemaps found that the Iranian criminal group’s losses were extremely small—only a few hundred dollars—and the company believes these losses were intentionally created to mislead investigators. A 98% win rate seems extraordinary, but a 98% win rate combined with trivial, deliberately incurred losses looks almost like that of an exceptionally skilled trader.
Yet, ironically, these markets are more transparent than traditional exchanges. Even though account holders remain anonymous, every transaction is at least recorded on a public system. It is this openness that enables analysts to use tools like Bubblemaps to reconstruct a conspiracy involving nine wallets, based on temporal patterns and trading volume—such as transactions recorded days before the market movement on February 28.
But the same transparency also introduces a secondary risk that deeply concerns regulators. If external analysts can decipher that a coordinated group is heavily betting on an attack, so too can adversarial actors. Adversarial observers can detect anomalous transactions and use them to formulate war plans and predict market movements. Abnormal surges in certain war markets serve as a low-cost, deniable source of intelligence for anyone monitoring the chain. The launderers cleanse their own information, but as a byproduct, they disseminate the original secret in abstract form to the entire world.
Why can't current laws simply cover this situation? Because traditional insider trading rules were designed around stocks, material non-public information related to companies—such as earnings, mergers, and executive disclosures—not around the timing of military operations. Wars have no "issuer," and legally, there are no corporate insiders.
Geographic factors within jurisdictions have exacerbated this issue. U.S. federal law prohibits prediction markets from offering bets on war or assassination, but bets on Maduro were placed on Polymarket’s offshore website, which is not subject to these restrictions. Moreover, the barrier to entry is laughably low—users can easily bypass U.S. bans with a VPN costing just about $2 per month. A KYC-verified account is also available for purchase. Nevertheless, Washington has finally taken notice. On May 22, the House Oversight Committee launched a formal investigation into prediction markets, demanding records on how they verify identities, enforce geographic restrictions, and handle suspicious transactions related to Venezuela and Iran. Proposed legislation, the Death Bet Act and the Financial Prediction Markets Public Integrity Act, aims to ban war bets and prohibit officials from trading using nonpublic information.
The harsh reality is that information laundering is not an artificial vulnerability created in markets, but a side effect of their core operating mechanism. A market that perfectly transforms knowledge into prices inherently rewards those with the best information—including those who should not have access to it. This loophole cannot be fully closed without weakening the very mechanisms that make these markets more accurate than polls.
As the industry looks to the future, even if only 1-2% of derivatives traders adopt these tools, annual trading volume could reach $50 billion. The question is no longer whether the market is effective, but whether it is too effective. The issue is whether a society can tolerate a machine that transforms society’s most closely guarded secrets into publicly quoted, tradable digital assets—and pays substantial rewards to those who hold them.
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