When the world's at stake,
go beyond the headlines.

When the United States and Israel struck Iran’s nuclear facilities in June last year, the operation caught many observers off guard — the planning was tightly concealed. By contrast, when Operation Epic Fury started in the early hours of Feb. 28, much of the world was staying up refreshing their screens, waiting for it to begin. Open source analysts tracked the usual indicators of escalation: satellite imagery, repositioning of carrier strike groups, and cryptic statements from officials. Intelligence agencies monitored missile deployments, while journalists quoted inside sources. Energy markets reacted to every rumor.

Amid this flood of signals, one stood out: Traders were placing real money on when the strike would begin, and whether it would happen at all.

Prediction platforms such as Polymarket now host multimillion-dollar markets on geopolitical events. Prior to Operation Epic Fury, thousands placed bets on whether Israel would strike Iranian nuclear facilities or if the United States would directly intervene. These markets produce constantly updating probabilities — numbers that journalists, analysts, and even policymakers increasingly cite as leading indicators of what informed observers believe will happen.

Most people assume these prices are forecasts. But in geopolitical crises, prediction markets are no longer merely forecasting tools. They are beginning to influence the bargaining process itself. This happens in two ways. First, states or state-aligned actors could deliberately move markets to create the appearance of insider knowledge, turning financial trades into signals of hidden intent. Second, even without manipulation, market probabilities can shape expectations among journalists, investors, and governments, subtly steering the dynamics of crisis escalation. Prediction markets therefore function not just as predictors of war, but as potential instruments within the signaling environment that precedes it.

While markets tied to military operations can incentivize insider trading and distort decision-making, even perfectly regulated markets would still reshape crisis dynamics. The issue is not only corruption. It is that market movements can be interpreted as credible signals of hidden intent — and potentially deployed as such. The result is a feedback loop in which market prices can both reflect expectations and actively shape them.

For decades, international relations scholars have argued that credibility in crises requires costs. When a state wants to demonstrate resolve, it must take actions that would be painful to reverse: mobilizing troops, moving aircraft carriers, evacuating embassies, or imposing sanctions. It is precisely because those actions are expensive, they help convince adversaries that a threat is real.

Political scientist James Fearon distinguished between two forms of costly signaling: Leaders can “tie their hands,” creating political penalties if they back down, or they can incur sunk costs, expending resources upfront to demonstrate seriousness. Mobilizing forces or deploying assets are classic examples.

Prediction markets create a digital version of this logic, but with an important twist. Imagine an anonymous trader suddenly purchases millions of dollars’ worth of contracts predicting an Israeli strike. Within hours, the market probability jumps from 25 to 60 percent. Financial media declares that “markets now expect war.” Analysts cite the surge as evidence that insiders anticipate escalation. Iranian intelligence officials notice the spike.

No one knows who placed the trades. That uncertainty is exactly what gives the signal power.

Governments cannot appear to openly gamble on prediction markets. The buyer might plausibly be someone with privileged information: a defense contractor executive, a politically connected investor, or an official with knowledge of classified deliberations. To outside observers — including Iranian decision-makers — the trade could look like a leak expressed through money. The wager appears to reveal insider knowledge and because real money is at risk, the signal seems credible.

This is where deception enters the picture. A state could quietly encourage proxies, aligned financiers, or intelligence intermediaries to move prediction markets in ways that mimic insider trading. The goal would not be to profit financially but to manipulate expectations. In principle, a government could secretly and anonymously place the bet itself. A $3 million wager that the United States will strike is far cheaper than mobilizing forces and may generate similar psychological effects at a fraction of the cost.

From Tehran’s perspective, the signal would be deeply ambiguous. Iranian leaders would not know whether the price surge reflects genuine private information about imminent military action or a strategic attempt to influence their beliefs. Ignoring the signal could be risky. If the trade truly came from someone with inside knowledge, dismissing it could lead to catastrophic miscalculation. That ambiguity is precisely what makes the signal effective.

In a crisis environment already saturated with uncertainty, prediction markets can look like windows into hidden information. A sudden surge in the perceived probability of war may appear to confirm rumors circulating within intelligence channels. It may suggest that people close to decision-makers are betting their own money on what they know is coming.

Even setting aside corruption risks, prediction markets reshape the logic of costly signaling itself. They introduce a form of low-cost, plausibly deniable signaling into crisis bargaining. Mobilizing a carrier strike group costs in the hundreds of millions of dollars and weeks of preparation. Moving a thinly traded geopolitical market might require only a few million dollars, a trivial amount for a state actor.

The psychological impact could be enormous. Prediction markets are assumed to aggregate dispersed information, so any spike in price looks like a collective judgment rather than the action of a single actor. Observers assume that many independent traders have updated their beliefs simultaneously. In reality, a single actor with deep pockets could be responsible.

This dynamic makes prediction markets uniquely suited to deception. Unlike official statements, which are easily dismissed as propaganda, market prices appear to emerge organically from decentralized actors risking real money. They look like information discovered by the crowd. That illusion can shape strategic perceptions.

In many cases, signals could influence how leaders interpret the intentions of state actors and their allies. If markets suddenly imply that a strike is highly likely, adversarial planners might infer that decision-makers have already moved closer to action. They may accelerate defensive preparations, disperse assets, or reconsider escalation. In that sense, the market becomes part of the bargaining process.

This strategy also carries risks. Prediction markets do not merely reflect expectations — they amplify them. Once journalists report that markets assign a high probability to war, those numbers begin circulating across financial media, intelligence briefings, and political commentary. What initially appeared to be a signal about hidden information can quickly become a widely shared expectation about future action.

This dynamic creates the possibility of strategic blowback. A state that manipulates markets to signal resolve may unintentionally generate expectations that constrain its own freedom of action. If markets suddenly imply that a strike is highly likely, backing down later could appear as weakness not only to adversaries but also to domestic audiences watching the same numbers. In effect, a cheap signal designed to shape an adversary’s beliefs can create a new form of audience cost.

The result resembles a classic commitment trap. If markets coordinate expectations around a particular outcome, then political leaders may face pressure to behave consistently with those expectations, even if their strategic calculus changes. A deception intended to influence bargaining can therefore narrow the manipulator’s own options, accelerating escalation rather than deterring it.

U.S. regulators already possess authority to intervene in these markets. Under Commodity Futures Trading Commission Title 17,  Section 40.11, contracts involving terrorism, assassination, or war are prohibited if they are deemed contrary to the public interest. Yet enforcement remains weak as prediction platforms grow in scale and political relevance. Recent legislative efforts led by Sens. Chris Murphy and Catherine Cortez Masto seek to tighten oversight of event-based contracts tied to geopolitical crises, while Sen. Jeff Merkley proposed a ban for government officials. The debate highlights a deeper issue: Even if regulators eliminate insider trading or corruption, the strategic signaling effects of these markets would remain.

Prediction markets were created to forecast the future but in geopolitics, forecasts can shape behavior as much as they predict it. As these platforms grow and liquidity deepens, they will become increasingly visible to governments, intelligence agencies, and adversaries.

Once states realize they can use markets to send deceptive signals about insider knowledge, prediction platforms will become a new arena of strategic competition. By the time officials determine who moved the market, the strategic consequences may already be locked in.

Current global crises still revolve around missiles, centrifuges, and aircraft carriers. However the first signal of escalation might not come from a radar screen. It might come from a sudden spike in the odds.

Jonathan Walberg is the associate director of Taiwan Security Monitor and a wargaming fellow for the Center for Security Policy Studies. He is a Ph.D. student at the University of Virginia studying political science and psychology, exploring the role of emotions and information in narratives.

Image: Midjourney