A new academic study found that Polymarket’s five-minute Bitcoin prediction contracts created incentives for sophisticated traders to manipulate spot prices and profit at the expense of ordinary participants.
summary
- Stanford University researchers link Polymarket’s five-minute Bitcoin markets to settlement price manipulation.
- The study estimates that about $1.28 million was transferred from retail traders to sophisticated participants.
- Researchers say longer settlement periods and improved pricing methods could reduce the risk of manipulation.
According to researchers from Stanford University and Singapore Management University, the structure of short-term Bitcoin markets at Polymarket encourages traders to influence the spot price of the cryptocurrency shortly before contracts are settled. they paper He concluded that the problem stems from the way settlement prices are calculated and not from the prediction markets themselves.
The researchers examined contracts that ask users to predict whether Bitcoin will finish above or below a fixed price within five minutes. Since settlements are based on Chainlink price feeds based on the Bitcoin market price at the end of each trading window, traders holding large positions may have an incentive to push the spot price in a favorable direction just before settlement.
The design of settlements creates opportunities for manipulation
After comparing market activity before and after Polymarket introduced these contracts in July 2024, researchers identified a clear pattern in Bitcoin trading. According to the study, spot market order flow increased sharply near settlement, and prices often reversed soon after, behavior that the researchers said was consistent with manipulation of settlement prices.
The newspaper estimated that the trading pattern had shifted by about $1.28 million from regular market participants to traders who took advantage of the settlement process during the period analyzed. Rather than describing prediction markets as fundamentally flawed, the researchers argued that contract design plays a central role in reducing the risk of manipulation.
Among the changes discussed in the study, extending the contract duration from five minutes to 15 minutes largely eliminated abnormal trading behavior. The researchers also pointed to alternative settlement methods, including time-weighted average prices, as potential ways to make futures contracts more resistant to manipulation.
Their findings extend beyond cryptocurrency markets. According to the newspaper, traditional exchanges such as Nasdaq and Cboe have proposed event contracts linked to asset prices, making settlement methodology an increasingly important issue as similar products move into regulated financial markets.
Prediction markets continue to expand despite regulatory pressures
Even as researchers highlighted weaknesses in contract design, prediction markets continued to attract investors Trading activity log. According to DefiLlama data, Kalshi processed approximately $9.4 billion in trading volume during June, while Polymarket International recorded approximately $4.3 billion during the same period.
Much of this activity came from markets linked to the expanded 2026 FIFA World Cup. Data from Polymarket and Kalshi showed that World Cup winning contracts had generated more than $5.4 billion in combined trading volume at the time of writing, including about $4.25 billion in Polymarket and Kalshi. About $1.2 billion On the same page.
At the same time, the rapid growth of this industry has increased Organizational interest In the United States. Several states have challenged the operations of companies including Calci and Polymarket this year, while the Commodity Futures Trading Commission has asserted that federally regulated event contracts fall under its exclusive jurisdiction rather than state gambling laws.
With those legal disputes now moving through the federal court system, legal observers said the conflicting appellate rulings may eventually require the U.S. Supreme Court to decide whether oversight of prediction markets belongs primarily to the states or to the Commodity Futures Trading Commission (CFTC).
