A new academic study found that Polymarket’s five-minute Bitcoin prediction contracts created incentives for sophisticated traders to manipulate prices and profits at the expense of ordinary participants.
Summary
- Stanford researchers link Polymarket’s five-minute Bitcoin markets to price manipulation.
- The study estimates about 1.28 million dollars changed from wholesalers to sophisticated participants.
- Researchers say longer dwell windows and improved pricing methods can reduce the risk of fraud.
According to researchers from Stanford University and Singapore Management University, Polymarket’s short-term Bitcoin market structure encourages traders to influence the spot price of the cryptocurrency just before the contracts settle. Their paper concludes that the problem stems from the way settlement rates are calculated rather than from predicting the markets themselves.
The researchers tested contracts that ask users to predict whether Bitcoin will end above or below a predetermined price within five minutes. Because settlements rely on Chainlink price feeds based on the Bitcoin market price at the end of each trading window, traders with large positions may have an incentive to push the spot price favorably just before settlement.
Residential design creates opportunities for deception
After comparing market activity before and after Polymarket launched these contracts in July 2024, researchers identified a clear pattern in Bitcoin trading. According to the study, order flow in the real estate market spikes near settlement, and prices tend to be reversed soon after, behavior that researchers say is consistent with price manipulation.
The paper estimates that the trading pattern has changed by approximately 1.28 million dollars from regular market participants to traders who have exploited the settlement process during the period under review. Instead of describing prediction markets as fundamentally flawed, researchers argue that contract structure plays an important role in reducing the risks of manipulation.
Among the changes discussed in the study, extending the contract period from five minutes to 15 minutes has largely eliminated abnormal trading behavior. Researchers have also pointed to other settlement methods, including time-weighted averages, as possible ways to make futures contracts more resistant to manipulation.
Their findings extend beyond cryptocurrency markets. According to this paper, traditional exchanges such as Nasdaq and Cboe have proposed contracts for events linked to commodity prices, making the method of payment a more important issue as similar products enter regulated financial markets.
Prediction markets continue to grow despite regulatory pressure
Even as researchers highlighted weaknesses in contract design, prediction markets continued to attract record trading activity. According to DefiLlama data, Kalshi processed about 9.4 billion dollars in trading volume in June, while Polymarket International recorded about 4.3 billion dollars in the same period.
Much of that activity has come from markets linked to the extended 2026 FIFA World Cup. Data from Polymarket and Kalshi showed that their World Cup winning contracts generated more than $5.4 billion in combined trading volume at the time of writing, including about $4.25 billion for Polymarket and $1.2 billion for Kalshi.
At the same time, the rapid growth of the industry has attracted increasing regulatory attention in the United States. Several states have challenged the operations of companies including Kalshi and Polymarket this year, while the Commodity Futures Trading Commission has maintained that contracts for state-regulated events fall under its special jurisdiction over state gambling laws.
As those legal disputes continue through the federal court system, legal observers said conflicting appellate decisions could eventually require the US Supreme Court to decide whether oversight of prediction markets belongs to states or the CFTC.
