A new academic study has found that Polymarket’s five-minute Bitcoin prediction contracts have created incentives for sophisticated traders to manipulate spot prices and make profits at the expense of ordinary participants.
Summary
- Stanford researchers link Polymarket’s five-minute Bitcoin markets to liquidation price manipulation.
- The study estimates that around $1.28 million passed from retail traders to sophisticated participants.
- Researchers say longer settlement times and better pricing methods could reduce the risk of manipulation.
According to researchers at Stanford University and Singapore Management University, Polymarket’s short-lived Bitcoin market structure encourages traders to influence the spot price of the cryptocurrency shortly before contracts are settled. His paper concluded that the problem arises from the way settlement prices are calculated rather than from the prediction markets themselves.
The researchers examined contracts that ask users to predict whether Bitcoin will end up above or below a fixed price in five minutes. Because liquidations are based on Chainlink prices based on the market price of Bitcoin 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 liquidation.
Settlement design creates opportunities for manipulation
After comparing market activity before and after Polymarket introduced these contracts in July 2024, the researchers identified a clear pattern in Bitcoin trading. According to the study, order flow in the spot market increased markedly near settlement, and prices often reversed shortly afterward, behavior that researchers say is consistent with manipulation of settlement prices.
The document estimated that the trading pattern diverted approximately $1.28 million from regular market participants to traders who exploited the settlement process during the period analyzed. Instead of describing prediction markets as fundamentally flawed, the researchers argued that contract design plays a central role in reducing the risks 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 possible ways to make futures contracts more resistant to manipulation.
Their findings extend beyond cryptocurrency markets. According to the document, 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 enter regulated financial markets.
Prediction markets continue to expand despite regulatory pressure
Even as researchers highlighted weaknesses in contract design, prediction markets have continued to attract record business activity. According to data from DefiLlama, Kalshi processed around $9.4 billion in trading volume during June, while Polymarket International recorded approximately $4.3 billion during the same period.
Much of that activity came from markets tied to the expanded 2026 FIFA World Cup. Data from Polymarket and Kalshi showed that their World Cup-winning contracts had generated more than $5.4 billion in combined trading volume at the time of writing, including around $4.25 billion on Polymarket and approximately 1.2 billion dollars in Kalshi.
At the same time, the rapid growth of the industry has attracted an increase regulatory attention in the United States. Several states have questioned the operations of companies like Kalshi and Polymarket this year, while the Commodity Futures Trading Commission has maintained that federally regulated event contracts fall under its exclusive jurisdiction and not under state gaming laws.
Now that those legal disputes are playing out in the federal court system, legal observers have said that conflicting appellate rulings could eventually require the U.S. Supreme Court to determine whether oversight of prediction markets belongs primarily to the states or the CFTC.
