Researchers from Stanford University and the Singapore Management University found that Polymarket’s five-minute Bitcoin prediction markets incentivize traders to manipulate spot prices around settlement, allowing sophisticated participants to profit at the expense of retail traders.
THE study looked at contracts in which traders bet on whether the price of Bitcoin would finish above or below a predetermined level after five minutes. Since contracts are settled using Chainlink price feeds based on the Bitcoin price at the end of each trading window, traders have an incentive to influence the spot market immediately before settlement.
Analyzing trading activity before and after Polymarket introduced the contracts in July 2024, the researchers found large increases in order flow in the Bitcoin spot market just before settlement, followed by rapid price reversals, which were consistent with settlement price manipulation.
The study estimates that this behavior transferred approximately $1.28 million from ordinary traders to manipulators during the sample period. The researchers said extending contract lengths from five minutes to 15 minutes largely eliminated this effect.
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The researchers said the results do not indicate that prediction markets are inherently vulnerable to manipulation, instead arguing that regulation design can reduce risk. They cited longer settlement times and alternative pricing methods, such as time-weighted average prices, as potential solutions.
The results could extend beyond cryptography. The paper notes that traditional exchanges, including Nasdaq and Cboe, have offered event-driven contracts tied to asset prices, making contract design an increasingly important consideration as prediction markets expand in regulated financial markets.
World Cup fuels prediction market growth
Prediction markets saw record trading volumes in June as the expansion of the 2026 FIFA World Cup fueled activity across the sector. According to data from DefiLlama, Kalshi processed around $9.4 billion in trading volume during the month, while Polymarket International processed around $4.3 billion.
The Platform World Cup winning marketplaces have since generated over $5.4 billion in combined trading volume, with Polymarket processing approximately $4.25 billion and Kalchi around $1.2 billion, according to data from both platforms at the time of writing.
The World Cup winner bets on Polymarket. Source: Polymarket
The growth of the sector has coincided with increasing legal scrutiny. Several US states have challenged companies, including Kalshi and Polymarket, this year, while the Commodity Futures Trading Commission has argued that federally regulated event contracts fall under its “exclusive jurisdiction” rather than state gambling laws.
The dispute is now before the federal courts, and legal observers have said conflicting appellate rulings could eventually prompt the U.S. Supreme Court to decide whether states or the CFTC have primary authority over prediction markets.
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