Researchers from Stanford University and Singapore Management University have identified a structural vulnerability in Polymarket's 5-minute Bitcoin prediction market, estimating that approximately $1.28 million (about 1.9 billion won) was transferred from ordinary investors to manipulators during the sample period. The short expiry combined with the price feed mechanism creates an environment where skilled participants can profit by influencing the spot price just before settlement.
Settlement Design Flaw
The study analyzed trading flows after Polymarket introduced the contract in July 2024. It found that order flow in the Bitcoin (BTC) spot market surged just before settlement, followed by a rapid price reversal — a pattern consistent with attempts to move the price at the settlement point. The contract uses a Chainlink (LINK) price feed to determine the winner based on the Bitcoin price at the last moment of a 5-minute window.
When the researchers extended the contract expiry from 5 minutes to 15 minutes, the manipulative effect mostly disappeared. This indicates that the vulnerability lies not in prediction markets per se, but in the settlement design. Alternatives such as longer settlement windows or time-weighted average price (TWAP) calculations could make price-swaying strategies far more difficult.
Broader Implications
The findings have relevance beyond crypto markets. Nasdaq and Cboe have explored event contracts tied to asset prices, and as prediction markets expand into regulated territory, contract structure becomes increasingly important. Meanwhile, prediction market volumes surged in June 2025 driven by the 2026 FIFA World Cup. According to DeFiLlama, Kalshi processed about $9.4 billion and Polymarket International about $4.3 billion in volume, with World Cup winner markets alone exceeding $5.4 billion across both platforms.
Legal challenges are also intensifying. Several US states have raised issues against Kalshi and Polymarket this year, while the CFTC argues that federally regulated event contracts override state gambling laws. The dispute has moved to federal court, and the upcoming ruling could set a precedent for jurisdiction over prediction markets. The research ultimately underscores that how settlement is designed matters more than how easily prices can be swayed, as Bitcoin-based short-term contracts proliferate.