A study from Stanford University and Singapore Management University has found that Polymarket's five-minute Bitcoin prediction markets create incentives for traders to manipulate spot prices around contract settlement, enabling sophisticated participants to profit at the expense of retail traders. The research examined contracts where traders bet on whether Bitcoin's price would end above or below a predetermined level after five minutes, settling via Chainlink price feeds.
Settlement window manipulation
The study analyzed trading activity before and after Polymarket introduced the contracts in July 2024. Researchers observed sharp increases in Bitcoin spot-market order flow just before settlement, followed by rapid price reversals, consistent with settlement-price manipulation. They estimated that this behavior transferred about $1.28 million from ordinary traders to manipulators during the sample period.
Extending contract durations from five minutes to 15 minutes largely eliminated the effect, the researchers said. They argued that the results do not indicate prediction markets are inherently vulnerable to manipulation, but rather that settlement design can reduce the risk. Potential solutions include longer settlement windows and alternative pricing methods such as time-weighted average prices.
The findings could extend beyond crypto. The paper notes that traditional exchanges, including Nasdaq and Cboe, have proposed event contracts tied to asset prices, making contract design an increasingly important consideration as prediction markets expand into regulated financial markets.
Prediction market growth and legal scrutiny
Prediction markets posted record trading volumes in June as the expanded 2026 FIFA World Cup fueled activity. According to DefiLlama data, Kalshi processed about $9.4 billion in trading volume during the month, while Polymarket International handled roughly $4.3 billion. The platforms' World Cup winner markets have since generated more than $5.4 billion in combined trading volume.
The sector's growth has coincided with mounting 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 moving through federal courts, and legal observers have said conflicting appellate rulings could eventually prompt the US Supreme Court to decide whether states or the CFTC have primary authority over prediction markets.