A study by Stanford University and Singapore Management University has revealed that Polymarket's five-minute Bitcoin prediction contracts create incentives for sophisticated traders to manipulate spot prices, shifting an estimated $1.28 million from retail participants to manipulators. The researchers found that the settlement mechanism, which relies on Chainlink price feeds based on Bitcoin's market price at the end of each trading window, allows large position holders to push the price in their favor just before settlement.
Settlement Design Creates Manipulation Opportunities
The study compared market activity before and after Polymarket introduced these short-duration contracts in July 2024. It identified a clear pattern: spot-market order flow increased sharply near settlement, and prices frequently reversed soon afterward, consistent with settlement-price manipulation. The researchers estimated that this behavior redistributed roughly $1.28 million from regular traders to those exploiting the settlement process during the analyzed period.
Rather than condemning prediction markets as fundamentally flawed, the researchers emphasized that contract design is central to reducing manipulation risks. They found that extending contract duration from five minutes to 15 minutes largely eliminated the abnormal trading behavior. Alternative settlement methods, such as time-weighted average prices, were also suggested as ways to make future contracts more resistant to manipulation.
The findings extend beyond crypto markets. The paper noted that traditional exchanges like Nasdaq and Cboe have proposed event contracts linked to asset prices, making settlement methodology an increasingly important issue as similar products move into regulated financial markets.
Prediction Markets Expand Amid Regulatory Scrutiny
Despite the identified weaknesses, prediction markets continue to attract record trading activity. According to DefiLlama data, Kalshi processed about $9.4 billion in trading volume during June, while Polymarket International recorded roughly $4.3 billion over the same period. Much of that activity came from markets tied to the expanded 2026 FIFA World Cup, with combined trading volume exceeding $5.4 billion—about $4.25 billion on Polymarket and $1.2 billion on Kalshi.
The industry's rapid growth has drawn increased regulatory attention in the United States. Several states have challenged operations of companies including Kalshi and Polymarket this year, while the Commodity Futures Trading Commission maintains that federally regulated event contracts fall under its exclusive jurisdiction rather than state gambling laws. With legal disputes now moving through federal courts, conflicting appellate rulings could eventually require the US Supreme Court to determine whether oversight of prediction markets belongs primarily to states or the CFTC.