Researchers at Stanford University and Singapore Management University found that Polymarket's five-minute Bitcoin prediction markets create incentives for traders to manipulate spot prices around settlement. The study examined contracts introduced in July 2024 in which traders bet on whether Bitcoin's price would end above or below a predetermined level after five minutes. Because the contracts settle using Chainlink price feeds based on Bitcoin's price at the end of each trading window, traders have an incentive to influence the spot market immediately before settlement. The researchers estimated that the behavior transferred about $1.28 million from ordinary traders to manipulators during the sample period. The findings come as prediction markets posted record trading volumes in June, fueled by the expanded 2026 FIFA World Cup, while facing mounting legal scrutiny from US states and the Commodity Futures Trading Commission over jurisdictional authority.
Study Finds Sharp Order Flow Increases Before Settlement
Analyzing trading activity before and after Polymarket introduced the contracts in July 2024, the researchers found sharp increases in Bitcoin spot-market order flow just before settlement, followed by rapid price reversals, which were consistent with settlement-price manipulation. The study examined contracts in which traders bet on whether Bitcoin's price would end above or below a predetermined level after five minutes.
Researchers Propose Longer Settlement Windows as Solution
The study estimated extending contract durations from five minutes to 15 minutes largely eliminated the effect. The researchers said the results do not indicate prediction markets are inherently vulnerable to manipulation, arguing instead that settlement design can reduce the risk. They pointed to longer settlement windows and alternative pricing methods, such as time-weighted average prices, as potential solutions. 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.
World Cup Drives Prediction Market Volumes to Record Levels in June
Prediction markets posted record trading volumes in June as the expanded 2026 FIFA World Cup fueled activity across the sector. 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, with Polymarket processing about $4.25 billion and Kalshi about $1.2 billion, according to data from the two platforms.
US States and CFTC Dispute Jurisdictional Authority
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 the 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.
FAQ
How did traders manipulate Polymarket's five-minute Bitcoin contracts?
Traders influenced Bitcoin spot prices immediately before the five-minute settlement window ended. The study found sharp increases in spot-market order flow just before settlement, followed by rapid price reversals, transferring about $1.28 million from ordinary traders to manipulators during the sample period.
What solutions did the Stanford researchers propose to prevent manipulation?
The researchers found that extending contract durations from five minutes to 15 minutes largely eliminated the manipulation effect. They also pointed to alternative pricing methods, such as time-weighted average prices, as potential solutions to reduce the risk of settlement-price manipulation.
