Researchers from Stanford University and the Singapore Management University found that Polymarket’s five-minute Bitcoin prediction markets encourage traders to manipulate spot prices around settlement, allowing sophisticated participants to make profits at the expense of retail traders.

The test examined contracts in which investors 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 the price of Bitcoin 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 launched contracts in July 2024, researchers found a spike in order flow in the Bitcoin spot market just before settlement, followed by rapid price movements, consistent with settlement price manipulation.

The study estimated that this behavior transferred approximately $1.28 million from ordinary traders to manipulators over the sample period. The researchers found that increasing the contract duration from five to 15 minutes largely eliminated this effect.

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The researchers said the results do not indicate that prediction markets are inherently susceptible to manipulation, arguing instead that settlement design can reduce risk. They pointed to longer settlement windows and alternative pricing methods such as time-weighted average pricing as potential solutions.

The discoveries may extend beyond cryptocurrencies. The article notes that classic exchanges, including Nasdaq and Cboe, have proposed contracts for asset price-linked events, making contract design an increasingly significant factor as forecast markets expand into regulated financial markets.

The World Cup is driving the growth of the prediction market

Forecast markets recorded record trading volumes in June as the expanded 2026 FIFA World Cup spurred activity across the sector. According to DefiLlama data, Kalshi handled trading volume of about $9.4 billion during the month, while Polymarket International handled about $4.3 billion.

Since then, the World Cup winners’ markets on the platforms have generated over $5.4 billion in total trading volume, with Polymarket processing approximately $4.25 billion and Kalshi approximately $1.2 billion at the time of writing, according to both platforms.

The World Cup winner places bets on Polymarket. Source: Polimarket

The sector’s growth has coincided with increasing legal scrutiny. Several U.S. states, including Kalshi and Polymarket, issued a challenge to the companies this year, while the Commodity Futures Trading Commission argued that federally regulated event contracts fell under its “exclusive jurisdiction” rather than state gambling laws.

The dispute is currently pending in federal courts, and legal observers say conflicting appellate rulings could ultimately force the U.S. Supreme Court to decide whether states or the CFTC have primary authority over prediction markets.

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