A new academic study has uncovered systematic settlement-price manipulation in Polymarket’s five-minute Bitcoin prediction markets, suggesting that the contract design allowed sophisticated traders to profit at the expense of everyday participants.
The paper, titled “Settlement Manipulation in Prediction Markets,” was authored by David Dai, Ruizhe Jia and Shihao Yu from Stanford University and Singapore Management University. It focused on binary contracts where users bet whether Bitcoin would finish above or below a fixed price within a five‑minute window, with payouts determined by Chainlink price feeds at settlement.
By analyzing trading activity before and after these contracts launched in July 2024, the researchers identified a clear pattern: spot-market order flow spiked sharply near settlement times and prices frequently reversed shortly afterward – behavior consistent with temporary price manipulation. Traders holding large positions, they argued, had a financial incentive to push Bitcoin’s spot price just enough to sway the contract outcome, earning more from the prediction-market payout than they lost on the spot trade.
The study estimates that approximately $1.28 million was transferred from regular market participants to sophisticated traders during the period examined. Importantly, the manipulation largely disappeared when the researchers examined fifteen‑minute Bitcoin contracts, indicating that the core issue was not prediction markets in general but the extremely short settlement windows.
To mitigate such risks, the authors suggest extending contract durations and adopting alternative settlement methods such as time‑weighted average prices (TWAP). Their findings carry wider significance as traditional exchanges like Nasdaq and Cboe propose event contracts linked to asset prices, making robust settlement design increasingly critical.
The report arrives as prediction markets boom. In June, Kalshi processed about $9.4 billion in volume and Polymarket International around $4.3 billion, with World Cup winner contracts alone generating over $5.4 billion. Meanwhile, regulatory tensions are rising – several U.S. states have challenged prediction‑market operators, and the CFTC asserts federal jurisdiction over such contracts, pointing to a potential Supreme Court showdown.
