A new academic study has flagged a design flaw in Polymarket’s ultra-short Bitcoin prediction contracts that appears to have rewarded sophisticated traders who nudged Bitcoin’s spot price just before settlement — at the expense of ordinary participants.
Researchers from Stanford University and Singapore Management University analyzed Polymarket contracts that asked users to predict whether Bitcoin would finish above or below a fixed price within five minutes. Because those contracts settle using Chainlink’s price feed — which samples Bitcoin’s spot market at the end of each five-minute window — traders with large positions had a clear motive to push the spot price in a favorable direction right before settlement. Comparing trading activity before and after Polymarket rolled out these five-minute contracts in July 2024, the team found a distinct pattern: a surge in spot-market order flow immediately ahead of settlement, followed by frequent price reversals soon after. The researchers say that pattern is consistent with manipulation of settlement prices.
Quantifying the impact, the paper estimates roughly $1.28 million was shifted from regular market participants to traders who exploited the settlement mechanism during the study period. Importantly, the authors do not condemn prediction markets wholesale; they argue the root issue lies in contract design and the chosen settlement method rather than in prediction markets themselves.
The study tested fixes. Extending contract duration from five minutes to 15 minutes largely eliminated the abnormal pre-settlement trading behavior, and the researchers also recommended alternative settlement approaches — for example, time-weighted average prices (TWAPs) — to make contracts harder to game.
These findings carry implications beyond crypto. Traditional exchanges such as Nasdaq and Cboe have proposed event-linked contracts tied to asset prices, meaning settlement methodology will be a critical design and regulatory question as similar products enter regulated financial markets.
The debate over prediction markets is happening amid booming activity. DefiLlama data cited in the study shows Kalshi processed about $9.4 billion in trading volume in June, while Polymarket International recorded roughly $4.3 billion for the same month. Much of that activity has centered on 2026 FIFA World Cup markets: combined World Cup winner contracts had generated more than $5.4 billion in volume at the time of writing (about $4.25 billion on Polymarket and roughly $1.2 billion on Kalshi).
That growth has attracted regulatory scrutiny in the U.S. Several states have challenged firms such as Kalshi and Polymarket, while the Commodity Futures Trading Commission maintains that federally regulated event contracts fall under its exclusive jurisdiction rather than state gambling laws. Those legal battles are now working their way through the federal court system, and legal observers say conflicting appellate rulings could eventually force the U.S. Supreme Court to decide whether oversight of prediction markets rests primarily with the states or with the CFTC.
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