- A new study has found that Bitcoin’s short-term prediction markets may be fostering price manipulation.
- The largest players profit at the expense of small investors, especially just before the contracts are settled.
- Extending the settlement time can significantly reduce this problem.
Researchers from Stanford University and Singapore Management University have concluded that Bitcoin’s five-minute prediction markets on Polymarket may create incentives to manipulate the spot price just before contracts settle. This market structure allows more advanced participants to make profits at the expense of less experienced investors.
Polymarket allows for manipulation?
The study focused on contracts in which players bet on whether the price of bitcoin will be above or below a certain level after five minutes. Since settlement takes place based on price data provided by Chainlink precisely at the end of this short time window, there is an incentive to influence the market just before it closes.
An analysis of trading activity before and after the launch of these contracts in July 2024 showed a marked increase in the number of orders on the spot market immediately before settlement. Importantly, after its end, prices quickly returned to previous levels, which, according to researchers, is a signal of potential manipulation. It is estimated that during the analyzed period, such activities led to the transfer of approximately USD 1.28 million from ordinary users to more advanced traders. At the same time, researchers noted that increasing the duration of contracts from five to fifteen minutes virtually eliminated this effect.
The conclusions from the analysis are important not only for cryptocurrency users, but also for the entire financial sector. They show that the way settlement mechanisms are designed can directly affect market fairness. Appropriate changes – such as longer time windows or the use of average prices rather than a single reference point – can reduce the risk of fraud and increase investor confidence.
The authors emphasize, however, that prediction markets themselves are not inherently susceptible to manipulation. Their design is crucial. They point to possible solutions, such as using a time-weighted average price or extending the settlement period.
The conclusions from the study may also be applicable outside the cryptocurrency market. Traditional exchanges such as Nasdaq and Cboe are considering introducing contracts based on events linked to asset prices. Therefore, the design of such instruments is becoming increasingly important.
The World Cup drives the prediction market
Prediction markets recorded record turnover in June, which was due to, among others, with growing interest in the 2026 FIFA World Cup. DefiLlama data indicates that the Kalshi platform achieved approximately USD 9.4 billion in trading volume during this period, while Polymarket International achieved approximately USD 4.3 billion.
Bets on the winner of the World Cup alone generated a total turnover of over USD 5.4 billion. Of this, approximately $4.25 billion was accounted for by Polymarket and $1.2 billion by Kalshi.
