- Stanford researchers found signs of manipulation in Polymarket’s five-minute Bitcoin markets.
- Suspected traders earned an estimated $8.2 million from the activity.
- Longer settlements and average-price methods could reduce manipulation risks.
Prediction markets keep drawing more traders from around the world. The new studies by scholars have revealed that there might be specific contractual designs. These would inadvertently favour such strategic behaviour of market participants. Scholars from Stanford University and Singapore Management University studied five-minute Bitcoin prediction contracts traded on Polymarket. They found anomalies that did not seem to correspond to normal trading behavior.
Researchers Study Trading Trends around Settlement
The study analysed approximately 16,000 five-minute Bitcoin contracts launched within two months of their market entry. Researchers noted sudden directional trading spikes on Binance shortly before contract settlement, followed by abrupt price retracements right after, repeatedly.
The trends appeared strongest when contracts remained evenly divided, giving traders with large positions stronger incentives to trade before settlement. Researchers tracked the trading volumes of the settlement period, which averaged 3.9x higher than usual in the case of contracts with strong signals of a possible manipulation attempt.
Overnights and weekends had higher concentration due to low liquidity, which made small transactions affect the prices of Bitcoin more efficiently, at least for some time. The researchers estimated that the total profit of the suspected manipulators was around $8.2 million, although some sources used different calculations. Researchers emphasized that the evidence remained purely circumstantial.
Longer Settlement Windows Make Price Manipulation Less Effective
Researchers found that most suspicious trading activity disappeared after contract durations increased from five minutes to fifteen minutes. This made price manipulation much less efficient since it was necessary to create an artificial market movement over an extended period of time, which increased costs.
Researchers proposed using time-weighted average price (TWAP) settlement to reduce opportunities for market manipulation at a single point in time. Polymarket admitted that no price manipulations have been seen but agreed to implement an averaging-based settlement process for some markets within a year.
Binance said that it has monitoring and anti-manipulation software installed on its platform, but stressed that the settlement process is decided by other platforms which operate outside the exchange. It was pointed out that similar vulnerabilities might be observed even outside cryptocurrency since prediction markets spread into traditional financial assets.;
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