A study from Stanford University and the Management University of Singapore indicated that the five-minute bitcoin forecast contract of Polymucket could allow traders with large warehouse positions to advance spot prices and profit from it in the short term before settlement. The study found that the problem arose mainly from the mode of calculation of settlement prices, rather than from forecasting the market itself.

There's been a significant increase in the availability of goods before settlement.

The study was concerned about a type of contract “if after 5 minutes bitcoin is higher than a fixed price”. The settlement of such products relies on Bitcoin price data provided by Chainlink. As the end result depends on the price at the end of the trade window, participants holding large positions may have the incentive to move spot prices in their favour as they approach settlement.

The team compared the market performance of Polymarket before and after entering into such contracts in July 2024, and found that the spot market in Bitcoin showed a more apparent anomaly before and after settlement: the pre-settlement order flow increased rapidly, and after settlement prices were often reversed. The study considers this phenomenon to be a feature of transactions consistent with settlement price manipulation.

  • The study estimates that during the analysis period approximately $12.8 million of the proceeds went from ordinary participants to more mature traders.
  • The object of the study is a five-minute-expired bitcoin-directive forecast contract.
  • Settlement price depends on the spot price at the end of the trade window

The problem is in contract design.

The paper did not define the forecast market as a whole as a failure mechanism. Researchers believe that the real decision to manipulate the risk is how the contract is settled. As long as the settlement points are too short and the price capture methods are too centralized, it may leave room for a small number of traders.

The study mentions that the extension of the contract from 5 to 15 minutes has significantly reduced unusual transactions. The team also suggested that time-weighted averages, for example, could be considered for settlement to reduce the impact of a single-point price being pushed short.

This means that if similar products continue to expand, the Platform will need to revisit the clearing window, the source of quotations and the method of costing, otherwise short-cycle contracts may continue to be detrimental to ordinary users.

The impact is beyond the encrypted forecast market.

The study notes that this issue is not related solely to encryption platforms. Settlement methods are becoming more critical as traditional trading venues, such as Nasdaq and Cboe, promote event contracts linked to asset prices. If similar products enter the regulated market, the ease of use of settlement designs may be the focus of audit.

At the same time, market transactions are projected to continue to grow. DefiLlama data show that Kalshi processed approximately $9.4 billion in transactions in June, and Polymarket International approximately $4.3 billion in the same period. The two platforms, the championship contracts associated with the 2026 World Cup, together traded over $5.4 billion.

Regulatory pressure in the United States is also rising. Since this year, many states have challenged the operations of platforms such as Kalshi and Polymarket. The United States Commission on Commodity Futures Trading, for its part, insisted that federally regulated incident contracts should be subject to its exclusive jurisdiction and not be dominated by state gambling laws. The dispute in question was heard by the Federal Court.