A study from Stanford University and the Singapore University of Management indicated that the five-minute bitcoin forecast market in Polymarket left room for short-term spot price pulls as settlements rely on single-point prices at maturity. The study found that the problem was not to predict the market itself, but that the design of the contract magnified the manipulation motive.

Settlement as a source of risk

Such contracts only determine whether the price of a bitcoin is higher or lower than a certain level in five minutes, and the final result is determined by the due price of Chainlink. As long as people are able to push spot prices for short periods of time before settlement, they may change the contract.

The team traced Polymarket ' s transaction data from the launch of the relevant product in July 2024 and found a more consistent pattern of anomalies before and after the settlement.

  • A few minutes before the settlement, the spot market order flow became significantly larger.
  • Prices are fast moving in a single direction.
  • Soon after the settlement, the price quickly withdrew.

According to the study, this trend of “near-settlement pull, quick reverse after settlement” is consistent with typical settlement price manipulation features. The associated fluctuations are not random noise, but rather short-term behaviour with clear directions and points of time.

Ordinary traders bear the cost.

The paper estimated that during the sample period, such acts resulted in the transfer of approximately $12.8 million from common traders to manipulators. Those who are familiar with the settlement mechanism can profit by affecting spot prices at the last point of time, while those who are not aware of this structural flaw are at a disadvantage.

The study also noted that the costs of moving spot prices closer to maturity may be lower than the contractual benefits that flow from this, provided the size of the warehouse is large enough. This makes the single point settlement price itself a target that can be targeted.

Longer cycles can significantly mitigate

The researchers tested the contract period from 5 minutes to 15 minutes, and the manipulation effect largely disappeared. When the time window is extended, the cost of maintaining artificial price pressures increases significantly, and short-term shocks are more difficult to continuously influence final settlement results.

In addition to extending the duration of the study, another variant was suggested, namely a time-weighted average price settlement rather than a single point price at a given point. This would allow the settlement basis to be spread over multiple time points and reduce the impact of short-term price shocks on outcomes.

The article mentions that this finding does not apply only to the encrypted market. As more event contracts and asset-price-linked products enter wider financial markets, settlement design will have a direct bearing on market equity and investor protection.