Polymarket Traders May Be Manipulating Crypto Bets, Study Says

(Bloomberg) -- Researchers at Stanford University identified signs that traders may be manipulating one of Polymarket's most popular Bitcoin betting markets by briefly influencing the cryptocurrency's price used to decide the wagers.

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The working paper, co-authored with a researcher at Singapore Management University, examined about two months of five-minute Bitcoin bets on Polymarket. It found repeated bursts of one-sided trading on the Binance exchange that temporarily moved Bitcoin's price in the final seconds before bets closed, benefiting traders positioned in the same direction.

The activity was heaviest at times when small, temporary moves in Bitcoin's price could determine whether a bet paid out. The researchers described the pattern as a "transitory push to manipulate the spot price."

Prediction markets have traditionally been used to forecast elections and sporting events, where traders cannot easily influence the outcome. The researchers argue bets tied to financial assets are vulnerable to manipulation because participants can trade the very asset that determines whether they win or lose.

"These contracts have a structural vulnerability," Singapore Management University assistant professor Shihao Yu, one of the paper's authors, wrote in a LinkedIn post about the research. "They settle on a price that traders can move by trading the underlying asset itself."

The findings come as exchanges expand prediction markets tied to financial assets. Cboe has begun rolling out products tied to stock indexes, while Nasdaq has sought approval for similar contracts, potentially extending the questions raised by the paper beyond crypto and Polymarket.

"Polymarket uses multiple independent pricing oracles to aggregate data and ensure accuracy," a company spokesperson said. The company is looking to transition certain markets in the next year to settlement methods that use prices over a longer period rather than a single point in time. The change would "further ensure market integrity," the spokesperson said.

While the researchers document unusual Bitcoin trading around when Polymarket's short-term Bitcoin bets settled, the paper does not prove that the trading necessarily came from Polymarket users who stood to gain from momentary moves in Bitcoin's price. The research also stops short of proving traders' intent but still presents evidence consistent with manipulation, according to Elton Shehdula, head of research at crypto analytics firm Allium.