Is the Prediction Market Becoming a Manipulation Tool? Large-Scale Manipulation Suspected in Polymarket's 5-Minute BTC Contracts

Information aggregation or result manipulation? Polymarket's short-term contracts expose structural risks in prediction markets.

Written by: @Steve_4P
Compiled by: AididiaoJP, Foresight News

Peter Drucker, the father of modern management, once said, "The best way to predict the future is to create it." If a person can turn their imagined future into reality through their own efforts, this may be the most certain form of prediction. However, in prediction markets, this phrase takes on a completely different meaning. When participants can change the outcome through their actions, a market that injects capital into possible futures may evolve into a mechanism that actively creates those futures.

Recently, prediction markets seem to have transcended mere information aggregation, with participants attempting to directly influence settlement outcomes. This article will explore the structural vulnerabilities of prediction markets and the duality of their technology through specific cases.

The Mechanism of Polymarket's 5-Minute BTC Contracts

To understand this phenomenon, one must first grasp how Polymarket's 5-minute Bitcoin contracts operate. The contract asks: At the end of a 5-minute window, will the Bitcoin price be higher than the price at the start of the window? Participants can trade on two outcomes: "up" or "down." If the settlement price is higher than the opening price for the "up" position, it pays $1; otherwise, it pays $0. Essentially, this contract is a binary bet, with its value entirely dependent on the direction of Bitcoin's price within a fixed short period.

This design creates a sharp settlement threshold. It does not primarily capture Bitcoin's long-term trend but rather determines the outcome based on a single reference point at a specific moment. When Bitcoin approaches the opening price as settlement nears, even minor fluctuations can decide the entire contract's win or loss.

Polymarket uses external oracles rather than its own order book to settle these contracts. This means the final outcome depends on the price reported by the oracle at the time of settlement. When traders hold positions in the prediction market while also participating in the spot Bitcoin market, if the activity in the spot market can influence the price reflected by the oracle, traders have an incentive to intervene in the settlement conditions rather than merely predict.

Signs of Manipulation During Settlement

A recent study found that after Polymarket launched the 5-minute BTC contracts, a unique pattern emerged: in the last few seconds before settlement, there was a sharp increase in Binance's spot order flow, and prices often reversed quickly after the contract ended. The brief price fluctuations themselves do not prove manipulation, but they are inconsistent with trading based on new information— the latter typically produces lasting effects, while the former resembles concentrated trading activity around the settlement clock.

The study proposed a simple mechanism: traders could first buy "up" contracts on Polymarket and then place orders in the spot market at the end of the settlement window. If the resulting price changes are captured by the oracle price, the "up" contract may settle in a favorable manner. Conversely, the same applies. The key is that the potential profit from the prediction market position may far exceed the cost of creating temporary price fluctuations in the underlying market.

The study estimates that a small number of accounts made approximately $8.2 million in profits during the periods classified as potential manipulation, while ordinary participants lost about $7.6 million. These figures should be interpreted cautiously—the study did not directly observe individual intentions or legally establish manipulation but rather relied on empirical patterns such as trading timing, post-settlement price reversals, and profit concentration. These clues collectively strongly support the hypothesis of settlement manipulation.

Distorted Intent: Is There a Solution?

Prediction markets are often valued for their ability to aggregate dispersed information and form collective views on the future. However, when participants can influence the outcomes they are trading, this function is significantly undermined. Elections, sports events, public opinion, public statements, and even weather readings all carry similar risks. When traders can directly or indirectly influence outcomes, a market that should answer "what might happen" may reward those who ask "how to make this outcome happen."

Reducing this risk requires more prudent market design.

First, caution should be exercised with markets that settle over extremely short time frames. Even if the underlying price information of the 5-minute Bitcoin contracts is useful, it is susceptible to manipulation. When settlements occur within a narrow window, even minor temporary fluctuations at the end of the contract can determine the outcome. Longer-term contracts are not entirely immune, but since the results reflect a broader price discovery process, they are typically less exposed to short-term intervention risks. Therefore, prediction market platforms should set clear minimum contract durations based on market characteristics and the liquidity of the underlying assets.

Second, platforms need to reassess which types of information are worth converting into markets. Polymarket and Kalshi have garnered attention for their ability to reflect social and economic information faster than traditional media or polls. In principle, markets about inflation, elections, or policy decisions can provide useful signals by aggregating the views of different information participants.

However, some markets seem to be driven more by trading volume and attention rather than information value. For example, Polymarket once launched a market on whether Federal Reserve Chairman Jerome Powell would say "Good Morning" during his speech at Jackson Hole. This contract generated about $80,000 in trading volume but provided limited insights into monetary policy or broader economic prospects.

If prediction markets are to prove their value by generating socially useful information, platforms need clearer listing standards. Not every event or piece of information needs to become a tradable product. While blockchain and tokenization can make a wide range of assets and outcomes tradable, the technical feasibility alone does not create social value.

Finally, oracle design must be viewed as a core part of market integrity. The 5-minute BTC contracts settle using Chainlink price data. Chainlink claims its price feeds aggregate information from multiple exchanges and data providers. However, publicly available information does not easily verify which exchanges are included and how each source is weighted.

The close relationship between Binance prices and Chainlink settlement prices raises important questions. This does not prove that Binance directly determines settlement outcomes, but it does make it difficult to assess the extent of a single exchange's influence on the results and the actual diversification of oracle inputs. In prediction markets, oracles are not merely technical data sources; they determine which outcome wins and how funds are allocated. If users cannot evaluate the methodology, source composition, and anti-manipulation capabilities of the oracle, the transparency and fairness of the market itself may be called into question.

Conclusion

Drucker's idea that "the best way to predict the future is to create it" captures the value of innovation and execution. However, in prediction markets, the same idea can become tricky—when participants are rewarded for influencing outcomes rather than predicting them.

The question is not whether prediction markets should exist. The more important question is: Who can influence the outcomes? How is settlement determined? Does market design provide sufficient anti-manipulation protection?

Prediction markets should not be viewed with blind optimism or outright skepticism. Like any emerging technology, they need to be assessed through their potential and limitations. Their long-term value will depend on whether platforms can maintain the market's role as an information discovery tool rather than allowing it to devolve into a mechanism for strategic intervention.

Disclaimer: This content is provided for general branding and informational purposes only and doesn't constitute financial, investment, legal, or tax advice. Any events, rewards, online events, or related information mentioned herein should not be considered a recommendation, solicitation, or invitation to purchase, sell, trade, or otherwise deal in any crypto assets or to use any services. Crypto assets are highly volatile and may result in loss. WEEX services and online events may not be available in all regions and are subject to applicable laws, regulations, and eligibility requirements. You are responsible for ensuring that your use of WEEX services complies with local laws and for carefully assessing the risks before participating in any crypto-related activities.