The volume of activity on Polymarket, one of the most popular prediction markets, has been significantly inflated by so-called wash trading in which users rapidly buy and sell the same contracts, according to a new study by Columbia University researchers.
The “artificial trading,” as the authors call it, varied over time but accounted for an average of 25% of all buying and selling on Polymarket over the past three years, the researchers concluded.
The paper, which has not undergone peer review, was posted Thursday on the open-access research platform SSRN. A representative for Polymarket said the company didn’t have an immediate comment and was reviewing the study.
The authors do not suggest that Polymarket itself was responsible for the wash trading, but they point to elements of the exchange’s crypto-based structure that make it possible.
The findings land as market participants and investors are closely watching the rising trading activity on Polymarket and its closest competitors, which allow customers to bet on the outcome of everything from sports games to elections.
Advocates promote these markets as an efficient, crowd-sourced barometer of the truth, with odds derived from the traders betting on different outcomes. If some of that volume is “fictitious,” the study says, it could alter the understanding Polymarket’s relative strength in the industry and also undermine the notion that prediction markets reflect the “wisdom of a larger crowd.”
“I’m hopeful that Polymarket will welcome the analysis in our paper,” Yash Kanoria, a professor at Columbia University’s business school, and one of the paper’s four co-authors, said in an email. “Wash trading doesn’t add liquidity or information to the market, so it would seem valuable to distinguish authentic from inauthentic volume.”
Kanoria wrote the paper with another business school professor, Hongyao Ma, as well as Rajiv Sethi, a professor of economics at Barnard College at Columbia and Allen Sirolly a doctoral student at the business school.
The authors emphasize that their attempts to identify wash trading are not definitive and amount to estimates. But their findings coincide with a heated race to identify and invest in the most successful prediction market platforms. Polymarket recently announced an investment of as much as $2 billion investment from Intercontinental Exchange Inc.
Read More: Polymarket CEO Is Youngest Self-Made Billionaire on ICE Deal
Wash trading refers to the practice of deceptively entering trades without shouldering any real market risk. The same trader or group of traders typically trade among related accounts. The practice can give the appearance of generating real volume and may impact pricing, but it generally doesn’t reflect real market sentiment. US regulators and exchanges typically view wash trades as a form of market manipulation.
The Columbia researchers said they were able to create algorithms to analyze Polymarket activity because the trading takes place on the publicly visible Polygon blockchain ledger.
The researchers flagged 14% of the platform’s 1.26 million wallets as having activity consistent with wash trading. Those wallets frequently transacted with each other, but seldom with other market participants, the researchers found.
While wash trading may have accounted for around 60% of all Polymarket trading last December, it subsided to around 5% in May of this year before rising again to about 20% in early October, according to the study.
Polymarket, which operates around the globe, has been the top prediction market for most of the past year, according to previous industry analysis. But its chief rival, Kalshi Inc. has attracted more trading in recent weeks, in large part due to the rising popularity of sports gambling on the exchange.
Kalshi does not operate on a blockchain so its trading data is not freely available to researchers.
Polymarket has been officially closed to US customers since a $1.4 million settlement in 2022 with the Commodity Futures Trading Commission for operating an unregistered exchange.
In July, the CFTC and the US Department of Justice closed parallel investigations into whether Polymarket continued to allow US traders despite the settlement. The company is planning to return to the US in the near future after acquiring a CFTC-regulated exchange, QCX.
Read More: Polymarket Plans US Return Within Weeks With Sports Focus
The authors of the new study suggest that the company’s customers may have independently engaged in wash trading in order to improve their chances of gaining access to a proprietary digital token that the company has said it may release.
Crypto companies often distribute their new tokens through “airdrops” that reward the most frequent users. Polymarket’s founder, Shayne Coplan, has hinted at the possibility of launching a Polymarket token as recently as Oct. 8 in a social media post.
Sirolly, the doctoral student, said in an email that “peaks in organic trading and authentic volume are linked to news about the referenced events, but peaks in wash trading are more likely to be linked to rumors about token issue.”
Several aspects of Polymarket’s operations open the door to wash trading, according to the authors. The exchange has not charged transaction fees, allowing traders to cheaply move in and out of positions. The decentralized exchange also allows users to register their own blockchain-based accounts and transact with a crypto-based stablecoin, which makes it possible for traders to create and control multiple pseudonymous wallets.
On Polymarket, the fictitious trading varied by market category, accounting for 45% of all sports-related trading and 17% of the activity tied to election outcomes, the researchers found.
“The potential for large-scale wash trading means that volume may be unreliable as a metric of authentic platform activity, especially in cryptocurrency-based exchanges which may not have proper safeguards,” the authors conclude.
Wash trading has been a recurring scourge of the crypto industry. Back in 2022, a study showed that wash trading may have accounted for 70% of the volume on unregulated crypto exchanges, significantly altering the public rankings of the largest exchanges.
