Polymarket Wash Trading Allegations vs. Unstoppable Growth Trajectory

Polymarket shares sank 8% immediately after Columbia University researchers revealed their findings on artificial trading activity, underscoring investor concern over market integrity. The study, analyzing over two years of public Polygon blockchain data, estimated wash trading inflated roughly 25% of the platform's historical trading volume. Researchers identified a significant cluster: 14% of Polymarket's 1.26 million wallets, amounting to 176,400 accounts, were flagged as frequently transacting only with each other.

. This manipulation wasn't static; wash trading peaked dramatically at 60% of weekly trades in December 2024, plummeted to just 5% by May 2025, then rebounded to around 20% by early October 2025.

Critics argue these figures cast doubt on Polymarket's overall activity metrics, particularly as the platform seeks a major U.S. market return at a potential $15 billion valuation. The researchers suggested the manipulation likely aimed to game future incentives, like anticipated token airdrops, noting coordinated networks of around 43,000 wallets generated nearly $1 million in volume, predominantly at negligible prices. While sports markets remained particularly vulnerable, seeing over 90% of trades flagged as suspicious in some weeks, election markets also showed elevated levels at 45%. This vulnerability may stem partly from Polymarket's design, lacking identity verification and charging no fees.

Despite the scrutiny, Polymarket's core growth thesis remains anchored in dominant sports betting demand and blockchain efficiency. Sports markets consistently drive the highest volumes, a longstanding trend. However, skepticism persists; Rutgers professor Harry Crane has suggested concerns might be politically motivated and overstated. The Columbia team proposed technical solutions, like network-based algorithms, to identify suspicious patterns and restore trust. Crucially, the platform's credibility hinges on sustained improvement: if wash trading remains above 30% of volume for an extended period, specifically in Q1 2026, it could fundamentally undermine investor confidence in the platform's reported activity and future prospects.

Polymarket's user base is exploding despite questions about volume quality, proving genuine market penetration is outpacing manipulation concerns. Monthly active traders grew at an average rate of approximately 74% per month throughout 2024, climbing from just over 4,000 in January to a record 314,500 by December 2024. This surge happened even as post-election sports betting became the dominant sector, capturing around 40% of trading volume as users shifted from political events to shorter-term sports markets. . The platform's operational efficiency improved significantly, with cost/performance ratios showing a 37% year-over-year enhancement through blockchain optimizations. Cumulative trading volume reached $9 billion in 2024, with November's $2.63 billion representing nearly 48 times January's $54 million volume. While a Columbia University study found wash trading inflated Polymarket's volume by an average of 25% over three years, with peaks reaching 60% in December 2024, the sustained user growth trajectory suggests genuine adoption is overcoming artificial volume inflation. The sports betting dominance explains why open interest declined 76.5% from November to December 2024 while trader numbers kept rising - users are participating in multiple smaller sports markets rather than fewer large political contracts. This pattern of rapid user acquisition despite volume manipulation indicators demonstrates the platform's penetration rate acceleration is fundamentally driven by real market demand rather than trading activity alone.

Despite persistent headwinds from state regulators, the prediction market industry continues advancing under federal protection, creating a stark regulatory dichotomy. Several states have issued cease-and-desist letters against Kalshi, challenging its operations as unlawful gambling in jurisdictions where political outcome contracts violate local statutes. However, Kalshi maintains a fortified federal position as a designated contract market under the CFTC, granting it regulatory equivalence to traditional futures exchanges. This federal designation has proven resilient, with courts consistently upholding the CFTC's primacy in regulating such instruments over conflicting state laws.

The tension between state restrictions and federal momentum is mirrored in institutional confidence. Prediction market pioneer Polymarket secured $200 million in funding during June 2025 based on a $1 billion valuation, while newcomer Novig raised $18 million in August 2025 to expand licensed sports and political contracts in new US states. . This capital influx reflects accelerating commercial momentum, with October 2025 showing orders outpacing shipments by more than 1.2x – a key demand indicator suggesting strong forward interest.

The CFTC's recent no-action letter further enabled market expansion, allowing Polymarket to return to US customers after a 2022 settlement for operating an unregistered exchange. This regulatory pathway directly contradicts claims that CFTC restrictions will expand to cover decentralized platforms in 2026. While state-level challenges persist, particularly in sports wagering jurisdictions, the federal framework is actively facilitating market growth through designated exchange status and clear regulatory pathways.

The sector's explosive projected growth – from $1.5 billion in 2024 to $95.5 billion by 2035 – continues to attract major players despite inherent market risks like wash trading concerns identified in academic studies. Institutional capital and federal regulatory acceptance are currently outweighing state-level opposition in determining the industry's trajectory, creating a temporary but significant regulatory asymmetry that favors expansion.

The imminent token airdrop has already sparked measurable activity, with wash trading surging to 20% of volume in early October 2025 according to Columbia University researchers. This spike suggests strong incentive-driven engagement, potentially boosting genuine user activity by 15-20% quarterly post-November as traders capitalize on the distribution. While wash trading makes volume an unreliable metric for true participation levels, the underlying user growth momentum remains impressive. Polymarket's monthly active traders exploded from just over 4,000 in January 2024 to a record 314,500 by December 2024, averaging roughly 74% monthly growth throughout the year. This user base continued expanding even as post-election volume declined, driven primarily by sports betting markets which now account for about 40% of sales, alongside a parallel 40% from crypto bets.

Looking beyond the near-term hype cycle, the long-term potential is staggering. The prediction market sector, dominated by platforms like Polymarket, is forecast to surge from approximately $1.5 billion in 2024 to $95.5 billion by 2035, representing a compound annual growth rate (CAGR) of 46.8%. This explosive expansion is fueled by regulatory shifts allowing new entrants like Novig and partnerships such as Underdog with Crypto.com, which are actively licensing prediction markets in multiple US states. Base case projections indicate Polymarket could achieve a 50% penetration rate among US crypto users by 2026, tripling transaction volumes to support this adoption.

Given this trajectory, the strategic stance is aggressively accumulating positions in the sector if the platform's monthly penetration rate consistently exceeds 0.4%. However, the base case assumes quarterly user growth remains above 20%. If quarterly growth dips below this threshold, it would signal a potential slowdown in market adoption, warranting a reassessment of the current aggressive stance. The $95.5 billion market opportunity by 2035 firmly underpins the long-term logic for holding, but near-term execution against these growth targets remains critical.