A helpful rule of thumb is: “You always find product market fit when your product is giving away money.” [1]  We talked last month about “the MoviePass economy,” the glorious period in the 2010s when venture capitalists subsidized money-losing consumer businesses so they could grow as fast as possible. The theory was that if a company — Uber or WeWork or even MoviePass — could sell its product below cost, a lot of people would use it and it would quickly become popular. And then one of four things would happen:

1. The company’s costs would go down, because of economies of scale, so it would become profitable;
2. The product would be so valuable, because of network effects or monopoly power, that it could raise its prices and become profitable;
3. The company’s user base would be so big and valuable that it could get ancillary revenue by, like, selling data or advertising, and become profitable; or
4. Hilarious bankruptcy.

WeWork and MoviePass ended up in the last category, but this was not a bad theory; Uber is big and profitable now. It is just a tricky theory. If you have rapid user growth and enthusiastic reviews and are giving away money, how do you know that people like the underlying product? How do you know they’re not just in it for the free money? If you turn off the free money, will they stop using the product?

Today Bloomberg’s Paige Smith writes about Bilt Technologies Inc., whose founder, Ankur Jain, “initially envisioned the company as an electronic system for paying rent and getting rewarded for it.” People did not quite want that, though: “Landlords proved hesitant to adopt Bilt’s payments software until they knew customers would actually use it.” So Bilt pivoted ever so slightly:

His solution: Add a credit card with a rewards program so generous that point-maxxing renters would demand that their landlords adopt Bilt’s payment platform. Renters could finally earn points for their biggest outlay each month—one which had previously been off-limits for credit card rewards—along with anything else they charged. …

The credit card took off; so did Bilt’s clout among landlords. Some 5.5 million Americans now pay for their housing via Bilt’s system. The company says it has relationships with 70% of the country’s top 100 property managers. One reason they like it, Jain says: Property owners using the software see a 12% decrease in delinquency and a 30% boost in on-time payments.

We talked in 2024 about the economics of Bilt, and there was another, possibly more important reason that landlords like Bilt. Typically merchants pay a fee — sometimes called “interchange” — for accepting credit cards. If you sell a product for $100, and the customer pays with a credit card, you might only get $98; the other $2 is an interchange fee that goes to the credit card banks and network. Many merchants accept credit cards because doing so increases transaction volume — most people pay for most stuff with credit cards — and 2% is a small price to pay for getting more customers. It’s a form of marketing spend.

For a landlord, though, this makes no sense. The rent is high, so 2% of it is a lot of money. And most of your tenants already live there, so you don’t need to attract them by taking credit cards; it’s not like they’ll move out if they can’t pay by credit card. And so, before Bilt, it was hard to put rent on a credit card. Or if you could, the landlord would charge you a fee to cover the interchange.

Bilt solved this problem by not charging anyone the fees. It partnered with Wells Fargo & Co. to issue the credit cards, and, as the Wall Street Journal reported in 2024:

There is a reason why credit cards hadn’t gained traction in the rent sector until Bilt came along. Most landlords didn’t accept them because they refuse to pay card fees that get pocketed by the banks issuing them and often run between 2% and 3%.

Bilt structured the card so landlords won’t incur the fees. Wells instead eats much of that. 

Right, great. The way rewards credit cards generally work is that I buy something from you, I pay $100, you get $98, and my credit card company gets $2. [2]  Some of that $2 goes to the bank’s expenses (marketing the card, processing the transaction, credit losses, etc.), but some of it — say $1 — is left over and can fund rewards. So I get $1 of cash back or airline rewards or whatever from this $100 transaction. So I feel great: I got a little bonus at the expense of, ultimately, the merchant who got $98 for a $100 sale.

But the way Bilt’s rent credit card worked was that I rented an apartment from you, I paid $3,000, you got $3,000, and Wells Fargo paid me $30 of rewards. Why? Well, the theory must have been something like this:

• I spend $10,000 on my credit card every month.
• Of that, $3,000 goes to rent, where Wells Fargo collects $0 of interchange, but $7,000 goes to other stuff, where Wells Fargo collects $140 of interchange.
• I get $100 of rewards (1% of my total spending, including rent).
• Wells Fargo keeps $40, just enough to cover its costs.
• Eventually this gets mass adoption, everyone has a Bilt credit card and uses it for everything, Wells Fargo’s revenue goes up, the costs go down, and perhaps there is some pricing power. Perhaps eventually you can make the landlords pay interchange fees.

These numbers are fake and stylized, although they’re in the right ballpark; the Journal reported that “the bank assumed around 65% of card-purchase volume would be nonrent, generating interchange-fee revenue.”  But the theory was wrong: Actually people mostly used the cards to pay rent, and Wells Fargo ate the cost. Smith writes:

While the company’s card rewards program became very popular, it also proved unsustainable. Card issuer Wells Fargo & Co. was losing as much as $10 million a month on the Bilt partnership, according to a 2024 Wall Street Journal article. In the wake of a public breakup with Wells, announced last July, Bilt touted what was supposed to be a fresh start, with new banking and financial-technology partners. The card revamp, unveiled in January, was also intended to close some loopholes customers had exploited, including an internet-famous one in which cardholders, required to make five transactions each month to fully activate their rent points, would pay rent and then go out and buy four individual bananas.

Everyone knew that if customers used their Bilt cards only to pay rent, Bilt and its card partner would get fleeced. So you only got rewards if you used your Bilt card for rent and also a reasonable amount of other stuff. But “a reasonable amount of other stuff” is a fuzzy concept, and for a while Bilt defined it as five monthly credit-card transactions. This requirement became known as “five bananas,” and buying five bananas is not going to cover the bank’s costs.

So Bilt pivoted, and people got mad, because (1) they had been getting free money and (2) now they weren’t:

The rollout hadn’t gone quite as planned. In the days after unveiling the replacement cards, Jain found himself on an apology tour as customers threatened to abandon Bilt en masse over changes to how its much-loved rent rewards would be calculated—a complex web of new multipliers and “Bilt Cash” payouts that confounded customers. Cardholders swarmed Reddit and YouTube to roast the program as “a complicated math problem” and “a trap.” As one commenter put it, “The fact that I’ve read this four times and still don’t understand what the hell it’s actually saying is enough for me to know I’ll just be closing the card.” The critical response was a jolt—especially for Jain, who says he gives all Bilt customers his personal email. “They get my inbox, and I respond to as many of them as I possibly can. People send me their hate mail, their love mail.” Within days of the digital dragging, Bilt announced it would tweak the new card structure again, including letting customers choose between two different points-accrual calculations.

Right but like … this is not a problem of customer service. This is a problem of arithmetic. If the customers only use their cards to pay for rent, the math doesn’t work. But something worked:

The big question now is whether Bilt cardholders will stick with the company considering its updated cards look a lot like other rewards cards on the market. On one hand, irked customers have been complaining (loudly) that what made Bilt’s card special is no more. But most consumers aren’t likely to ditch Bilt outright, as credit cards are notoriously sticky, and the company says it’s been getting a record number of applications for the new cards. In the final two weeks of January, 83% of Bilt’s active cardholders requested one of the new cards, the company says. Adding to Bilt’s stickiness: Its rent-processing software, Jain’s original vision, is now used in 25% of US apartment buildings.

Bilt wanted to create an electronic system for paying rent, but landlords didn’t want that system unless it had customers. So it gave away free money to get customers, and now landlords use its electronic system for paying rent, so it can stop giving away free money.

Right now, something close to 100% of SpaceX’s stock is held by Elon Musk, SpaceX employees, and big venture-capital-type early investors. [3]  This time next year, something like 22% of that stock — $330 billion worth, at SpaceX’s hypothetical $1.5 trillion IPO valuation — will be held by index funds. You know that, I know that, Elon  Musk knows that, his bankers know that, SpaceX’s private investors know that and the index funds know that.

They could do a trade? The index funds could give SpaceX orders to buy stock, and the employees and private investors could give SpaceX orders to sell stock, and SpaceX could arrange the trade. SpaceX does trades like that with some regularity, “employee tenders” where outside (private) investors buy and current investors sell in bulk transactions arranged by SpaceX. [4]  Very tidy.

But what will actually happen, between now and a year from now, is less tidy. It’s more like this:

1. SpaceX will arrange a trade in which the company itself will sell, say, $50 billion of stock to public investors. This is called an “initial public offering.” Maybe the existing early investors will sell a little bit of their stock in the IPO, though maybe not; the IPO’s purpose seems to be mostly to raise funding for SpaceX (and xAI), not to cash out early investors. And the public investors who buy stock in the IPO will not be index funds; they will be mutual funds, hedge funds, other public institutional investors and, probably, retail investors.
2. Then that $50 billion of stock will start trading publicly, and anyone who wants to buy it will be able to, at the market-clearing price. The price of the stock will reflect demand for SpaceX, a trillion-dollar-plus company. And it will reflect $50 billion of supply. It would not be especially surprising if the stock went up: Lots of people want to own SpaceX, but they’ll only be able to get $50 billion of it.
3. Six months later, the “IPO lockup” will expire, and all of those private investors — employees, venture capital investors, Musk — will be able to sell their stock at the market-clearing price. Some won’t, but some will, and the stock price will now reflect hundreds of billions of dollars of new supply. It would not be especially surprising if the stock went down.
4. At some point, SpaceX will be added to the S&P 500 index, and index funds will buy the stock. And the price will reflect hundreds of billions of dollars of new demand. It would not be especially surprising if the stock went up.

Doesn’t it sound like that would create a lot of volatility? You start by selling a little bit of stock into a lot of demand. Then, when things have settled down a bit, you sell a lot more stock. And then at some random other point, index funds have to go buy a lot of stock. Everyone knows all of this, and the market does a decent job of anticipating it: The IPO price in Step 1 reflects the anticipated public demand in Step 2, the price before the lockup expiry will reflect the anticipated supply in Step 3, index arbitrageurs will buy stock to anticipate the index demand in Step 4. But it would be tidier if everything just lined up. Even if just Steps 3 and 4 lined up — if SpaceX got added to the S&P 500 index the same day the lockup expired, so all the early investors could sell directly to the index funds — that would avoid a lot of inefficient trading.

We talked yesterday about how it would be nice if SpaceX could sell to index funds in the IPO, but the real issue is the lockup expiry, when all of SpaceX’s private investors finally get their chance to sell. If they could sell to index funds, that would avoid a lot of heartache and volatility. The Wall Street Journal reports:

Advisers for the company, which recently merged with xAI, have reached out to major index providers, including Nasdaq, to discuss how SpaceX and this year’s other hot startups might join key indexes sooner than normal, according to people familiar with the matter. 

Companies typically must wait several months or a year after their public debut before gaining inclusion in a major index such as the S&P 500 or the Nasdaq-100. Inclusion unlocks access to retail and institutional capital from funds, particularly those mimicking the performance of indexes that have to hold the companies in the index.

The traditional waiting period is intended to give the companies time to demonstrate that they are stable and liquid enough to handle extensive buying from index funds.

SpaceX hopes to skirt traditional rules in an effort to bring liquidity to its shareholders sooner as part of its planned IPO. …

Investors and advisers to companies planning to go public this year are concerned not only about initial trading, but also that the standard six-month lockup period—which prevents early investors, executives and employees from selling their stock—might prompt significant selling that pressures shares. After Meta went public in 2012, shares sank when early investors unloaded all at once.

SpaceX is exploring ways to better balance supply and demand to avoid that outcome, some of the people said. 

Obviously one could have a cynical view of this. (I wrote on Tuesday, not about SpaceX, that “If you are really ambitious at pumping and dumping, the ultimate buyer of last resort — the final dumping place for your stock — is an index fund.”) But SpaceX has a point! Lining up the buyers and the sellers really would be tidier. 

One interesting question is: How much undetected insider trading is there? I write a lot about detected insider trading, because the US Securities and Exchange Commission brings a lot of cases, and often they are dumb. Often the people doing the insider trading are pretty obvious about it, and of course they get caught. And so you might think “oh wow insider traders are dumb.” But of course that proves nothing. Maybe 99% of insider traders are very smart and never get caught, so I never write about them. I only write about the dumb minority.

My guess is that this is mostly wrong, but I don’t know. Perhaps there are a lot of sophisticated insider traders out there who have taken the compliance trainings and read Money Stuff and know all the pitfalls, so they insider trade in ways that avoid the pitfalls and never get caught. Perhaps this knowledge is slowly spreading, and the frequency of dumb insider trading — of insider trading that gets caught — will decline over time.

How much undetected insider trading is there in prediction markets? Well, a few points:

• The legal status of insider trading in prediction markets is at least somewhat less obvious than it is in the stock market, so sophisticated hedge fund managers can go around saying in public that prediction market insider trading is totally legal. (Not legal advice!)
• But actually it’s probably illegal in the US. (Not legal advice!)
• Prediction markets are regulated by the US Commodity Futures Trading Commission, not the SEC, and the CFTC is smaller and maybe less aggressive about bringing cases.
• There are so many more things that you can predict than there are public companies. If a public company announces a merger, the SEC can ask it who knew about the merger and cross-check the list against trading records. But the front page of Kalshi this morning had questions like “Which brands will advertise during the [Super Bowl],” [5]  “[Super Bowl] Championship: Seattle vs New England,” “Ali Khamenei out as Supreme Leader,” “2028 Democratic nominee for President,” “Will Timothée Chalamet and Kylie Jenner be engaged this year” and “What will Logan Paul’s Pikachu Illustrator go for at auction?” It’s not that the CFTC couldn’t ask the Patriots who knew about Drake Maye’s injury status, or that it couldn’t ask Timothée Chalamet about his intentions, or that it couldn’t ask Logan Paul what a Pikachu Illustrator is, and then cross-check the answers against trading records. It’s that every day there’s some entirely new thing to worry about, and — unlike public companies and the SEC — the new thing is probably not already deeply engaged with the CFTC. Timothée Chalamet might not pick up their call. Ali Khamenei definitely won’t.
• The amount of money that you can make in most prediction markets, other than sports, is mostly pretty small, so the incentives to insider trade aren’t really there yet.
• But that might be changing as they get more popular.

I think it is reasonable to look at the situation and conclude:

1. There’s probably not that much insider trading in prediction markets yet, but that will grow rapidly as the markets do.
2. The insider trading will probably be quite sloppy, because there is not the same widespread understanding that it is illegal that there is in the securities markets.
3. The sloppy insider trading might nonetheless be hard to catch, because the surface area is so large and because deep down the regulators might not care.

Anyway here’s an announcement from Kalshi:

Prediction market platform Kalshi today announced a major expansion of its market surveillance and enforcement framework. The company has formed an independent surveillance advisory committee and new trading surveillance partnerships with Solidus Labs and the Director of the Wharton Forensic Analytics Lab, Daniel Taylor. These initiatives further strengthen Kalshi’s market surveillance and compliance programs, solidifying its position as the leading federally regulated prediction market….

Being federally regulated means that Kalshi bans market manipulation, insider trading, has limits on the types of markets it lists, runs Know-Your-Customer (KYC) and Anti-Money Laundering (AML) checks on every user before they can trade, and publicly reports all trades to the CFTC daily. Kalshi also spent years building custom prediction market trade surveillance and enforcement systems that are similar to those used in the stock market.

I just feel like the first, you know, 20 people to get arrested for insider trading on Kalshi will be very surprised. “Wait, was I not allowed to do that? I thought that was the whole point.”

I mean the way the world works is that there’s some stock, and it trades at $100, and some people own it on margin, and then it falls to $90 and they get margin calls, and some of them sell it to meet the margin calls, and then it falls to $80 and some more people get margin calls, and they sell more stock to meet margin calls, and then it falls to $70 and some more people get margin calls, but then some deep value investors are like “wait a minute this has gone on too long. This company has a good business and steady cash flows that are worth at least $75 per share. Sure the market is scary, sure there are a lot of forced liquidations, sure the technicals are bad, but in the medium term this stock is worth at least $75, so I will buy it now when it is on sale.” And the spiral stops.

Not always, of course; some companies are worth zero, and get there. And of course this process is messy and uncertain and will tend to overshoot. But broadly speaking, a stock’s price in the short term will reflect things like forced sales by its owners, but its price in the long term should reflect market expectations of the present value of its future cash flows. There’s usually somebody with some spare cash looking for a bargain, and when a stock’s price falls too far below its fundamental value they will buy it.

In other news, Bloomberg’s Emily Nicolle, Vildana Hajric and David Pan write about Bitcoin’s slide:

Bitcoin tumbled below $70,000 as the unwinding of leveraged bets and broader market turbulence deepened a selloff that has wiped out all of the gains since President Donald Trump’s election set off a speculative rush into cryptocurrencies.

The token fell as much as 10% Thursday to $65,344, the lowest since October 2024. …

The market started cracking this month as rising geopolitical tensions sent tremors across global financial markets and curbed risk taking. That sparked Bitcoin’s precipitous decline from mid-January and set off a self-reinforcing cycle of selling as funds liquidated assets to meet redemptions and unwind leveraged bets.

Yes, fine, but eventually the fundamentals will, uh, you know what, never mind, let’s let them continue:

This time, Bitcoin and other cryptocurrencies are also seeing competition from other forms of speculation, like legalized sport gambling and prediction-market wagering on everything from politics to entertainment. At the same time, retail flow continues to chase zero-day options in equities and higher-yield crypto plays across decentralized exchanges.

The latest drop comes as digital assets face continued doubts about their real-world use, as well. Once touted as an inflation hedge or a rival to gold or the US dollar as a stable store of value, Bitcoin has continued to trade more like a high-risk asset and has failed to serve as a haven during times of financial market stress.

I love that you can describe Bitcoin as both “a haven during times of financial market stress” and also a competitor for sports gambling.

Novo Shares Fall As Hims & Hers Offers $49 Wegovy Copycat. OpenAI Unveils Platform to Help Companies Deploy ‘ AI Coworkers.’ Divorce, Hedge-Fund Style: Inside the Breakup at Two Sigma. Patrick Drahi shifts assets worth billions away from creditors. Rio Tinto Abandons Glencore Talks to Form World’s Biggest Miner. UBS Investment Bank Units to See Bonus Pools Jump by Up To 20%. Senators Accuse Equifax of ‘Price-Gouging’ Medicaid Programs. New York’s Pension Funds Scrutinize Palantir Over ICE Contract. Epstein’s Fondness for Elite Lawyer Ends in Downfall. Kirkland & Ellis lawyer sought use of Epstein helicopter after securing plea. “Goldman Sachs general counsel Kathy Ruemmler appeared to ask Jeffrey Epstein if he planned to ‘trade one of your Russians for my comp’ in an email exchange about her negotiating a potential job at hedge fund Citadel.”

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