Apparently there’s a gorilla named Little Joe. In 2003, he escaped from a zoo in Boston and had a brief spree of terror, but they got him back. Last week, it was announced that he’s moving to a zoo in Pittsburgh “to begin his own family,” mazel tov. On Polymarket, there is a betting market on “Will Little Joe escape again,” because that’s how financial markets work now. There’s about a 3% market-implied probability that he will escape before the end of July. “His scheduled transfer to another zoo or removal from the enclosure for vet visits or maintenance will not qualify,” says the contract specification, reasonably.

The Polymarket rules go on:

Damaging or disrupting animal enterprises is a federal crime under the The Animal Enterprise Terrorism Act (AETA) of 2006 (18 U.S.C. § 43). Penalties include fines in excess of $1,000,000 and life imprisonment. Polymarket will cooperate fully with law enforcement in any investigation of interference. Polymarket reserves the right to void any market if there is credible evidence of coordinated manipulation or external interference with the gorilla or its enclosure.

This is, one assumes, a response to last month’s scandal in which Polymarket traders apparently tampered with a temperature sensor at a Paris airport to win a bet on the weather. In the optimistic early days, people thought that prediction markets would be “truth machines,” and you could go to a prediction market’s website to learn the future. Who will be the next president, will there be a recession, who will win the Super Bowl, will Little Joe the gorilla escape again, all these crucial questions about the future could be answered — probabilistically — by the wisdom of the crowd and the invisible hand of the market.

This only works if prediction markets are big enough to attract real betting interest: If you can’t make real money on prediction markets, there’s no incentive to invest time and effort in making prediction-market prices accurate. Not too long ago this all felt pretty hypothetical — back in 2024 I was approvingly quoting a paper arguing that “there is little natural demand for prediction market contracts, as we observe in practice” — but now it feels quite real. You can make lots of money betting on elections and sports and economic indicators and the weather and maybe even gorilla escapes, [1]  and people do.

But now that prediction markets are big, they are not purely “truth machines,” not pure observers and predictors of the future. They are truth modification machines: If you can make lots of money predicting some relatively trivial thing, you should just make the thing happen. Reality responds to incentives: If the market pays out money for an event happening, someone is going to try to make the event happen. [2]  If you can make tens of thousands of dollars for warming up one little sensor, someone’s going to warm up that sensor.

And then a plane might crash? I mean, probably not, but that temperature sensor is “important for the safe operation of the airport.” If people are constantly going around tampering with reality to win bets, they will create glitches in reality, some of which will have bad consequences for ordinary people going about their day out in regular reality.

For instance! If you could make some money betting on a gorilla zoo escape, you might be tempted to spring the gorilla from the zoo. Ideally you’d spring him from the zoo, take him to a diner, get some coffee, wait until the escape was confirmed and the contract resolved, and then bring him back to the zoo. But he’s a gorilla. He has a large and tangible reality, and also a history of attacking a child the last time he escaped. A gorilla walking around a Pittsburgh residential neighborhood, attacking children, so that you can win a Polymarket bet, would definitely be a glitch in reality.

And so Polymarket is like “Stop. Don’t.” This is the first Polymarket contract that I have seen that cites the felony you’d be committing if you tried to manipulate reality to make the contract pay out, but I have not done a comprehensive survey and I doubt it’ll be the last. The most classic worry in this vein is about event contracts on some public figure’s death: “Assassination markets” could fund assassinations, etc. Those worries are why Kalshi doesn’t list those contracts, though Polymarket is less squeamish. “Causing the death of a person is a crime under most jurisdictions’ murder statutes,” I suppose it could say, in the contract specifications. 

Everyone knows that murder is illegal, though. Most people probably understand at some level that you should not free gorillas from zoos, but “penalties include fines in excess of $1,000,000 and life imprisonment” probably is surprising news, so you can see why Polymarket would highlight it. I’m sure that France has some law against manipulating the temperature sensor in the airport. I suppose the future of prediction markets is every contract listing every law that you might be violating by trying to make the event occur. A good exercise for Polymarket’s legal department would be brainstorming ways that someone could commit a felony that reduces the probability of the Knicks winning their next playoff game. [3] Do you have to list them all in the contract?

Companies can raise money with debt, or with equity. If you use debt, you have to pay back the amount you borrowed, with interest. This is expensive for you if things go poorly: If you borrow $1 million to invest in your business, and your business doesn’t make any money, you still have to pay back like $1.1 million, and how will you do that? You might have to default, file for banruptcy, etc.

If you use equity, you don’t have to pay back any fixed amount, but you give up a share of your business. This is expensive for you if things go well: If you raise $1 million by selling 10% of your company, and your business goes amazingly well and makes $20 million per year in profits, the person who bought 10% of your company gets $2 million a year, [4] even though she only gave you $1 million to begin with. 

In practice, founders of companies tend not to complain that much about this, because:

1. It’s the good scenario: The company is doing well, and the founder is also getting rich.
2. Everyone knows this. The deal is quite clear to everyone up front. If you are the founder of a company, and you sell 10% of your company, you understand that you’re selling 10% of your company. If you go back to your investor and say “I didn’t realize that selling you stock would mean that you share in all the upside,” your investor will say “what are you even talking about?” 

Companies can raise money with debt, or with equity, but most other things can only be financed with debt. You can put a sandwich on a credit card, but you can’t get a venture capitalist to give you $1 for a 5% stake in your sandwich.

This is quite untidy, and people who work in the financial industry — where everything can be financed with debt or equity — are often bothered by it. “Shouldn’t people be able to finance _____ with equity,” they constantly muse, and then launch companies to fill the niche. We talk about this a lot. The two main versions are:

1. “Shouldn’t people be able to sell stock in themselves,” and 
2. “Shouldn’t people be able to sell stock in their houses?”

I sometimes refer to the first question as “the great late-night dorm-room question of financial capitalism,” in part because it comes up most often as a replacement for student loans: Instead of financing college with hundreds of thousands of dollars of loans, what if you could finance college by selling 5% of your future income? It’s not strictly college-linked, though, and there are versions for sports too: Lots of aspiring professional athletes make peanuts in the minor leagues, some of them will eventually become stars and make millions, and they could sell equity stakes in their future earnings in exchange for some much-needed cash today.

The people who start these companies always immediately think of all of the important economic issues — moral hazard, adverse selection, etc. — because those are the obvious things that would occur to you in your late-night dorm-room conversations. And they figure out ways to mitigate those problems. 

But they sometimes have trouble with a weird definitional problem, which is that people can’t sell stock in themselves. “Stock” is an attribute of corporations; it is defined by statute. You can’t sell stock in yourself unless you are a corporation. What you can do is write a contract. The contract says something like “I pay you $X today and you will pay me Y% of your future income each year.” [5]  That is roughly economically equivalent to stock, sure. But what is it legally? It’s a contract, in which I give you money now and you agree to pay me back money later. Which … sounds like … debt?

“No no no no no,” I say, “it’s not debt, it’s equity. The whole point of this is not to be debt. You have no fixed repayment obligation: If your future income is zero, you pay me back zero. We have solved the big problem of debt, which is that it carries a fixed repayment obligation and is expensive in downside scenarios. This is free or cheap in downside scenarios, and expensive only in upside scenarios, when everything is going great for you and you're making tons of money. This is a much better product. It’s equity!”

And then you start making tens of millions of dollars a year, and you owe me millions of dollars each year to repay me for the hundreds of thousands of dollars I fronted you when you were broke, and you start reconsidering. Isn’t it debt, really? Aren’t you paying me back way more than you borrowed? Isn’t your effective interest rate hundreds of percent? Isn’t that illegal under usury laws? Shouldn’t you be able to get out of the contract?

Again, this doesn’t happen much in the startup company case because (1) norms are much more settled and (2) companies have actual equity. A company can’t say “our stock went up 10,000%, so the people who bought our stock were really making a usurious loan, so we shouldn’t have to give them anything.” The people who bought the stock of a company weren’t making a loan, because stock isn’t a loan. But the people who bought the quasi-stock of a person were, arguably, technically, making a loan. 

We have talked about occasional lawsuits along these lines. There was one in 2024 against BloomTech. Last year baseball player Fernando Tatis Jr. sued Big League Advance, which gave him some money in 2017, when he was a minor leaguer, in exchange for a share of his future earnings. When he signed a $340 million Major League deal he reconsidered. “BLA has for years run an unlicensed lending business,” he said, but were they? They thought they were buying equity.

Same with houses! Today Bloomberg’s Patrick Clark and Prashant Gopal report on home equity investments:

It’s a rapidly growing segment that’s attracted Fortress Investment Group, Carlyle Group Inc. and Bain Capital as backers in various forms. Private credit giant Blue Owl Capital Inc. said in December it plans to deploy $2.5 billion into the contracts in the coming years, one of the largest commitments yet.

For investors, the agreements are a lucrative way to tap into the $34 trillion that Americans have tied up in their homes, turning future price gains into a new stream of returns. For homeowners, they can mean giving up a large share of the appreciation that would otherwise build long-term wealth — and in some cases, owing far more than they initially borrowed.

Yes, right, the defining feature of financing something with equity is that sometimes you “owe more than you initially borrowed.” Everyone understands that when a company issues stock. But when a person sells equity in her house for money, (1) she doesn’t necessarily understand that and (2) it’s not exactly equity:

In February 2025, the Massachusetts Attorney General’s office sued Boston-based Hometap, saying that its contracts amounted to predatory loans designed “to strip that home equity away from vulnerable consumers.” Hometap Chief Executive Officer Jeffrey Glass declined to comment on the specifics of the lawsuit, but said that he’s aligned with regulators on some key points, including the need for consumer education and government oversight.

Unlike a credit card with a clear interest rate, the true cost of an HEI is opaque, like a financial time bomb that only detonates years later when the homeowner realizes exactly how much of their future they sold off, said Ken Johnson, a real estate professor at the University of Mississippi. …

As HEIs proliferate, even basic questions about the products can be difficult to answer. The industry argues that they are investments, not loans, emphasizing the lack of monthly payments. But when it comes time to pay, the maturity date, lien on the home and threat of a forced sale make the distinction harder to draw.

The National Consumer Law Center calls them “subprime mortgages” with predatory rates, disguised to bypass laws designed to protect consumers. In a 2024 consumer alert, the group called the terms of the contracts confusing, and said the true cost of an HEI requires making difficult calculations about rates of real estate appreciation and inflation a decade into the future.

Two points here. First, while it is genuinely impossible to sell stock in a person, it’s not actually that hard to sell stock in a house? You know: Form a shell company, buy the house in the company’s name, give the homeowner 80% of the stock of the company and the HEI investor 20%, give the homeowner management rights (she can sell the house, etc.) and the investor some governance rights, etc. I gather that HEIs mostly don’t work this way in part because it is administratively annoying (you have to form a company, it might be harder to get a mortgage on a house owned by the shell company, etc.) and in part because actual HEIs do have some rather credit-like features to make them easier to securitize. Clark and Gopal note:

It’s not hard to see why the contracts would have investor appeal. Point, as one example, calculates the amount that its borrowers pay back as a percentage of the change in home value over the life of the contract. But it discounts the starting value of the home by about 15% to 30%, securitization documents show.

That feature virtually ensures that investors make money. A DBRS Morningstar analysis of 2,700 Point contracts showed that more than 98% generated positive returns for investors. The Urban Institute, meanwhile, found that an underlying home could decline in value by 3% annually for six consecutive years and a Point contract would still be in the money. Hometap offers investors even more protection, Urban Institute found.

Point cofounder Eoin Matthews said the investor protections built into the contracts are a prerequisite for lining up the capital that funds homeowner advances. That's especially true for money flowing into HEIs through securitizations that have been vetted by ratings companies, where memories of the subprime mortgage crisis are still fresh. 

Right, if you are getting money from investors in an investment-grade-rated securitization, it’s not exactly equity, is it?

Second, I do think that people here are genuinely talking past each other. I am convinced that everyone who has ever started a “sell stock in your house” company (or a “sell stock in yourself” company) was motivated by a genuine, possibly slightly naive belief that people should be able to sell stock in their houses. And then life intervened and they ended up building a product with a preferred return and a maturity date that they could sell into a rated securitization, fine fine fine, but in their hearts they all believe that they’re buying equity in people’s houses. And then when the homeowners are like “we have to pay you far more than you initially gave us,” they are like “right yes that is how equity works, what is the problem?”

My basic theory is that defined benefit pension plans were good for the financial industry, the modern US has moved away from pension plans into defined-contribution retirement accounts like 401(k) plans, those defined-contribution accounts have some advantages for Wall Street but also a lot of problems (lower fees, tougher liquidity requirements, less ability to invest in spicy stuff), and now the financial industry is trying to recreate pension plans from first principles. I wrote in March:

What you want, in other words, is a pension fund for a client. What you want is one big client who pools the funds of a bunch of retirement savers, locks up their money, tells them “don’t you worry about this but in 20 years, when you retire, you’ll have income,” and then is able to make its own investment decisions, take long-term risk and earn a liquidity premium. …

It would be interesting if the story of the next decade in retirement investing is a move back to something like pensions, an increasing emphasis on pooled guaranteed-income vehicles rather than atomistic individual self-managed lump-sum investment accounts, because those vehicles are better for private-market investing, and everyone is solving for private-market investing.

Today Bloomberg’s Layan Odeh and Allison McNeely report:

AllianceBernstein Holding LP is teaming up with Brookfield Asset Management and Carlyle Group Inc. to offer private-markets investments to everyday retirement savers.

The firms will collaborate on a single, standalone product that will invest in private equity, private credit and real assets for 401(k) and other workplace defined-contribution plans, according to a joint statement Wednesday.

The product, called ABC [ONE], is designed to be implemented alongside existing target-date funds or managed accounts, and investors’ exposures to the underlying asset classes will be adjusted depending on when they’re expected to retire, according to the statement.

A target-date fund — “just tell us when you’re going to retire and we’ll do all of the investing for you until then” — is broadly speaking a way to make a 401(k) feel a bit more like a pension, in that the manager takes care of the investing mix and the timing, rather than leaving that to the investor. But actual defined-benefit pensions tend to invest not just in stocks and bonds but in all sorts of less-liquid private assets, real estate, etc. And now everyone is trying to recreate that in a 401(k) too.

The story of banking is that it is a magic trick for transmuting risky assets into safe liabilities. A bank lends money to companies and homeowners, which is risky (they might not pay back the money). The bank gets the money by issuing deposits, which are safe. A $1 deposit at a bank should always be worth $1. There are various problems with this magic trick; those problems are the main theme of this column, and of financial history generally. But the magic trick exists for a reason: This transmutation increases society’s capacity to take productive risks. There are only so many people who want to make risky investments. Lots of people would rather keep their money safe in the bank. If the bank uses that money to make risky investments, then everyone is happy: The people who want their money safe in the bank feel safe, but the risky investments that create economic growth still get made. Again, there are problems! 

Bitcoin is, let’s assume, a risky asset. Some people want to buy Bitcoin, because they want that risk: They think Bitcoin will go up, they want to own it when it goes up, and in exchange they are willing to take the risk that it might go down. Other people do not want to buy Bitcoin, because they do not want that risk. They want to keep their money safe in the bank. [6]

In general, when people want to own Bitcoin, it goes up, and when people don't want to own Bitcoin — they just want to keep their money safe in the bank or whatever — it goes down. But the story of banking is perhaps instructive here. You might think: “If people put their money somewhere safe, like a bank deposit, and then the bank invested the money in Bitcoin, that would make everyone happy. The people with money would feel safe, but also Bitcoin would go up. The magic transmutation of banking increases society’s capacity to take risk on Bitcoin. There will be more productive investment in Bitcoin, because of this magic.”

Is that stupid? I mean. For the most part, banks do not actually do this; banks are more or less not allowed to fund Bitcoin investments with deposits. But crypto has, over the years, created all sorts of “shadow banks” to do some form of this trade: They take money from depositors, promise the depositors their money back whenever they want it with interest, and then use the money to make speculative crypto investments. Do these shadow banks prop up the price of Bitcoin and other cryptocurrencies? Some people think so. When the shadow banks collapse — as they sometimes do! — does that drive down the price of Bitcoin and other crypto? Yes, absolutely.

Here is a fascinating article from Bloomberg’s Olga Kharif:

Bitcoin is trading just over $77,000, down almost 30% from a year ago. What appears to be largely preventing a steeper fall — and what has been doing so for much of this year — is a single company operating on a scale that has no precedent in the asset’s history. Strategy Inc., the company run by Michael Saylor, has acquired 171,238 Bitcoin year-to-date, according to its public filings. That exceeds the roughly 62,000 Bitcoin produced by the entire global mining network over the same period — and appears to represent the majority of net corporate and ETF-related accumulation in 2026, according to Mark Palmer, an analyst at Benchmark-StoneX, who covers the company. …

Strategy funds its Bitcoin purchases through a perpetual preferred stock called STRC, which pays investors an 11.5% annual cash dividend. In the weeks before each month’s record date — set around the 15th — investors accumulate the shares, driving the price back up toward its $100 face value. That recovery allows Strategy to sell new shares into the market and direct the proceeds straight into spot Bitcoin. When the cutoff passes and the shares drift lower, the buying slows. It picks up again the following month. STRC traded at around $99.28 on Wednesday. …

“Although traditional Bitcoin demand indicators, including spot BTC ETF inflows, Bitcoin futures open interest and even stablecoin inflows have yet to meaningfully accelerate into 2026, Strategy continues to accumulate Bitcoin at roughly the same pace as a year ago, when it purchases nearly $12 billion,” said Markus Thielen, chief executive officer of 10x Research. “This suggests that the current wave of demand is being driven less by organic market participation and more by financial engineering, as Strategy increasingly relies on yield-generating capital market products to fund its Bitcoin acquisition strategy.”

Strategy’s most recent update says that it sold about $1.95 billion of Stretch in a week to buy Bitcoin. We talked about Stretch last year, and it is an odd instrument. It is a perpetual preferred stock of Strategy, but it has a floating coupon rate (currently about 11.5%) that is designed to keep it at par: The rate is reset each month to try to keep Stretch’s trading price at $100 per share. “For the issuer,” I wrote, that “is essentially very short-term financing”: Strategy’s interest cost on Stretch resets every month to reflect its current financing cost. Not exactly — it’s preferred stock, and Strategy has flexibility to pay less than the market-required interest rate — but that’s the idea.

Essentially Strategy is issuing dollar-denominated one-month financing (at 11.5%!) designed to always pay back par, and using that financing to buy a big chunk of all the Bitcoins that are for sale. So that’s neat!

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