Luna landing: Crypto chaos

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Hello and welcome to the Intelligence from the Economist. In New York, I'm John Fassman.

And in London, I'm Jason Palmer. Every weekday we provide a fresh perspective on the events shaping your world. Heat waves come to India every year, but this year's came weeks early and have been increasingly brutal. We look at the costs that Indians will have to bear as the scorching temperatures continue and the few means of relief they might rely on.

And if your bird can sing in Indonesia, it can make you a pretty penny. Almost one third of households there keep songbirds, often for lucrative competition. But this increasingly popular sport threatens wild bird populations. First up, though, It was a calm statement plainly delivered.

Today the FOMC raised its policy interest rate by a half percentage point.

But when Jerome Powell, chair of the Federal Reserve, raised the bank's overnight interest rate by half a percentage point in early May, markets were roiled. Tech stocks suffered big losses. So did all major US Indices. But one area has arguably suffered more than most cryptocurrencies.

Well, they're actually taking a bigger hit.

Than the major one minute it looks.

Like the market's going to rip, the.

Next minute it looks like the market's going to dip.

And I don't know what.

Obviously right now, getting crushed.

Plummeting in lockstep with the carnage in.

The crypto world continued today with bitcoin hitting its lowest level since December 2020.

So what does the crypto was already having tough 2022, but in the past few weeks, some of the biggest assets in the sector seemingly collapsed in the blink of an eye. And others have been put under severe pressure. For the people holding those assets, known as stablecoins, it's been a wrenching experience and it could have serious consequences for the financial system far beyond the crypto universe.

The history of crypto is one of these huge bull runs followed by quite vicious Crashes, and the last few years have been no exception to that. There was a crash in 2020, there's been a boom in 2021, and now things are crashing again.

Alice Fullwood is the Economist's American Finance correspondent.

So the total market cap for crypto peaked at around $3 trillion in November, but is now less than half of that. Bitcoin is trading at around 29k, which is about 40% of its all time high. Ether, the other sort of second biggest cryptocurrency has fallen by a similar amount of. And the share price of the leading crypto industry struck. Coinbase, which is the major exchange, is down by about half in just over a week and fell 26% in a single day after it reported earnings. So it's been quite a chaotic time for crypto and the past month has been sort of particularly vicious.

So what happened? How did things get so bad so quickly?

The backdrop to all of the crypto moves is that it's been a pretty nasty year for financial markets in general. So, so you've seen this sort of big shift change in policy from global central banks that has really hurt stocks, bonds as well. All kinds of financial assets have sold off. Crypto has just sold off the most aggressively of all the kinds of risky assets. And in particular the sort of last week or so you've seen that sort of big drop in value is exposing some of the flakiest parts of the crypto universe. These so called stablecoins are having a particularly tough moment, especially the dodgier ones. And stablecoins matter a lot because they're in integral to the financial plumbing of crypto. They're meant to be pegged to a real world asset, usually the dollar. And they're meant to be the crypto assets that people hold onto in between trading. So if you own bitcoin and you want to own something else, you might transition through a stable coin to sort of hang on to the value of your money while you're making those asset moves. And in the past couple of weeks we've had real instability with some of the biggest stablecoins.

What kind of instability?

So the fourth largest stablecoin, which is called Terra, has pretty much completely unravelled. It's supposed to be pegged one to one to the DOL. It's trading at about 10 cents now. And what happened is very similar to the kind of crisis of confidence that you might see during a bank run. So Terra's peg was maintained via algorithms. It's called an algorithmic stablecoin and essentially there was the Terra cryptocurrency, which was supposed to be pegged. And there was this thing called Luna, which was another cryptocurrency issued by the same firm. And at its peak, that was trading over $100 a piece. A week ago, it was trading at $85 a piece. And the theory was that you could always trade a dollar worth of Terra for a dollar worth of Luna. And so as long as Luna had some value, that peg would be maintained. But Luna started to slide along with all kinds of crypto assets. And it was sliding so quickly that people began to worry about the peg and they worried about Terra, and the price of both of them began to slide. And on May 10, Luna was worth around $30. The following day it fell to less than 150 worthless. And the peg for Terra broke around a similar time as well. By May 11, it was down to 30 cents. It's now at about 10 cents.

And so, Alice, does Terra's fall matter just to people who hold Terra, or is it a sign of wider trouble?

It matters a lot to people who do hold Terra. At its peak, it was worth about $18 billion, and it's now approximately zero, although it still has a little bit of market cap. That's obviously sort of very painful for people who, who had held that asset. But it does matter for wider purposes as well. So as Terra was sort of slipping from its peg and the chaos was at its peak, you also saw another major stablecoin, the biggest one, it's called Tether. Yes, very similar word to Terra Tether, which has a market cap of about $75 billion. It also slipped from its peg. It dipped down to 95 cents briefly last Thursday. And as much as you know, the failure of Terra is a difficult pill for the crypto industry and crypto assets to swallow. The failure of something like Tether would be an order of magnitude wor worse. And these kinds of assets slipping from their peg, it might deter adoption from them and sort of undermine trust in any kind of crypto financial systems as a whole.

I'm curious why Tether has not suffered the same total collapse as Terra.

So they operated on sort of completely different systems. Tether is backed by, actually, we don't really know what. The company has refused to disclose precisely the nature of its backing assets, but it said at various points that it's a mix of corporate debt, cash and treasury bills. So it's backed by traditional financial assets that are held in investment accounts or bank accounts. And the way that it maintains its peg is that if you hold a tether token and you want to redeem it with them for a dollar's worth of, you know, US dollar cash, they will do that process for you. The problem with tether is that although it's told us a bit about what it holds, it's never fully disclosed all of the assets that are backing it. The boss calls it its secret sauce that it didn't want to tell everyone about. And so there have been times in the past where people have worried that it's not 100% backed. And that can cause these kinds of slips from the peg or sort of general fear that actually if all of Tether's holders went to try and redeem their tethers all at once, some of them would get left with nothing. That is a very different kind of problem than what happened with terror. But in general, it sort of gets to this bigger question, which is all these things called stablecoins. They say they're pegged to the dollar, but are they really backed by anything that means that they can maintain that peg?

So let's delve into that question a bit. What does this say about regulation? Who gets to call themselves a stablecoin and why?

So far, there's not really been any gatekeeping of the term, which is unusual in finance. Typically, when you put your money in a bank or in a money market mutual fund, if they say that you can redeem it for precisely how much you put in, those are sort of regulated terms and entities, and they have to have to keep their word. And the alternative is that they get bailed out. The banks and money market funds have both been bailed out when they have broken the buck effectively. So what this moment shows us is kind of how far behind regulation is of the stablecoin universe. And there have been calls at various points to treat stablecoins like banks because there are some similarities between the way that they're structured. But under sort of current rules, there's no sort of legal obligation for them to demonstrate that they have assets to back up their pegs or any policing of what it is that calls itself a stablecoin.

And so what do you think the goal of regulators should be, roughly? Do you think these types of investments will or should be allowed to fail?

It is an interesting question, this let them fail idea, because in some ways, the failure of terror is a good thing. I mean, not for the people that were holding it, but it was a very poorly designed project and mechanism. A lot of crypto industry insiders who'd looked at it closely, seemed to think that its failure was inevitable. It just took this sort of big market route for it to become unstuck. And markets are supposed to sort the wheat from the chaff. And that is precisely what they did here, given enough time. And if you sort of zoom out to the sort of big picture, what you want financial regulation to achieve, you want it to guard against systemic risks and you also want it to protect investors from being ripped off. The failure of Terra clearly wasn't systemic. You haven't seen it fail the entire financial system. But that doesn't mean that they can just sit around and wait for other stablecoins to fail. You know, in particular Tether, it may well be big enough to be systemically important. People think that it might be one of the largest holders of corporate debt in the world. And if it were to fail and dump all those assets, you could see really nasty ripples through other financial markets. So I think that there definitely is a case to intervene. You do want things like this to fail if they're unworthy, but that doesn't mean that you can just sit around and wait for them all to do it.

And Alice, you'll also be talking more about this when you host our sister podcast, Money Talks this week, right?

Yes. We will be dissecting all things markets, so stocks going down, bonds going down, crypto going down, and the unravelling of Terra and various other stablecoins. So if you haven't heard enough about crypto, then do listen in. You can hear it on Wednesday wherever you get your podcasts.

All right, sounds great. Alice, thanks so much for joining us today.

Thank you, John.

For a lot more analysis like this, subscribe to the Economist. To find the best introductory offer wherever you are, just go to economist.com intelligenceoffer.

In India, heat waves that typically start in May 1st showed up in March, and by now it's blistering. Over the weekend, temperatures in some places crossed 48 degrees Celsius. That's 118 Fahrenheit. In Jodhpur, a city in India's northern state of Rajasthan, a tanker sprayed people with water to cool them down. In Delhi, residents flocked to fill containers with drinking water imported by truck. The heat is uncomfortable, it's dangerous, and it's also been costly. On Saturday, India's government banned wheat exports, hoping to tame spiraling prices in the face of ruined harvests. But with temperatures expected to rise again this weekend, and with climate change firmly in people's minds, there are fears this extreme Heat could become a new normal.

Well, it's been really hot. If you're outside, it feels like you're in a furnace. So I avoid going outdoors much during the day, but not that staying indoors is any better. It can get uncomfortable very quickly if you don't have an air conditioner.

Vishnu Padmanabhan is a data journalist for the Economist.

There have been reports from Gujarat, which is a state in western India where birds were falling from the sky because they were dehydrated and exhausted. So it's just been really, really hot.

And that's much hotter than it historically gets.

Yes, well, the past couple of months have been hotter than usual in South Asia, even when you look at. I mean, this is usually the time of the year before the monsoons when you typically see high temperatures. But the last two months have been much hotter than usual. We have had consecutive days in the mid 40 degrees. And the other unusual part is how early the hot weather has started and how large a geographic area it's affecting. It's affecting large parts of north India, parts of South India. It's even gone stretched to parts of Pakistan as well. The data confirms this. This is the highest temperature since records began 122 years ago. And it doesn't look like it's easing up. Meteorologists are predicting more scorching temperatures later this week.

And so how are people dealing with those now historical heats?

Well, it's proving very dangerous for poor Indians who are sort of exposed to the heat the most. Many of them live in temporary homes that get built out of things like sheet metal. These structures have no windows, no proper ventilation. They turn into ovens very easily. And for them, it's very difficult to actually cope with it. Many of them won't have access to air conditioning, and many of them suffer from electricity power cuts. So for them, it's very difficult. And it's especially difficult in places where there's high humidity, like in Chennai, which is a city in the south on the east coast. The humidity there is making things really dangerous. This is largely because our vulnerability to heat as humans depends on our ability to sweat. Sweat evaporates and cools the skin. But in more humid places, such evaporation is harder. So the combination of heat and humidity, which is measured by something called a wet bulb temperature, is very dangerous. Sustained exposure to wet bulb temperatures exceeding 35 degrees is considered fatal. But even at 32 degrees, exposure can be exceedingly harmful. And in this heat wave, there have been already a couple of days in Chennai where this wet bulb temperature has exceeded 32 degrees, so it's having a big impact on people. And different city governments are trying the best now to respond in different ways.

And the question when presented with these historical highs and so on, is always whether or not it can be pinned on climate change. What connection do we think there is to climate change in this case?

I think it's definitely an example of what happens when things get hot, which is where the world is headed with climate change. So I think climate scientists have noticed that heat waves around the world have been made more common and hotter because of climate change. The world is on average 1.1 to 1.3 degrees warmer than in pre industrial times. And according to IPCC, UN body, even if we manage to cap this rise to less than 2 degrees by the end of the century, half of the global population will have been exposed to life threatening heat and humidity. India, of course, is especially vulnerable. The number of heat wave days in India has increased, but it's just not the heat. India is also experiencing more frequent serious weather events like exceptional levels of rains during monsoons and increased flooding.

But as for the current heat wave, what impact could that have on India?

It would have an impact on several different dimensions. There's the human cost. Obviously people have died in past heat waves, but it will also hit the economy. According to the World bank, rising temperatures could lower the standards of living for half the population by 2050. It would also hurt productivity of workers. Different sectors will also be affected. We are already seeing in this heat wave people are using much more energy because they are using air conditioning units more and fans are running more. That's put a huge demand on the power grid which really can't handle it. And ironically, a lot of the power being demanded now comes from coal fired power plants which will contribute more to greenhouse gas emissions. The other big sector that will be affected will be the agriculture sector. Higher temperatures hurt yield. We are already seeing this happen now with wheat production, which has been hit hard. And this also has important implications for the global food supply chain because wheat production is already stressed. And now with India also not being able to produce as much wheat, that could have a big impact on global food supply.

But if the causes here are ultimately global, what's to be done about these heat waves as they get more numerous and worse?

Yes, so there are measures that governments both at the state level and city level in India are doing. Not necessarily about the heat itself. The factors causing that are global, but these are measures in place to help people cope with the heat. So for example, several cities have developed heat action plans. The most famous one is in Ahmedabad in Gujarat, which has drawn up after a deadly heat wave in 2010. It has been very successful. The measures include an early warning system, which alerts residents to come in heat waves and tells health workers to prepare for an increase in admissions in hospitals. It also includes smaller measures. For instance, if temperatures are high enough, it compels authorities to keep gardens and parks open for shade so people can come in and rest there. Other cities have also tried some of these changes. Other changes include painting roofs of homes with solar reflective paint, which can lower indoor temperatures by several degrees. But ultimately, I think the best way to deal with this is to reduce greenhouse gas emissions to keep temperatures from rising. But this will require policies at both the national and global level. And until then, heat waves will keep getting more severe and it'll become harder to adapt until those changes happen.

Vishnu, thanks very much for joining us.

Thanks for having me. Disney.

It's become a regular weekend sporting event in Indonesia. Competitions between songbirds. Men crowd around cages encouraging their birds to sing to impress the judges. Winners can earn big prizes and acclaim, but the growing popularity of these contests is putting songbirds at risk.

Hundreds of songbird contests take place across Indonesia every year.

Charlie McCann is the economist Southeast Asia Correspondent.

You'll see these referees walking, you know, under these caged birds, judging the complexity and range of their melodies, also taking note of their stamina and posture as they kind of dance around their cages. For Indonesians, watching these songbird contests is much like watching a football or basketball game. The tournaments are really boisterous. You hear a lot of whooping and hollering.

And so what's in it for the competitors aside from pride? What do they get?

Well, if you do well in these contests, you can do very well for yourself. Prizes include televisions, motorcycles, cars. There are cash prizes of hundreds or even thousands of dollars. I spoke to one bird owner called Imam Safiyi. He has this stone magpie called Ethis. And Ethis, he's a prize winning bird. He has racked up scores of trophies and has won Imam over $1,000, which is a lot of money in Indonesia. That's half the average annual wage. Imam said that looking after his bird is much like looking after a child. It has this routine. You take him out in the morning, you let him enjoy the breeze, you feed him breakfast. Once the day is done, you cover the cage up, take him back inside and let him sleep. He attributes his bird's success to that consistent routine, good nutrition and maybe above all else, the love and care that he lavishes him with.

How did these contests come about?

Keeping songbirds has been part of the culture on Java, Indonesia's most populous island, for a very long time, centuries. A bird in a cage is actually one of the symbols of Javanese knighthood. Contests, though, didn't start to take off until the 1980s and 1990s. And that's because that was when contestants started replacing imported zebra doves with. With native songbirds. And the reason that's important is because these zebra doves, their vocalizations are fixed, they basically can't be trained, unlike these songbirds. So with this shift, it really opened up the tournaments to anyone who had the time and the patience to coach their birds.

And how common is it for people to own songbirds?

It's really common. One study conducted in Java in 2018 found that nearly a third of households keep songbirds, and their popularity is booming. The same study found that ownership of songbirds on Java has doubled over the past decade. Now, this would not be an issue were it not for the fact that demand for these birds means that traders are increasingly hunting for them in the wild. Just to give you some numbers, an estimated 66 million to 84 million birds are in captivity on Java, and a significant portion of them have been whisked from the forests of Indonesia. So many birds have been taken from the wild that more than a dozen species are in danger of going extinct. And the forest of Indonesia, it's increasingly difficult to find these birds. So traders are now looking further afield to the forests of Malaysia and Thailand, too.

And so is anything being done to protect the birds from going extinct?

I spoke to Serene Chung of Traffic, which is a wildlife monitoring group, and she says that the Indonesian government is aware of the problem and does forbid trade in protected species. And four years ago, it updated its list of protected species, which was important because it hadn't done that in 20 years. And it added hundreds of birds, including songbirds, to that list. As she also pointed out, very frequently we see news reports about the authorities confiscating birds that have been smuggled illegally and basically rescuing tens of thousands of songbirds.

And has that helped reduce the trade?

Well, this is the thing. I mean, the authorities are confiscating ever more songbirds, and yet you have estimates like, one researcher thinks that as many as 1 million birds were smuggled out of the forest of Sumatra, which is another big Indonesian island, in 2019 alone. And that's because even though the government is thinking about this issue, and it has updated its list of protected species. There are legal loopholes. Traders exploit those loopholes, and they exploit the fact that many of these laws are patchily enforced. This is the tragedy of this sport. Indonesia's love of bird song threatens the songbirds themselves.

All right, Charlie, thanks so much for joining us today.

Thank you very much, John.

That's all for this episode of the Intelligence. Let us know what you think of the show. You can get in touch at podcasts@exterator.com.

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