Despite the legions of critics declaring that the crypto winter has arrived, there are more than enough reasons for bulls to remain optimistic.

AsKai Nguyen stepped out of the house his family had occupied for generations farming the northern plains of Vietnam, he remarked how it was unseasonably warm for this time of year.

Winters in Vietnam’s fertile north were not known to be particularly harsh, but even this winter was exceptionally mild by the country’s standards.

And over the past several decades, Nguyen had noticed that the growing seasons seemed to be getting longer and the winters, milder.

In some years, Nguyen could even get away with three harvests, instead of the two that was typical for that latitude.

While climate change may be wreaking havoc for weather patterns globally, there have also been unexpected winners and Nguyen has been one of them.

Everyone’s a Winner (Sort of)

Not dissimilarly, years of negative real interest rates has proved a boon for all manner of risk assets, even as bondholders have seen the value of their investments eroded.

But with the world’s major central banks tightening monetary policy and either starting to raise interest rates or raising them already, risk assets have gotten off to a poor start in 2022.

Highly-prized tech stocks have stumbled at the start of the year and cryptocurrencies have not been spared either.

Bitcoin is now over 40% off its all-time-high at the time of writing and there has been no shortage of critics waiting to dance on a cryptocurrency grave or two.

But how much lower can Bitcoin go?

Much depends on the timeline that investors see themselves in.

In 2017, the launch of cash-settled CME and Cboe Bitcoin futures saw the bellwether cryptocurrency surge to an at the time all-time-high of near US$20,000, swept up by expectations that institutional investors would rush to embrace the nascent asset class.

But 2017 also dovetailed with the initial coin offering craze, with many projects either outright scams or the product of opportunistic individuals looking to sell the “next big thing” and admittedly, the difference between the two was more imagined than real.

These ICOs raised billions of dollars worth of cryptocurrencies, mainly Bitcoin and Ether, and since few of the individuals who raised these amounts were ever interested to do anything about the projects they raised them for, became net sellers of the very cryptocurrencies they soaked up from investors.

Because there were only sellers and few (if any) buyers, cryptocurrencies inevitably crashed, sparking off the long “Crypto Winter” until the pandemic changed all that.

But it’s also worth recalling that 2017 was hardly the first major Bitcoin crash.

In November 2013, Bitcoin rallied to a high of around US$1,150, before dropping by around 84% to US$180 just over a year later in mid-January of 2015.

Four years later, Bitcoin, which peaked around US$19,000 in December 2017, bottomed out about a year later at US$3,200, a cumulative drop of around 83%, not far off from its previous capitulation in 2013.

Were this historical pattern to repeat itself, Bitcoin should fall to a low of around US$11,500 this November, around 83% off its 2021 November peak.

Yet despite economist Nouriel Roubini and other critics chomping at the bit to declare the demise of Bitcoin and its brethren, there are reasons to believe that this time really is different.

Is This Time Different?

Cryptocurrencies today are a much larger asset class than they were in the 2010s.

Whereas the entire cryptocurrency market was barely worth a billion at the start of that decade, Bitcoin alone pushed around US$1 trillion in market cap last year.

The process of adoption by individuals and institutions continues apace, with even ride-hailing giant Uber conceding that at some point it may have to accept cryptocurrencies as a form of payment.

Almost every other week, some of the world’s biggest asset managers are creating new cryptocurrency products and finding ways to get more investors onboard.

Last week Fidelity, one of the world’s largest asset managers, launched a Bitcoin ETF product underpinned by actual Bitcoin and Singapore’s largest bank DBS Bank, announced that it would be making cryptocurrencies available to retail investors by the end of this year.

Some of Wall Street’s biggest names have embraced cryptocurrencies, whether on their balance sheets or for their clients, while some of the world’s biggest payment companies are working to process and accept them as payment methods.

And while hedge funds formed the sharp tip of the spear when it came to trading and investing in cryptocurrencies, some of the financial universe’s most conservative participants have also started lining up.

Sovereign wealth funds, pension funds and massive endowments have all started sniffing around cryptocurrencies, with varying levels of commitment, from “exploring” to “invested.”

And given the relentless money printing by the world’s major central banks in the period after the 2008 Financial Crisis, it’s only a matter of time before a respectable central bank admits that it has some Bitcoin in its reserves, just in case.

Digital Gold

Despite three being no shortage of competing narratives as to the nature of Bitcoin, it can be argued as serving the role of “digital gold.”

Indeed, a study of fllows has shown that when demand for gold has gone up, flows into listed Bitcoin products has fallen and vice versa.

As Manny Rincon-Cruz argued last month,

Bitcoin’s core value proposition, and technological innovation, is digital scarcity via a public, decentralized ledger that tracks a fixed supply of 21 million bitcoins.

Rincon-Cruz suggests that Bitcoin is today playing the role that gold played in the inflationary days of the 1970s, when the Nixon administration first abandoned the dollar’s peg to gold.

Soon after the Bretton-Woods system which allowed a dollar to be exchanged for its equivalent in gold was abandoned in 1971, the price of gold surged by nearly ten times from a low of US$256 in 1970, to a high of US$2,348 by February 1980.

In the nine years after the U.S. took the dollar off the gold standard, inflation soared and consumers were hit with soaring energy and food prices.

Things came to a head when then-U.S. Federal Reserve Chairman Paul Volcker was appointed in August 1979.

Volcker raised the U.S. Federal Reserve funds target rate from 10.5% when he was appointed, to 20% just seven months later, which sent gold plummeting and by January of 1985, the precious metal was back below US$800.

Fast forward to our current epoch and if gold in the 1970s is analogous to Bitcoin today, could a more hawkish Fed spell the demise of Bitcoin?

Ample savings from the pandemic because of lowered consumption forced by repeated rounds of lockdowns has meant that consumers can stomach higher prices and suppliers are more than willing to oblige, whether they’re justified or not.

Inflation? What Inflation?

But inflation isn’t a global phenomenon — the world’s second largest economy, China, isn’t facing the same price pressures that Europe and the United States are having to contend with.

In fact, Beijing is actively looking to loosen monetary policy and ease liquidity conditions to reflate its rapidly slowing economy.

The divergent paths of the People’s Bank of China and the U.S. Federal Reserve also means that there’s a limit to what the Fed can do.

In 2015, when the Fed wanted to tighten conditions, policymakers considered that China, which had at the time suffered a horrendous stock market correction, was looking to loosen rather than tighten, and ultimately held back.

And even if the Fed were to roll out five 25-basis point rate hikes this year, real rates, adjusted for inflation, will likely remain negative.

Because the U.S. government still issues the world’s safest financial asset, U.S. Treasuries, a world awash with savings and in search of a guaranteed returns will almost inevitably ensure a cap on real yield.

Consider that despite benchmark U.S. 10-year Treasury yields soaring past 2% in the first two weeks of February, they’ve nonetheless sunk on concerns that Russia could invade Ukraine.

Because the U.S. continues to provide the safest asset — a bond paying a fixed annual amount — Washington can afford to pay relatively low nominal rates and more often than not, negative real rates.

So investors will still need to look for assets that can offset these negative real rates and that could potentially come in the form of cryptocurrencies.

Volatility? What Volatility?

Although Bitcoin has had a dismal start to 2022, it has been far less volatile compared to the tech-centric Nasdaq 100, which observers note it has an increasingly strong correlation to.

Whereas Bitcoin moved over one standard deviation from its average in either direction just five times so far this year, according to data from Bloomberg, the Nasdaq 100 has had a far wilder ride, with swings more than one standard deviation having occurred 12 times in 2022 alone.

Part of the reason for that of course has been leverage.

Whereas much of the leverage in cryptocurrencies has already been flushed out, there is still plenty of margin in the Nasdaq 100, making bets in either direction swing even more violently than they otherwise would.

Even in the typically speculative world of cryptocurrencies, the use of margin has been down, with decentralized finance or DeFi protocols Maker, Compound and Aave seeing just US$17.3 billion in margin loans outstanding as at the start of February this year, about 24% off its peak in early December 2021.