Although they may appear like jargon, economic concepts like recession and inflation can have a detrimental impact on the economy. Another term for a downward spiral of unfavourable economic events is the "doom loop" in economics.
An impending doom loop, according to Bitcoin enthusiast and former CEO of BitMEX Arthur Hayes, will push the price of gold to $20,000 and the price of Bitcoin to $1 million.
Here, we've broken out Hayes' Doom Loop theory and discussed potential triggers for the sharp rise in asset prices.
What Is a Doom Loop?
A doom loop is a word used to describe an economic scenario in which one unfavourable event feeds into another unfavourable event, creating a downward spiral or cycle with worsening circumstances. It is frequently defined as a downward cycle that feeds on itself, caused by a number of unfavourable economic factors.
Doom Loop Example
The Greek Debt Crisis of 2009 is the ideal illustration of the doom loop. Generally speaking, it is believed that the 2007–2008 Global Financial Crisis served as the catalyst for the Greek debt crisis. The debt crisis, however, was only the culmination of a declining trend that began in the 20th century.
Greek financial issues started as a result of an increase in sovereign debt between 1980 and 1990. With the end of military authority came a civilian administration that didn't care about the nation's financial situation. They increased Greece's debt and fabricated the state's financial situation to give the impression that everything was normal.
The government's debt pyramid was eventually overturned by the Global Financial Crisis. The previously kept secret details on the state's debt became public by the time the financial crisis started to lessen. When creditors and investors arrived at Greece's door, the debt-to-GDP ratio reached a peak of 180%.
Greece's debt problem started in the 2010s, but it hasn't totally subsided since then. Its debt-to-GDP ratio reached a high of 206% in 2020 as a result of the COVID-19 epidemic, although it dropped to roughly 197% in 2021.
What Is the Bitcoin Doom Loop?
The Doom Loop doesn't just appear, as we've seen. Instead, a string of unfortunate occurrences triggered the Doom Loop. At this moment, it starts to spiral downward without apparent end.
In a piece of writing, former BitMEX CEO Arthur Hayes predicted that a series of events and the ensuing doom spiral will raise the price of gold as well as Bitcoin by over 2500%.
The doom loop's initial trigger event has already taken place. The world as we know it was altered by the global pandemic of 2020. The subsequent event, Russia's invasion of Ukraine, happened somewhat recently. The area was destabilised by this invasion and the ensuing war tensions, which drew sanctions from the Western countries.
These financial sanctions will cause Russia to stop supplying all the things that it has previously supplied in large quantities, which will significantly increase the price of things in the West.
How Does the Doom Loop Affect Bitcoin?
Hayes believes that these events, particularly the West's control of foreign exchange reserves, will force countries to seek alternative investment opportunities. Hayes drew on China as a case study because the country has some of the largest reserves in the world.
China has an estimated $3 trillion in reserves, about one-third of which is held in U.S. government bonds (though this number is declining). However, U.S. sanctions against various regimes make it clear that the U.S. dollar may not be the safest form of reserve holding.
The dilemma is where to move the money. Selling everything is out of the question because that would collapse markets around the world. Investing in storable commodities like gold is another option, but the top ten gold-producing countries do not produce enough to meet China's demand, and storing $1 trillion worth of gold is no mean feat. This is where the next and most viable option comes in: Bitcoin.
Investing China's foreign reserves in Bitcoin involves more than just buying Bitcoin. The first step is to reevaluate China's current mining policies. China has banned mining of cryptocurrencies because it is very energy intensive. However, if China were to invest in hydrocarbons to build new and existing power plants, it could meet electricity demand and attract crypto miners with cheap electricity (ignoring the environmental costs of fossil fuel bitcoin mining).
This would increase bitcoin mining and the crypto hash rate, which is important for the bitcoin price.
The nature of crypto mining explains the relationship between Bitcoin's hash rate and price. In mining, nodes solve complex mathematical equations with computational power to validate transactions and earn rewards. This activity contributes to what is known as the network's hash rate, which is the amount of computing power that flows into a network.
As more nodes mine a cryptocurrency, the network's hash rate increases, which means three things. First, mining that coin is profitable; second, demand for the coin is high; and third, the network is decentralized, which means the network is largely safe from malicious actors.
It is understandable that miners flock to cryptocurrencies whose mining is profitable, and that users invest in networks that are safe from attacks.
China could impose a tax on block rewards and transaction fees to recoup all its money. As Bitcoin's hash rate rises, so does the price of the cryptocurrency, and China's holdings of the asset also rise. In time, other countries with foreign reserves in U.S. Treasuries may also open their eyes to the country's precarious control over their funds. Most likely, countries will buy a mix of storable commodities like gold and bitcoin.
This Is Good for Bitcoin
According to the meme, "This is good for Bitcoin." A doom loop scenario that forces powerful nations to move away from the US dollar and towards alternative assets may have a significant impact on Bitcoin.
The most appealing choice is bitcoin because of its quick ascent from an asset worth zero to one worth trillions of dollars. The market will grow as additional nations make investments in the cryptocurrency asset, pushing the coin's price over the estimated $1 million.
