Bitcoin mining is gaining momentum in Kazakhstan. Nothing happened after that.

Mining companies flock to the country to take advantage of cheap energy and looser regulation. Most are now gone, leaving behind old equipment and social tensions.

 

To get to the largest Bitcoin mine in Kazakhstan, you need to enter the Danish belt of the country, the city of Ekibastuz. In the northeast of the country, the capital Astana, similar to the country’s border with Siberia, has dilapidated shops and cramped residential houses from the Soviet era, known to locals as “” henhouse”. “.

 

In late October, I waited in a rented car in a downtown parking lot to join a short convoy to the mine, led by armed bodyguards and private security vehicles. . With the orange lights on, they passed through a narrow path that zigzagged between the waste storage area and the mine, which created swirls of gray dust. 

Twenty minutes later, a car was parked in front of the gate, guarded by a soldier in a black uniform with a Kalashnikov slung across his chest. Inside, many armed guards stood guard, and the surveillance cameras in the tower kept watch. “A picker,” explains Yerbol Turgumbayev, the mine manager of the Enegix owner. He had to scream over the sound of fans pumping hot air from eight 200-foot hangars, each filled with two-story computer racks.

 

At full capacity, the Enegix facility will consume 150 megawatts of electricity, five times the peak Ekibastuz consumption. This is just one of dozens of bitcoin miners that have moved to Ekibastuz and surrounding areas in recent years. After the collapse of the Soviet Union, a sharp decline in industrial and coal production left the region and Kazakhstan in general with a surplus of electricity. Eventually, Bitcoin miners realized this fact and started popping up in 2017, not only with cheap electricity but also with almost unlimited unused land for mining and lots of buildings. industry.

By the summer of 2021, through a combination of entrepreneurship, transformation, and circumstance, Kazakhstan has risen to second place in the world in terms of “hash rate”, a measure of the amount of computing needed to mine Bitcoin mining. 

 

But the lust for gold disappeared in the first place. Kazakhstan’s miners – both “white” miners who benefit from tax breaks and cheap electricity, and illegal “gray” miners who take advantage of criminal policy and governance Kazakhstan’s poor management and underground work are overloading the country’s energy sector. By the end of the year, more than 7% of the total electricity produced in Kazakhstan with a population of 19 million will be needed for mining. The shortfall turned the industry from surplus to deficit. Power shortages have left some countries without electricity, fueling tensions over corruption, nepotism and soaring fuel prices. In January 2022, this issue became a major protest. 

 

This is just the beginning of a scary year for crypto. In 2022, the crypto world is awash with scandals, from the collapse of stablecoin Terra to the collapse of third-largest crypto exchange FTX amid alleged fraud. But Kazakhstan’s experience also points to a slow-moving crisis in the crypto supply chain, where surface miners can thrive everywhere and raises fundamental questions about the integrity of the cryptocurrency. social, economic and environmental sustainability of the industry.

 

When Kazakhstan shut down bitcoin mining rigs, dozens of mining operations were halted. Almost all of the international miners have left, some fleeing across the border in the chaos. The Enegix is ​​still grounded, but operates at partial capacity, operating from midnight to 8 a.m. and on weekends, and using electricity imported from across the Russian border. Companies expect the environment to change, but with the bitcoin price now down to just a fraction of its 2021 peak, the industry’s economy has fundamentally changed. Bitcoin caravans are moving – some to China, Russia and the US, others to new frontiers in Central Asia and Africa. 

It removes trapped hopes and possessions: computers, server racks, and rusted electronics can no longer be used for other purposes. In northeastern Kazakhstan, MIT Technology Review spoke to miners who had no choice but to fail as they witnessed mines being mined or abandoned. 

 

Bitcoin critics say that what is happening in Kazakhstan is inevitable. It is an industry that often takes advantage of weak political institutions, stifles values, exacerbates social divisions, and drags it into geopolitical gray zones and borders. While advocates say it is high-tech export businesses that will form the basis of the new economy, the benefits in terms of employment and social security contributions appear to be the best. Industry comes and goes, gobbling up hundreds of millions of dollars in government subsidies, fueling corruption, hijacking the power grid and burning thousands of tons of coal every day. Leave nothing but stress and doubt when you leave. 

 

“They’ll go wherever they want until they get everything they need, and then they’ll move,” Pithazen said.

As an assistant professor at Northumbria University, he has studied the mining sector extensively. “It’s a parasitic industry.” 

The government of Kazakhstan hopes their crypto story is not over yet. Even if miners die and leave, officials are ambitiously looking to transform the industry, roll out the red carpet for crypto investors and exchanges, and turn the country into a financial hub. global electronics. The government sees this as a way to boost the financial and technology sectors. But he may face an uphill battle as he finds a way out of the realm of philosophy and practice to avoid oppression.

 

The innovation that started the Bitcoin group is ASIC, or Application-Specific Integrated Circuits. These custom chips can be set up to do trillions of guesses or hashes per second, and they also mine some bitcoins today. 

Introduced in 2013, this optimized ASIC transformed Bitcoin mining from a cottage industry (albeit using GPUs) into an industrial process. In 2013, the global “hash rate”—the number of guesses on the network—was 75 terahash (or 75 trillion hashes) per second. According to the International Energy Agency, as of 2016, it exceeded 1 million terahashes per second. The more computers on the network, the more competition there is, prompting miners to build larger and larger rigs. ASICs are relatively portable – you can ship them anywhere in the world, plug them in and mine.

 

“It’s a very simple market – there are two main components. One is the equipment. The other is the energy you need. That’s all,” says Alex de Vries.

 

Data scientist and founder of Digiconomist, a platform for monitoring energy consumption in the cryptocurrency industry. “As the Bitcoin price reaches a decent level and the industry starts to specialize, we will see a trend of miners looking for cheaper energy places to do business.”

The United States was initially the center of gravity for the industry, but China has grown rapidly, with large deposits appearing in remote parts of the country, including Xinjiang, Inner Mongolia and Sichuan, where many are located. hydroelectricity and little government control. Border crossings are also popping up elsewhere, including the Baltic states, parts of Norway and Sweden and Iceland, where geothermal energy is abundant.

 

It’s not just cheap electricity that attracts miners. The industry thrives in weak or uninterested countries, where miners can or will find a home, or where there is an urgent need for unattended currency. Usually this refers to the countries of the former Soviet Union (sometimes referred to as the Commonwealth of Independent States or the CIS), where the transition to the free market destroyed many industries and infrastructure becomes unfeasible. Oil and gas-rich Russia will be accepted, as will Ukraine, at least until early 2022. 

 

There were representatives of the secessionist and vassal regimes in Moscow. In Moldova’s Russian-backed breakaway region of Transnistria, opportunistic entrepreneurs have built a small mining industry using free gas-powered electricity provided by Gazprom, the Russian energy company said. funding the regime despite threats to the regime. international sanctions. In the Abkhazia region of Georgia, which was illegally annexed by Russia in 2008, bitcoin producers pushed the shaky energy sector to the brink of sustainability ahead of a final ban in 2021. That same year, the land of Kosovo in northern Serbia has become a mining center. It was created in areas that do not pay electricity bills due to not recognizing the legitimacy of the Pristina government.

Howson compares bitcoin mining to a transparent pill that dentists give to primary school students in the UK for bright colouring.

 

“I think that’s what bitcoin does,” he said. “It covers the world and opens up areas of geopolitical tension, poverty and corruption,” he said.

 

Kazakhstan has won big for miners accustomed to the difficult border. It has many attractive factors – cheap prices, subsidized energy and real estate in the industrial zones are falling into disrepair. It is also a relatively safe and stable power whose post-Soviet decline was characterized by the export of natural resources. For nearly 30 years, the country has been ruled by old-fashioned Nursultan Nazarbayev, Central Asia’s security mogul with predictable policies. Nazarbayev officially stepped down in 2019, but he and his allies remain close to the center of power.

 

“It has excess [energy] capacity, [and] facility,” said Denis Rusinovich, a bitcoin mining veteran working for Now Maveric Group, a Swiss crypto consulting firm. infrastructure is very cheap because there are all the old Soviet buildings in the middle of it.” Rusinovich, who took up residence in Kazakhstan in September 2017 and later founded the Kazakhstan National Blockchain and Data Center Trade Association, a trade association and lobbying group: “There is a kind of engagement typical corruption in this CIS. I think it exists in the whole region,” said Rusinovich. . However, “well, we should say it’s more stable,” he said, “because there’s a president who’s been there for 20 years.

 

As Kazakhstan’s bitcoin mining industry took off in 2018, several miners settled on existing structures; Others use portable modular truss in shipping containers. Local entrepreneurs have begun to build exceptional infrastructure, including warehouses and powerful electrical equipment. There is no legal way to convert Bitcoin to fiat currency in Kazakhstan. So instead of mining on their own, companies like Enegix have built their own facilities to host international customers, who can ship machines to countries and plug them into the grid. .