An overview of the current state of Bitcoin mining in Kyrgyzstan

Kyrgyzstan has a complicated relationship with Bitcoin miners. Bitcoin mining is a huge opportunity for Kyrgyzstan if done right.

Bitcoin is becoming an increasingly important part of Kyrgyzstan's export trade.

The country’s vast hydropower resources and a murky regulatory environment have spawned a sizeable underground mining industry that has taken advantage of government subsidies on electricity prices, putting pressure on the already fragile power grid. Legitimate miners are working hard to replenish the country’s much-needed electricity resources.

This article explains the peculiarities of Bitcoin mining in Kyrgyzstan and analyzes the future of the industry.

This article is the latest in our series on Bitcoin mining around the world. Previous articles covered Sweden, Norway, Iceland, and Paraguay.

One of the least known countries in the world

Kyrgyzstan is arguably one of the least-known countries in the world. This small, landlocked, mountainous country in Central Asia borders Uzbekistan to the west, Kazakhstan to the north, China to the east, and Tajikistan to the south.

80% of the country is made up of mountains, and most of the 6.6 million people live in valleys and lowlands in the north and west. The country has 1,923 lakes and more than 25,000 rivers, with huge hydropower potential. The large amount of hydropower resources and favorable electricity subsidies have attracted considerable mining companies to settle here.

Kyrgyzstan is the seventh poorest country in Asia by GDP per capita. Like most developing countries, the economy is growing rapidly, but the country's poor electricity system is constantly hindering its development.

It is also a politically unstable country, having experienced three political crises in the past 18 years. As with many post-Soviet countries, the regulatory environment is a mess. Unlike North American or European businessmen, who can rely on relatively predictable legal systems, Kyrgyz businessmen must rely more on themselves and their networks, but this wild west environment can still provide great opportunities for entrepreneurs and investors with a tolerance for risk.

Bitcoin is Kyrgyzstan’s seventh largest export partner

Insiders in the country estimate that domestic Bitcoin mining will consume 80 megawatts of electricity. Like in other politically unstable countries with cheap electricity, miners in Kyrgyzstan try to minimize capital expenditures by using old-generation mining machines and rusty shipping containers. As a result, the average energy efficiency of its mining machines may be only around 50-60j/TH, slightly lower than the global average.

Given these assumptions, Kyrgyzstan’s hashrate output is approximately 1.6EH/s, which is equivalent to 0.5% of Bitcoin’s global hashrate.

At first glance, Kyrgyzstan’s Bitcoin mining industry may seem insignificant. However, it is an increasingly important source of exports for the country. At the current daily mining revenue of $80/PH (the price of hashrate), Kyrgyz miners generate approximately $47 million per year (2.1% of the country’s total exports of $2.2 billion).

At 2.1%, Bitcoin is the seventh-largest export “partner” for this small economy. Kyrgyzstan has a large trade deficit and needs new sources of exports to move away from its heavy reliance on gold mining, which historically accounted for around 40% of total exports.

Will digital gold one day replace physical gold as Kyrgyzstan’s most important export? The answer may be found in the following description of the country’s huge hydropower potential.

The power system is fragile, but has great potential

As mentioned at the beginning of the article, Kyrgyzstan is one of the poorest countries in Asia, so you can imagine the state of the country's power system. Let's put it this way, it's in pretty bad shape, but it has huge potential.

The country's power system was built during the Soviet era. Most of the power infrastructure, including power plants, substations, and transmission networks, is still in operation despite having long exceeded its useful life (30 years) due to underfunding.

At the same time, as shown in the above figure, the country's growing population is demanding more electricity. From 2017 to 2021, electricity consumption has increased by 3% per year, while the country's power generation has remained "flat". Since 2017, the power system's power supply capacity may even have declined due to wear and tear, and it is currently operating at full capacity to provide electricity to the country.

Kyrgyzstan has historically enjoyed a sizeable electricity surplus, but is now struggling with regular rolling blackouts as the system cannot keep up with demand. In the coming years, the country will need to add 100-150 megawatts of generating capacity per year to meet demand, in addition to replacing aging substations and transmission networks. Faced with huge electricity challenges, Bitcoin mining may be a solution.

Currently, 90% of the country's electricity comes from hydropower, while the remaining 10% is produced from coal, mainly to make up for low hydropower generation in winter.

Hydropower has a low marginal production cost, making it a magnet for Bitcoin miners seeking to minimize their electricity costs. Hydropower appears to make up a significant share of all the electricity systems needed by Bitcoin miners, and Kyrgyzstan is no exception.

Underground miners 'exploiting' electricity subsidies

Kyrgyzstan’s Bitcoin mining industry consists of two groups: legal miners and underground miners.

While legal miners follow regulations and pay taxes, underground miners use other industrial activities as a cover to take advantage of electricity subsidies that are not intended for them. In some cases, they even steal electricity. Currently, most of Kyrgyzstan's Bitcoin mining industry is made up of underground miners.

An underground miner could be a bread factory that repurposes its production facilities into a mine without registering as a miner. Thus, a bread oligarch could become a Bitcoin tycoon by purchasing electricity at subsidized industrial rates and using it to mine Bitcoin while pretending to produce bread.

These underground miners are often well connected to (or are themselves) government officials or other powerful people, and can continue to operate illegally in the wild commercial environment of western Kyrgyzstan. However, the central government has never given up on cracking down on them, confiscating thousands of machines in the past few years.

Why are there so many underground mining groups in Kyrgyzstan? The answer is subsidized electricity. The Kyrgyz government heavily subsidizes electricity by setting some of the lowest electricity prices in the world. Electricity suppliers are not allowed to charge consumers more than that price.

The country's residential and industrial electricity prices are $0.025/kWh and $0.033/kWh, respectively, far below the global median Bitcoin mining electricity price of $0.04/kWh to $0.05/kWh. The low electricity prices attracted an army of Bitcoin miners after the bull run in late 2017. The industry peaked at around 200 megawatts in 2019, driven by cheap equipment flowing in from China. At the time, the industry was not regulated, so there was no clear separation between underground miners and legal miners.

But governments and energy companies, which generally don’t like the sudden emergence of a new class getting rich by converting subsidized electricity into Bitcoin, temporarily banned technical licenses for mining operations in 2019. Since then, many formerly legal miners have been forced to start operating in the shadows.

The government even set a special electricity price for miners, which is $0.066/kWh, and an additional 15% miner-specific electricity tax. In the current market environment, such electricity price levels have forced miners to constantly break even. Of course, if you pay such a high electricity price, you will undoubtedly expose yourself to political risks, so almost the entire industry has begun to go underground to continue to obtain cheaper residential and industrial electricity prices.

The government is cracking down on underground mining and has managed to reduce the size of the industry from 200 megawatts to around 80 megawatts. However, the high financial incentive to extract electricity subsidies by mining Bitcoin will continue to attract operators, and the government will find it very difficult to get rid of these underground miners.

Underground miners are challenging the viability of Kyrgyzstan’s government electricity subsidies. Ultimately, these miners may force the government to reduce or abandon subsidies, which could lead to political unrest in the short term. However, reducing subsidies will likely have a positive long-term impact on Kyrgyzstan’s electricity system, as current low electricity prices do not allow power companies to recoup their investments, which has led to massive underinvestment in power infrastructure over the past 30 years.

Legal miners will fund construction of hydropower deployment

While the bitcoin mining industry in Kyrgyzstan is mostly comprised of underground miners, some highly sophisticated players have begun using mining to finance increased power generation capacity. These miners operate directly at hydroelectric power stations and purchase electricity from them, thus circumventing the strict regulations and high electricity costs that apply to grid miners and taking advantage of some tax incentives introduced to incentivize hydropower development.

Earlier, we mentioned how Kyrgyzstan urgently needs to develop more power generation capacity. Fortunately, due to its mountainous and river-rich topography, the country is rich in hydropower resources. Its annual power generation can reach 143 terawatt hours, which is more than 10 times the current built capacity and almost twice the annual power consumption of the entire Bitcoin mining network.

As mentioned above, electricity taxes are currently very low, so deductions are not allowed, which is a serious deterrent to investment. Hydropower projects can increase revenue, reduce risk, and make financing easier by selling some of their electricity to managed miners to recover dollars. These hydropower projects are also incentivized to sell some of their electricity to utilities to keep the government and local residents happy, which is a win-win.

The country is currently planning to build nine additional hydroelectric plants with a total capacity of 8.4 GW, almost 2.5 times the country’s current capacity. These projects have been on hold for years due to a lack of funding. If the current pilot projects of small hydroelectric plants are successful, Bitcoin miners could help realize these massive projects by providing the necessary funding.

Currently, Kyrgyzstan sells a large amount of its water resources to Kazakhstan, which uses it to generate electricity and sells it back to Kyrgyzstan at a high profit. Bitcoin mining gives Kyrgyzstan the opportunity to build hydroelectric power plants and monetize the electricity generated domestically.

Bitcoin Mining Conditions in Kyrgyzstan

A critical but often downplayed consideration in Bitcoin mining is climate conditions. Generally speaking, a cooler mining environment allows you to overclock more often when using firmware like LuxOS, running your machine longer, reducing cooling requirements, increasing the life of your machine, reducing maintenance costs, and ultimately increasing your Bitcoin earnings and mining efficiency.

What are the climate conditions like in Kyrgyzstan? The country has a rugged terrain with large differences in altitude, which means that climate conditions and temperatures vary widely from place to place.

The capital, Bishkek, is one of the warmer places in the country, with average daily temperatures ranging from -2.7°C (27.1°F) to 25.5°C (77.9°F) in the coldest and hottest months; summer temperatures can reach 40°C (105°F), which is too hot for Bitcoin mining.

However, most of the country’s legal bitcoin mining is done in the mountains, where the climate is perfect, allowing legal miners to operate more efficiently, while underground miners in cities will continue to struggle in the summer heat.

Bitcoin mining will bring huge development to Kyrgyzstan

Kyrgyzstan has a complicated relationship with Bitcoin miners. On one hand, underground miners are taking advantage of heavily subsidized electricity rates, putting pressure on the country's Soviet-era power system. When the government imposed unbearably high mining-specific electricity rates, much of the country's mining industry was forced underground. Since then, the government has been playing a game of whack-a-mole with underground mining.

On the positive side, legal miners could provide the necessary funding to develop the country’s vast, untapped hydroelectric potential. The country has the potential to produce 10 times more hydropower than it currently does, and desperately needs to increase generating capacity to power its growing economy. So far, hydropower development plans have been stalled by a lack of funding, with virtually no new power generation construction in the country since Soviet times. Bitcoin miners have already funded several of the country’s smaller hydropower plants, and if these pilot projects are successful, could help finance larger projects.

Kyrgyzstan has a huge trade deficit and relies mainly on gold mining for export revenue. Diversifying the export base with digital gold could be a good solution.

If done right, Bitcoin mining can be a huge opportunity for Kyrgyzstan. But we must remember that the country is politically unstable, anything can happen, and the huge potential hides a high risk.