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Kazakhstan is becoming an important destination for Bitcoin miners seeking cheap electricity in a market that has seen reduced profits due to the halving. According to recent reports, the oil-rich Central Asian country expects the total amount invested in local cryptocurrency mining operations to double by the end of 2020 and attract $738 million over the next three years.
Unlike other countries in Central Asia, the Kazakh government has de facto legalized crypto mining, making the market more attractive to both local and foreign players. So, could this vast semi-desert land become a new destination for BTC miners?
From blanket crypto ban to legalization
The Kazakh government has recently adopted an overall friendly attitude towards crypto, although regulation of the sector remains minimal. However, the positive developments came before regulatory turmoil, with its central bank even suggesting a blanket ban on cryptocurrencies.
In early 2018, Daniyar Akishev, chairman of the National Bank of Kazakhstan, announced that his agency was considering outlawing all cryptocurrencies. Just a few months later, Kazakh President Nursultan Nazarbayev called for global cooperation on crypto regulation, but did not mention whether the regulation should encourage the growth of the industry or curb it.
Back in 2017, the Kazakh government-backed Astana International Financial Center signed an agreement with Maltese firm Exante to develop the Kazakh digital asset market, while the central bank announced it was considering using blockchain to sell short-term bonds to investors.
Things are starting to look more concrete and positive for local crypto miners in 2019. In December, local media reported that Kazakhstan’s lawmakers would not tax cryptocurrency mining until the mined assets are exchanged for fiat currency, as crypto mining would not be considered an entrepreneurial activity but a “purely technological process.”
A recent bill passed by the Kazakh Senate and signed by Nazarbayev in early June essentially legalizes mining, saying those involved in digital mining must inform authorities of their activities. It also emphasizes that miners are the legal owners of the digital assets they produce.
Didar Bekbauov, founder of Xive, a cryptocurrency mining marketplace, previously worked for Hive Mining, a company that provides hosting services to large international miners. Finalization: "The bill says that miners need to report their activities to the government. However, still no one knows how it will be implemented. Other than that, there are no regulations."
Cheap electricity attracts foreign companies
According to Bekbauov, the main mining companies in Kazakhstan are foreign companies from China, Japan and “other Asian countries.” There is also an international cloud mining company, Genesis Mining, with farms in several countries, and another non-Chinese mining giant, Bitfury, which is headquartered in Amsterdam.
“They are experienced miners, some private funds, private investors,” Bekkov said of the companies mining in Kazakhstan. The Xive founder added that about 90% of their mining activity is conducted on the Bitcoin blockchain, and he said the arrival of foreign companies is not difficult for local mortgage mining operations because Kazakhstan “still has a lot of electricity generation.”
Therefore, the main attraction for miners is not the regulatory framework, which remains unclear despite some positive developments, but rather the unusually cheap electricity prices. As of December 2019, the price of electricity in Kazakhstan was $0.041 per kilowatt-hour for households and $0.049 for businesses. In comparison, the average electricity price in the United States is $0.14, although some states, such as Texas, appear to offer competitive prices under certain conditions.
The price of electricity has always been one of the main factors in cryptocurrency mining, but it has become even more important after the Bitcoin halving in May. The halved reward prompted miners to sell their equipment or relocate to regions with cheaper electricity, such as Kazakhstan, Russia, the Middle East, and South America.
Thomas Heller, head of global operations at F2Pool, said that in addition to abundant and cheap electricity, Kazakhstan’s location also makes it a “fast-growing hotbed of Bitcoin mining operations,” stating:
“Kazakhstan is in the best location for mining. It has a cool climate and is close to China. It is becoming a popular location for Chinese miners to move older machines from China to Kazakhstan, taking advantage of cheap electricity prices outside of the hydroelectric season in Sichuan, China.”
Bekbauov said that most local mining operations are located in regions with high electricity generation, such as Ekibastuz, Karagandy, Pavlodar and Taraz, while the country enjoys an overall good climate for crypto mining most of the year. Dmitrii Ushakov, chief commercial officer of BitRiver, a major Bitcoin mining hosting provider in the Commonwealth of Independent States region, told Cointelegraph that Kazakhstan’s cheap electricity prices have attracted investors. “Mining electricity prices in Kazakhstan and some other former Soviet countries are comparable. This is the main reason for the current interest in mining in Kazakhstan.”
However, Ushakov added that “there are no natural prerequisites for cheap electricity in the country” as it is mainly produced by coal-fired power plants. He elaborated on some other drawbacks of Kazakhstan’s mining industry, namely the overall instability in the region and the lack of safety at local mining sites:
“This is risky because the market and other factors that influence the price of such electricity within a country can change rapidly. Another aspect that should be considered here is the security of these mining farms, which are often set up in a very short time by using old, unreliable infrastructure.”
Will Kazakhstan become a top three mining destination?
Last month, Kazakhstan’s Minister of Digital Development, Innovation and Aerospace Askar Zhumagaliyev announced that the ministry plans to attract $738 million in investments by 2023 for activities related to cryptocurrency mining.
Kazakhstan’s ambitious mining plans may seem staggering at first glance, but the country has some statistics to back them up. According to Zhumagaliyev, there are currently 14 cryptocurrency mining farms that have cumulatively brought in around $201.7 million in investments.
Furthermore, the Bitcoin Mining Map designed by the Cambridge Centre for Alternative Finance at the Cambridge University Judge Business School shows that the countries of the CIS region together constitute the fourth largest crypto mining region in the world. According to reports, in the second quarter of 2020, mining in Kazakhstan accounted for about 6.17% of Bitcoin's average monthly hash rate, only slightly lower than Russia (6.9%) and the United States (7.24%), while China remains the undisputed number one (over 65%). Alejandro De La Torre, vice president of the Poolin mining pool, agrees that under certain conditions, Kazakhstan could become the third largest destination in the near future:
“I do foresee Kazakhstan becoming a top three cryptocurrency mining destination due to the abundance of cheap electricity, mild temperatures, and the government’s ‘hands-off’ approach to mining.”
Other experts are more skeptical. BitRiver’s Ushakov believes that while low electricity prices are a solid advantage for Kazakhstan in the mining industry, the region itself is not stable enough to achieve significant growth:
“While low electricity prices make Kazakhstan a popular destination for mining, we believe that China, Russia and the United States will continue to be the world’s top three mining destinations due to increased investment in the mining sector, predictable energy policies, and a more stable political and economic environment for mining.”
Kristy-Leigh Minehan, a mining consultant and former CTO of Core Scientific, said she does not expect Kazakhstan to be a top-three destination anytime soon due to an apparent lack of interest from institutional players: “Bitcoin mining is becoming a destination for institutional investment seeking an alternative asset base; many are still concerned about Kazakhstan’s politics.” (Pencil) |
