How the great migration of cryptocurrency mining is playing a rising role in the global energy crisis
As the country’s central bank and state authorities followed through on pledges to effectively wipe out crypto mining operations in China, the Cambridge Centre for Alternative Finance (CCAF) estimated the country’s average monthly share of the Bitcoin network hashrate had fallen from near 70 per cent in September 2020 to 0 per cent by August 2021.
Meanwhile, the neighbouring republic of Kazakhstan had become an obvious destination for many cryptocurrency miners forced to flee China, with an abundance of cheap electricity awaiting miners and foreign mining farm owners searching for new pastures in which to build their fortunes.
According to estimates behind the Cambridge Bitcoin Electricity Consumption Index, based on geolocational data collected from a set of cryptocurrency mining pools, Kazakhstan’s average monthly share of the Bitcoin network hashrate rose as China’s vanished – increasing by almost 10 per cent in two months as it jumped from 8.8 per cent in June to 18.1 per cent in August 2021.
“The Bitcoin protocol – per se – has no preference for geography," says Professor Aggelos Kiayias FRSE, chair in cybersecurity and privacy at the University of Edinburgh.
“However it rewards miners with a digital asset that is traded globally and in this way it incentivises them to find the cheapest possible electricity so they maximise their profit.”
Professor Kiayias adds: “For this reason, countries that offer subsides for electricity, have lax regulation and/or have cheap electricity due to natural resources can be very attractive as places to set up mining operations.
"This can lead to over reliance of Bitcoin to such countries and over exploitation of preferential electricity rates and resources which, in turn, can lead to the withdrawal of subsidies and the unavailability of resources.”
Indeed, as quickly as Kazakhstan became the world’s second largest home to crypto mining behind the US, the proliferation of mining ‘hotels’, allowing people to rent space in data centres for their mining rigs, and ‘grey’ unregistered miners guzzling gigawatts of electricity per year illegally across the country were blamed for a buckling national grid.
"The thing is, China was the world’s largest cryptocurrency producer,” says Alex de Vries, a data scientist and cryptocurrency researcher who created his own landmark consumption indexes for Bitcoin and Ethereum at his site, Digiconomist.
"So when all the miners have to migrate, you're effectively relocating the energy consumption of a country like Argentina to somewhere else – to a grid that is a lot smaller than what China is capable of offering.”
The Kazakhstan Electricity Grid Operating Company (KEGOC) stated in late October that power consumption was exceeding generation “due to the sharp increase in consumption by the digital mining consumers (over 1,000 MW) and higher number of emergencies at power plants”.
“My guess is that the government wanted to make a quick buck [off cryptocurrency mining],” says Dr Luca Anceschi, Professor of Eurasian Studies at the University of Glasgow, “then they discovered they couldn't manage it because they haven't got an infrastructure big enough”.
For Dr Anceschi, Kazakhstan, as an energy rich nation, is facing a situation it should never have been in in the first place.
"A country like Kazakhstan does not have to be in the position it is in with its energy,” he says.
"It’s like if Scotland ran out of water, with all the rain we get.”
When Kazakstan’s Bitcoin mining operations ramped up in late 2021, even some of the country’s largest, oldest data centres found themselves in a different landscape to the one they enjoyed previously.
Electricity supply grew patchier by the day amid electricity rationing for crypto mining farms, with these issues compounded further when the Kazakh government turned to internet shutdowns to try dispel uprisings and riots.
On Wednesday, 5 January, anger over government corruption, inequality across social classes, doubled Liquefied Petroleum Gas costs and complex, historic problems in Kazakhstan erupted on the streets of Almaty in a demand for change, with 164 people killed in protests across the country.
And when the Kazakh government shut down the internet, limiting online freedom of speech, access to social media and web services in Kazakhstan, Bitcoin’s hashrate also appeared to take a hit across several major mining pools as the country’s miners were unable to access the network – initiating a flash cryptocurrency crash in which already dulled prices of Bitcoin, Ethereum and more sank even lower.
With many other miners now looking to the US for greater geopolitical, economic and energy stability for large-scale mining farms, the great cryptocurrency mining migration looks only to continue apace in states like Kentucky and Texas, thanks to their cheap energy and minimal regulation.
The Electric Reliability Council of Texas (ERCOT) says it expects energy loads to increase five-fold by 2023, with demands of crypto mining and its data centres requiring up to 5,000 megawatts of further electricity.
"Once Kazakhstan is done with this industry and its government tries to kick out Bitcoin miners, they will probably go elsewhere,” says Mr de Vries.
"But then the next country will have the same problem.”
Mr de Vries and Dr Pete Howson, Senior Lecturer in International Development at Northumbria University, recently explored the impact of cryptocurrency miners relocating from country to country and that of mining itself on vulnerable communities in countries with poor energy infrastructure and inexpensive, fossil fuel-powered electricity in a joint paper.
It brought Dr Howson to the conclusion the energy-intensive process of mining Proof-of-Work cryptocurrencies such as Bitcoin and Ethereum “can be seen as parasitic, in the sense that it sort of plugs itself in to local resources”.
“It takes and takes until the host has to try to eliminate it through regulation, banning or violent uprising, or it kills the host because it's taken too much of the resources that it needs,” Dr Howson continues.
"I think there's this idea amongst some crypto proponents that, especially with Bitcoin, mining is coming to the rescue in providing a source of income for so-called stranded energy resources that states can't find a buyer for.
“But the reason that crypto and Bitcoin miners move to these locations is because they have vulnerable, poor populations, rusty infrastructure and weak regulatory regimes.
“That's the reason they go there – to exploit them, not help them.”
Kosovo began the new year by banning cryptocurrency mining, with police seizing hundreds of expensive graphic processing units (GPUs) and application-specific integrated circuits (ASICs) in nationwide raids as the country’s Minister of Economy Artane Rizvanolli cited the potential for blackouts, while Iran introduced a second four month suspension of cryptocurrency mining operations in the country in late 2021.
Such moves are echoed throughout Central Asia and Europe – where countries such as Abkhazia, Georgia and Uzbekistan have turned to crypto mining bans and suspensions to contend with increased demand for cheap electricity, while popular Scandinavian mining countries Norway and Iceland look to back Sweden’s push for an EU-wide ban on cryptocurrency mining.
"What it is inevitable is not that mining will be banned,” says Professor Kiayias, “but the fact that Bitcoin miners will seek the cheapest possible electricity and, if they are unencumbered by regulation, they will not stop at utilising any source, at any country, no matter the environmental impact.”
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