Mining in Kazakhstan
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Central Asian energy superpower Kazakhstan skyrocketed to become the world’s second largest bitcoin miner in 2021. However, the seemingly invincible bitcoin mining industry soon began to struggle to grow and suddenly found itself in a dire situation of electricity rationing. As a result, the country’s share of the global hashright plummeted from a peak of 18% in October 2021 to just 4% in May 2023.
Kazakh bitcoin miners are currently at a crossroads as a new bitcoin mining law is being implemented. This law is exceptionally strict, but still welcomed by most Kazakhstani miners desperate for regulatory stability after being trapped in a Kafkaesque bureaucratic mess for over a year now.
- The rise and fall of Kazakhstan’s bitcoin mining industry
- Kazakhstan gets its power from unallocated coal
- Miners can now only use licensed service providers
- Miners become last in line for electricity supply
- New electricity tax sets minimum electricity price
- Production conditions for miners in Kazakhstan
- Conclusion
The rise and fall of Kazakhstan’s bitcoin mining industry
Most observers were surprised when, out of nowhere, Kazakhstan emerged as the world’s second largest bitcoin miner in 2021. During that year, the country’s bitcoin mining capacity grew from 500MW in January to 1,500MW in October, and its share of the global hashrate increased from 6% to 18%. Kazakhstan has suddenly become a bitcoin mining superpower.
However, the celebration of bitcoin mining in Kazakhstan did not last long. After peaking in October 2021, the volume of mining in the country has sharply declined: it is now only 400 MW, which corresponds to 4% of the bitcoin hashrate. The once great bitcoin mining industry in Kazakhstan has become a shadow of its former self.
Let’s take a brief excursion into the history of bitcoin mining in Kazakhstan to understand what led to the rapid rise and fall of the industry.
The outstanding growth in 2020 and 2021 was driven by four factors. The most important factor was widespread access to cheap electricity. The Kazakh government caps electricity prices at $0.02-0.03 per kWh. This gave Kazakh miners access to globally competitive electricity prices.
In addition, low electricity prices incentivize Kazakhstani power plants to mine bitcoin using their power rather than selling it to the grid. If you, the power plant owner, can choose between earning $0.25 per kWh from mining bitcoin and a lousy $0.02 per kWh from selling electricity to the grid, the choice is easy, isn’t it? Faced with this choice, many Kazakhstani power plants have installed bitcoin miners right at their facilities.
The second growth factor was the huge influx of capital from Western miners who were looking to install miners quickly and cheaply during the previous bull market. Kazakhstan was considered an affordable and relatively safe place to mine bitcoin, so Kazakh hosting providers had no problem filling their shelves with machines owned by American and European customers.
The third growth driver was the ban on bitcoin mining imposed by China in May 2021. Shortly after China’s ban, mining equipment began flowing into neighboring Kazakhstan, which stimulated the construction of even more mining facilities to house the equipment. In addition, no longer being able to sell products on the Chinese market, rig manufacturers, in particular Canaan, began to target the Kazakhstan market more actively.
The fourth growth factor was the free regulation in Kazakhstan and tax incentives provided to IT companies. Kazakhstan is seeking to diversify its commodity-based economy and offers a number of advantages for IT companies. Bitcoin miners, being pseudo IT companies, have been quick to take advantage of these tax incentives.
Cheap electricity, huge demand for hosting during the bull market, wide access to cheap Chinese machines, free regulation and tax incentives created the perfect breeding ground for Kazakhstan’s booming mining industry. Unfortunately, the rapid growth soon spiraled out of control.
In October 2021, the total bitcoin mining load in Kazakhstan reached 1.5 GW, up from just 200 MW a year and a half ago. This is a huge increase even for a huge country like Kazakhstan. The only way for the power grid to safely turn on such a gigantic bitcoin mining load without a corresponding increase in power supply is to ensure that miners shut down their machines during periods of peak demand. This concept is called “demand response” and allows more modern power systems, such as Texas’, to safely integrate hundreds of megawatts of miners and even use the flexibility of miners’ demand to balance the electric grid.
Unfortunately, Kazakhstan’s Soviet-era power system does not have a well-developed demand response system and struggles to cope with sudden increases in mining demand. The first blackouts occurred in the summer of 2021 in the power-starved south of the country. Soon Kazakhstan’s grid company KEGOC warned that miners may have to reduce their electricity consumption.
Starting in September 2021, KEGOC began cutting electricity supply to bitcoin miners in the south of the country. The situation only got worse, and soon more and more miners found themselves in a bitcoin miner’s worst nightmare – electricity rationing. Miners could now only use electricity imported from Russia at inflated prices, causing many businesses to go bankrupt. Many of the remaining ones operate in a limited mode, only on weekends or at night.
For more than a year now, Kazakhstani miners have been experiencing serious difficulties in the face of electricity restrictions and unclear regulation. However, those who are still operating are more optimistic than they have been recently, as a new law was recently passed that brought clarity to the regulation of the industry.
Kazakhstan gets power from unallocated coal
Kazakhstan, with its huge reserves of oil, gas, coal and uranium, is an energy superpower. However, the country is landlocked and the nearest seaport is thousands of kilometers away, making it difficult to transport these energy resources. Coal has the lowest cost density of all these energy resources, so Kazakhstan uses it for domestic power generation, while it exports most of its oil, gas and uranium production.
In 2021, 68% of the country’s electricity was generated by coal, 20% by natural gas, 8% by hydropower and 4% by wind and solar power.
Most coal-fired power plants were built in Kazakhstan during the Soviet era, and today they are suffering from decades of wear and tear. Although the country is building several new coal-fired power plants to replace outdated ones, the share of wind and solar power is likely to increase in the coming years as the Kazakh government plans a significant build-up of these resources. The vast windy steppes have decent solar and excellent wind potential.
It may seem strange to you that the world’s largest uranium producer has no nuclear generating capacity. However, the country is planning to build new nuclear power plants with a total capacity of 2.4 GW by 2035, which will be powered by locally produced uranium. Nevertheless, 2035 is a distant future, especially for the time-consuming bitcoin mining industry. Therefore, coal will remain the base load in Kazakhstan for the foreseeable future, although the share of wind and solar power will increase slightly.
The state-owned company KEGOC manages Kazakhstan’s national power system, and several regional power companies are involved in electricity distribution and sales. Most generation assets are owned by private enterprises. Miners in Kazakhstan are interested in receiving electricity from private coal and gas-fired power plants, which allows them to save on transmission and distribution fees.
Kazakhstan is a huge country with large distances. Most of the electricity production is concentrated in a few industrial cities in the north-east of the country. These centers of power generation and transmission have the largest concentration of production capacity. These are cities such as Karaganda, Pavlodar, Oskemen and Ekibastuz.
There is also mining in the west of the country, near oil and gas fields on the Caspian Sea. In this area, miners typically generate their own electricity either from associated gas or from gas pipelines. Kazakhstan’s mining industry is likely to move to this region to take advantage of associated gas from oil production, as this may be the only long-term solution to avoid heavy regulation. It is likely that some miners will also use associated gas from coal mining in Karaganda.
The uncontrolled growth of the bitcoin mining industry eventually forced the government of Kazakhstan to take action. After more than a year of uncertainty, a new law “On Digital Assets in the Republic of Kazakhstan” came into effect on April 1. The government could have banned the industry, but instead it sought to ensure a stable environment through strict regulation, which is standard procedure for industries it considers critical.
The new law has four implications for miners. First, miners must obtain licenses for their activities. Second, miners will only be able to use licensed crypto exchanges and mining pools. Third, miners will be last in line to receive electricity. Fourth, a tax on electricity for miners will be introduced.
Miners can now only use licensed service providers
In addition to controlling the miners themselves by imposing a licensing requirement, the government of Kazakhstan also seeks to obtain a full overview of the bitcoin flow from the mining pool to the miner and the exchange. Accordingly, the government has decided that all mining pools operating in Kazakhstan must be licensed and report miners’ income to the government of Kazakhstan for tax purposes.
In addition, miners will be required to sell their bitcoins on local licensed exchanges. This requirement will be introduced gradually: currently, 25% of bitcoins must be sold on local exchanges, from 2024 – 50%, and from 2025 – 75%. Currently, miners have a choice of seven licensed exchanges to choose from, including Binance, which is known to be actively cooperating with the Kazakh government.
All Kazakhstani mining pools and crypto exchanges must be registered with the Astana International Financial Center (AIFC), a regional financial and technology hub opened in 2018. Kazakhstan’s economy is heavily dependent on commodities, so the government is looking to diversify into technology and finance by attracting companies from these industries to the AIFC.
Miners have become the last in line for electricity supply
As mentioned above, the rapid growth of bitcoin mining without a corresponding increase in generating capacity has led to problems with the power grid. The Government of Kazakhstan seeks to prevent a similar situation from happening again and has therefore strictly regulated the procedure for the purchase of electricity by miners.
Previously, miners could purchase electricity like any other business. Under the new law, they can only purchase electricity through the national electricity auction system KOREM, which will have a separate trading platform for miners only. National grid operator KEGOC will set a quota in the mining auction depending on how much electricity it determines to be surplus at any given time. Miners would then compete for this “surplus” electricity in the auction. The surplus electricity would likely not be enough to supply all the miners, so this method of acquiring electricity would likely not be a viable solution in the long term.
Another way to purchase electricity is to import it from Russia at a price of $0.07 to $0.09 per kWh. These prices are too high to build a sustainable bitcoin mining business on them. And why would anyone want to mine in Kazakhstan using imported Russian electricity when they can simply set up store abroad, pay significantly less for electricity and face less stringent regulations?
The third and potentially only long-term way to purchase electricity is through a direct contract with an energy producer. This can be coal, natural gas, hydroelectric, wind, solar, or associated gas from gas or coal mining. As I will explain, solar and wind power have tax advantages, but associated gas can be obtained much cheaper.
New electricity tax sets minimum price for electricity
The new regulation will not only restrict miners’ access to electricity, but will also set high taxes on electricity.
The level of tax depends on how and at what price a miner obtains electricity. We can categorize the taxes into three types. The highest tax is levied if a miner buys electricity from the grid through the KOREM auction system or imports from Russia, and effectively sets the minimum price of electricity at 25 tenge ($0.055) per kWh.
This seems complicated, but let’s look at an example. Suppose there is a period with a large surplus of electricity in the KOREM auction system, and a miner buys it for only 5 tenge ($0.011) per kWh. Then the electricity tax will be 20 tenge. Then the electricity tax will be 20 tenge ($0.045) per kWh, which will increase the total price to 25 tenge ($0.055) per kWh.
This tax structure further reduces the profitability of grid-connected mining in Kazakhstan. Even if miners manage to obtain cheap electricity from the grid, heavy taxation will result in them ending up paying a rather high rate.
It is hardly a coincidence that the government has structured the tax in such a way as to create a price floor at $0.055 per kWh. That amount is close to the historical break-even rate for mining in a bear market using medium-efficient machines, so it seems like the tax is designed to extract as much as possible from miners without wiping them out completely. One thing is certain, this tax is not designed to optimize the efficiency of the industry, as it does not incentivize miners to get cheap electricity.
The second type of electricity tax for miners concerns those who buy offline electricity directly from non-renewable energy producers. Such miners pay a flat electricity tax of KZT10 ($0.022) per kWh. The government introduced this tax to prevent Kazakhstani power plants from engaging in mining instead of selling electricity to the grid.
The single tax of $0.022 per kWh is significant. Traditionally, offline miners in Kazakhstan have been able to purchase electricity at a price of approximately $0.03 per kWh. Once the new tax is added, these miners will be paying about $0.052 per kWh, which is not globally competitive. In addition, if a significant portion of these power plants continue to mine after the tax is introduced, the Kazakh government may increase the tax even further in an effort to squeeze the industry.
A more moderate electricity tax applies to miners who purchase electricity directly from wind or solar power plants. Such miners will pay just 1 tenge ($0.0022) per kWh. Such a tax can be endured, but the problem is that wind and solar power in Kazakhstan is usually the most expensive. In addition, wind and solar power, representing only 4% of total generation, is currently insufficient to meet the high demand in the mining industry. Therefore, miners have to build their own wind and solar power plants to capitalize on this opportunity.
Production conditions for miners in Kazakhstan
The most important, but often underestimated factor in bitcoin mining is climatic conditions. Typically, a cooler operating environment allows for more frequent overclocking of processors using embedded software, increased uptime, reduced cooling infrastructure requirements, longer equipment life, reduced maintenance requirements, and ultimately increased bitcoin production and efficiency.
Kazakhstan has warm summers and freezing winters. In the north of the country, where most of the mining industry is located, average daily temperatures range from -15°C (6°F) to 21°C (70°F) during the coldest and warmest months. In the summer, most miners use hydro curtains for cooling. In the winter, freezing weather can make it difficult for miners, but miners solve this problem by reducing air circulation. Overall, Kazakhstan provides decent climatic conditions for mining, at least compared to U.S. mining centers such as Texas.
Another production advantage of mining in Kazakhstan is excellent access to labor. Kazakhstan has a young, hard-working population with good IT skills. Therefore, it is usually not difficult to find qualified workers. Labor costs are also very cheap, ranging from $0.002 to $0.0025 per kWh.
The future of bitcoin mining in Kazakhstan is uncertain
With the introduction of the new law, Kazakhstan’s bitcoin mining industry is at a crossroads. Either the law will provide a stable regulatory environment necessary for the sustainable development of the industry, or its strict taxation and power purchase rules will lead to the demise of the remaining part of the industry. How the law will affect the industry remains to be seen, and I will update this article as the situation becomes clearer.
What is certain is that Kazakhstan has a power shortage problem that needs to be addressed before the country’s bitcoin mining industry can return to its former gigawatt glory. The only way that bitcoin mining in Kazakhstan can grow significantly in the coming years is for miners to create their own generating capacity. These can be obtained from various sources, but associated gas, wind and solar energy have the greatest potential.
Due to the challenges, the growth of Kazakhstan’s bitcoin mining industry will be limited for the foreseeable future. Nevertheless, the long-term potential of mining in Kazakhstan is huge.
So, what conclusions can we draw from the sudden rise and fall of Kazakhstan’s bitcoin mining industry? Two points. First, there is always political risk in bitcoin mining. In late 2020 and early 2021, many people believed that bitcoin mining in Kazakhstan was safe and that the Kazakh government was friendly to the industry. Many foreigners placed their machines there and then found out that it was not so safe. I believe that the political risk for miners is significant in all countries, especially in developing countries. Paraguay and Argentina may feel safe right now, but who knows what could happen.
The most important conclusion is that miners should avoid using subsidized or price-limited electricity, especially in unstable power systems. The use of subsidized electricity for bitcoin mining has drawn the ire of many governments, including neighboring Kyrgyzstan. Electricity systems with subsidies or price caps also tend to be fragile due to underinvestment.
Source: https://hashrateindex.com/blog/bitcoin-mining-around-the-world-kazakhstan/
