Mining in Kyrgyzstan
Bitcoin is an increasingly important export commodity for Kyrgyzstan, a small mountainous developing country in the heart of Asia.
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Huge hydro resources and a chaotic regulatory framework have led to a large underground mining industry putting a strain on the country’s fragile power grid, benefiting from heavily subsidized electricity tariffs. At the same time, legal miners help finance badly needed power generation capacity.
- One of the world’s most obscure countries
- Bitcoin network is Kyrgyzstan’s seventh largest export partner
- Fragile electricity system with great potential
- Clandestine miners take advantage of electricity subsidies
- Legal miners can help finance hydropower development
- Working conditions for bitcoin mining in Kyrgyzstan
- With the right approach, bitcoin mining can boost Kyrgyzstan’s development
One of the least known countries in the world
Kyrgyzstan is perhaps 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 mountainous, and most of the 6.6 million population lives in the valleys and lowlands in the north and west. The country has 1,923 lakes and more than 25,000 rivers, providing a huge hydropower potential. These hydropower resources and favorable electricity subsidies have attracted a significant bitcoin mining sector to the country.
Kyrgyzstan ranks seventh in Asia in terms of GDP per capita. Like most developing countries, its economy is growing rapidly, but a weak electricity system could slow that growth. More on this later in the article.
It is a politically unstable country with three political crises in the last 18 years. As in many other post-Soviet countries, the legal and regulatory framework in the country is chaotic, for better and for worse. People doing business in Kyrgyzstan have to rely more on themselves and their connections than in North America or Europe, where businesspeople can count on a relatively predictable legal system. Nevertheless, this “Wild West” can offer great opportunities for risk-averse entrepreneurs and investors.
Bitcoin network is Kyrgyzstan’s seventh largest export partner
Kyrgyz insiders estimate that the country’s bitcoin mining industry consumes 80 MW. As is usually the case in politically unstable countries with cheap electricity, Kyrgyz miners tend to minimize capital costs by using old-generation ASICs and rusty shipping containers. Therefore, the average energy efficiency of Kyrgyz miners is likely to be around 50-60 J/TN, which is slightly worse than the global average.
Given these assumptions, Kyrgyz miners should produce about 1.6 EH/s, which corresponds to 0.5% of the global Bitcoin hashrate.
At first glance, the Kyrgyz bitcoin mining industry may seem microscopic. However, Kyrgyzstan is a small developing country with meager exports, so bitcoin is becoming an increasingly significant source of exports. At the current daily mining revenue (hashpraise) of $80 per PH, Kyrgyz miners generate about $47 million per year – 2.1% of the country’s total exports of $2.2 billion.
With 2.1% of Kyrgyzstan’s export earnings, the bitcoin network has become the small country’s seventh largest export partner. Kyrgyzstan has a high trade deficit and needs new sources of exports to diversify its dependence on gold mining, which has historically accounted for about 40% of total exports.
Could digital gold one day replace physical gold as Kyrgyzstan’s most important source of exports? As you will learn later in the article, this is possible thanks to the country’s enormous hydropower potential.
A fragile electricity system with great potential
As mentioned at the beginning of this article, Kyrgyzstan is among the poorest countries in Asia, so you can imagine the state of its electricity system. Let’s put it this way: it is in a deplorable state, but it has huge potential.
The country operates the remnants of the electricity supply system built during the Soviet era. Most of the electricity infrastructure, including power plants, substations and transmission networks are still beyond their useful life after more than 30 years of underinvestment.
Meanwhile, as the graph above shows, the country’s growing population is demanding more and more electricity. Between 2017 and 2021, electricity consumption increased by 3% annually while the country’s electricity generation remained flat. The system’s ability to supply electricity has even likely declined since 2017 due to wear and tear and is currently operating at capacity to supply the country.
Kyrgyzstan, which historically had a significant surplus of electricity, is currently facing intermittent outages due to the inability of the system to meet demand. To meet demand in the coming years, the country will need an annual increase in generating capacity of 100-150 MW, as well as replacement of old substations and transmission networks. Kyrgyzstan faces a huge challenge in the electricity sector, but as you will learn next, bitcoin mining could be the solution.
Currently, 90% of the country’s electricity is generated by hydroelectric power plants and the remaining 10% is coal-fired, mostly during the winter months when hydroelectricity is low.
Hydropower has a low marginal cost of production and is therefore a magnet for bitcoin miners seeking to minimize energy costs. Bitcoin miners seem to be present in all power systems with a significant share of hydropower, and Kyrgyzstan is no exception.
Clandestine miners utilize subsidies for electricity
Bitcoin mining in Kyrgyzstan consists of two groups: legal and underground miners.
While legal miners follow the rules and pay taxes, underground miners misuse electricity subsidies by operating under the guise of other industrial enterprises. In some cases, they even steal electricity. Currently, most of the bitcoin mining industry in Kyrgyzstan is represented by underground miners.
An example of an underground miner is a bakery that has converted its production facilities to a mining site without registering as a miner. Thus, a bread oligarch can become a bitcoin baron by buying electricity at subsidized industrial rates and using it to mine bitcoins while pretending to produce bread.
These underground miners often have close ties to government officials or other influential people (or are themselves) and can continue to operate illegally in the wild west Kyrgyz business environment. Nevertheless, the central government has cracked down on such miners and has confiscated thousands of machines over the past few years.
Why is there so much underground mining in Kyrgyzstan? The answer lies in electricity subsidies. The Kyrgyz government heavily subsidizes electricity by setting some of the lowest tariffs in the world. Electricity suppliers are not allowed to charge consumers more than these tariffs.
Domestic and industrial electricity consumers pay just $0.025 and $0.033 per kWh, well below the global average electricity price for bitcoin mining of $0.04-0.05 per kWh. Such low electricity rates have attracted an army of bitcoin miners after a boom in late 2017. Thanks to cheap equipment sourced from China, the industry peaked at around 200 MW in 2019. At this time, the industry was unregulated and therefore there was no separation between underground and legal miners.
The government and energy companies didn’t like the fact that a new class of people were suddenly getting rich by turning subsidized electricity into bitcoin, and a temporary ban on issuing technical permits for mining was put in place in 2019. From that point on, many previously legal miners were forced to start working in the shadows.
Not only that, the government has set a special electricity tariff for miners at $0.066 per kWh and a 15% electricity tax on miners. This electricity price puts miners dangerously close to breakeven under current market conditions. Of course, no one would want to expose themselves to the high political risk associated with mining in Kyrgyzstan by paying such high electricity tariffs, so almost the entire industry has gone underground to continue to access much lower electricity tariffs for households and industry.
The government is cracking down on underground mining and has managed to reduce the size of the industry from 200 MW to about 80 MW. Nevertheless, the high financial incentives of arbitraging electricity subsidies through bitcoin mining will continue to attract operators and it will be extremely difficult for the government to get rid of these underground miners.
Clandestine bitcoin miners are questioning the viability of electricity subsidies provided by the Kyrgyz government. These miners may eventually force the government to reduce or eliminate subsidies, which could lead to political upheaval in the short term. However, reducing subsidies would likely have a positive impact on the Kyrgyz electricity system in the long term, as low tariffs currently prevent electricity companies from recouping investments, which has led to massive underinvestment in electricity infrastructure over the past 30 years.
Legal miners can help finance hydropower development
Although most of the bitcoin mining industry in Kyrgyzstan is represented by underground operators, some high-tech players have started using mining to finance power generation capacity. These miners work directly at hydropower plants and buy electricity from them, which allows them to bypass the strict regulation and high electricity tariffs applied to grid-connected miners and take advantage of some of the tax incentives introduced to stimulate hydropower development.
Earlier in this article, I mentioned that Kyrgyzstan is in dire need of building new generating capacity. Fortunately, thanks to its mountainous terrain and large number of rivers and lakes, the country is set up for hydropower. It can generate up to 143 TWh per year, which is more than 10 times the current capacity and almost double the annual electricity consumption of the entire bitcoin mining network.
As mentioned above, the current low electricity tariffs do not allow to recover the costs of building generating facilities and strongly discourage investments. By selling a portion of the electricity to a nearby bitcoin miner paying in U.S. dollars, hydropower projects increase revenues and reduce risk, making it much easier to obtain financing. In addition, these hydroelectric projects are incentivized to sell some of the electricity to utilities to keep the government and local people happy.
There are plans for nine more hydroelectric projects totaling 8.4 GW, nearly 2.5 times the country’s existing capacity. These projects have been on hold for several years due to lack of funding. If the current small hydropower pilot projects prove successful, I would not be surprised if bitcoin miners help bring these grandiose projects to life by providing the necessary funding.
Kyrgyzstan currently sells some of its vast water resources to Kazakhstan, which uses them to generate electricity, which it sells back to Kyrgyzstan at a high margin. Bitcoin mining gives Kyrgyzstan the opportunity to build hydroelectric power plants and monetize the resulting electricity domestically.
Working conditions for bitcoin mining in Kyrgyzstan
A crucial but often overlooked factor in bitcoin mining is the climatic conditions. Typically, a cooler operating environment allows for more frequent overclocking with firmware, longer run times, lower cooling infrastructure requirements, longer equipment life, lower maintenance requirements, and ultimately higher bitcoin production and efficiency.
What are the climatic operating conditions in Kyrgyzstan? The harsh topography of the country and significant altitude differences result in widely varying climatic conditions and temperatures throughout the country.
The capital, Bishkek, is one of the warmest places in the country, with average daily temperatures in the coldest and warmest months ranging from -2.7°C (27.1°F) to 25.5°C (77.9°F). Periodically in the summer, temperatures can rise to 40°C (105°F), which is too hot for bitcoin mining.
Nevertheless, most of the legal bitcoin mining in the country takes place in the mountains, where the climatic conditions are very favorable. Therefore, legal miners can expect high uptime and efficiency. In contrast, underground miners in cities will continue to struggle with high temperatures during the summer months.
With the right approach, bitcoin mining can boost Kyrgyzstan’s development
Kyrgyzstan has a complicated relationship with bitcoin miners. On the one hand, underground miners take advantage of favorable electricity tariffs and put a strain on the country’s Soviet-era power grid. The bulk of the country’s mining industry was forced underground when the government imposed unbearably high electricity tariffs on miners. Since then, the government has been playing a game of whack-a-mole with the underground mining industry.
On the positive side, legal miners can provide the financing needed to develop the country’s vast untapped hydropower potential. The country could produce 10 times more hydropower than it currently generates and is in dire need of new capacity to power its growing economy. So far, plans to develop hydropower have stalled due to a lack of funding, and the country has seen virtually no power plant construction since Soviet times. Bitcoin miners have already financed several small hydropower plants in the country and could help finance larger projects if these pilot projects prove successful.
Kyrgyzstan also has a large trade deficit and relies heavily on gold mining for export revenue. Diversifying the export base through digital gold could be a good solution.
With the right approach, bitcoin mining offers huge opportunities for Kyrgyzstan. However, it should be remembered that this country is politically unstable and anything can happen. The potential for bitcoin mining in Kyrgyzstan is huge, but so is the risk.
Source: https://hashrateindex.com/blog/bitcoin-mining-around-the-world-kyrgyzstan/
