The Kazakhstan situation and how it affects bitcoin mining

[TL;DR]

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Cryptocurrency mining is a complex process through which new coins enter circulation. It requires computers to solve complex mathematical issues and it is quite an energy-intensive process. Not every country has the suitable infrastructure for cryptocurrency miners to operate properly.

One country that seemed to tick all the right boxes is Kazakhstan, in Central Asia. With China instituting a ban on crypto mining, miners based in China had to find an alternative. And Kazakhstan was the go-to location for quite a lot of miners.

At first, this was a great decision. Electricity was cheap, the weather was good, etc. However, Due to recent political conflicts and protests in Kazakhstan mostly related to high fuel prices, the internet was shut down as a measure to contain violence and a population coup. Kazakhstan was until then the largest miner of bitcoin in the world, but the internet shut down wiped its large share of bitcoin mining instantly.

The incident, however, poses no threat to bitcoin’s network. Causing a fast reduction of the blockchain’s hashrate, it simply reduces its efficiency but under no circumstance compromises security.

Kazakhstan’s internet has been partially reactivated, and bitcoin’s hashrate has been slowly recovering since then.

The Conflict in Kazakhstan Posed Crypto Fall

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Kazakhstan was very recently thrown into a state of absolute chaos. A spike in fuel prices sparked protests in the south of the country.

Several events have occurred as a result of these protests. There have been accounts of violence, with several people killed and even more people injured. Also, there was a widespread shut down of the internet and even telecommunication lines. As can be predicted, this is having a huge negative impact on the cryptocurrency mining operations in Kazakhstan - the bitcoin network has lost about 12% of its hashrate as a result.


For the mining industry in Kazakhstan, that wasn't the end of the misfortune they would experience. Cheap electricity had attracted many cryptocurrency miners into the country. However, these miners would soon discover that the aging power grid of the country wasn't sufficient to meet the sudden increase in demand posed by several thousands of new crypto mining machines.

According to the Kazakhstan government, mining was already responsible for 8% of the country's electricity generation capacity. The government decided to address the issue of unregistered miners and start rationing energy supply even to registered miners.

The internet shutdowns coupled with the blackouts and power cuts have cost cryptocurrency miners millions of dollars per month. And the loss is not only these, but also a large amount of potential gains.

As if all that were not enough, the cold weather also poses a risk to the equipment of crypto miners. Mining machines could freeze during shutdowns and these machines are quite expensive.

The Crypto Rise of Kazakhstan

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After China officially banned cryptocurrency mining businesses, bitcoin’s hashrate fell dramatically during the period as miners faced an exodus from the country and had to find new territories to set up their mining facilities.

Out of several chosen countries at the time, such as the US, Thailand, Vietnam and more, Kazakhstan was the main choice of replacement for the industry. Kazakhstan is a country in Central Asia that seemed to have everything that a crypto-miner could want. It had a cold climate, several old warehouses, and factories that could be used to house mining rigs. And most importantly, it had incredibly cheap electricity. This was a big plus because crypto mining is an energy-intensive process and the lower the cost, the better.

Before long, more and more crypto miners began to pour into the country with their mining equipment. According to estimates, over 87,000 mining machines crossed into Kazakhstan just that year.

Just before China outlawed cryptocurrency mining, Kazakhstan accounted for about 8% of the global crypto hashrate. A few months later, after the crypto mining ban by the Chinese government, this number rose to 18%. What this meant was that Kazakhstan was responsible for 18% of the computational power being used to mine bitcoin around the world.

Is bitcoin in danger?

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In a nutshell, the bitcoin network is not in any danger currently; just dealing with a major inconvenience.

bitcoin’s hashrate, whether too high or too low, does not affect the integrity of the network at this point. Since it’s already extremely large and used by over 100 million people daily, it’s mostly referenced to determine the efficiency of the network.


Also, China’s crackdown period shown in the graph above is a great example of how bitcoin’s network is able to survive any network hardship. After China’s announcement, the hashrate fell a staggering 50% in less than a month, but it quickly began its recovery process. It also represented a much larger chunk of bitcoin miners at the time than Kazakhstan’s recent 20%, yet it survived without any damage to the integrity of the network.

What's the Next Step?

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Presently, Kazakhstan’s internet has now been partially activated. However, even if it hasn’t, the miners would migrate to other countries that have the suitable infrastructure for crypto mining - such as Russia, the US, and Canada. The bitcoin network would slowly but surely recover itself.



Author: Gate.io Observer: Victor Bastos &M.OLATUNJI
Disclaimer:
* This article represents only the views of the observers and does not constitute any investment suggestions.
*Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all other cases, legal action will be taken due to copyright infringement.



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