Why did the Civil Strife in Kazakhstan Lead to the Sharp Tumble of Bitcoin?

【TL; DR】

1. Bitcoin prices have plummeted since the 6th of January and reached a recent low of $41,220 for the first time at noon on the 7th Jan 2022. It is 40% down from its record high of $69,000 in November last year.
2. Affected by the rise in domestic prices of liquefied natural gas, protests and demonstrations have taken place in many places in Kazakhstan since January 2, and then evolved into large-scale riots.
3. In August 2021, Kazakhstan's mining capacity accounted for approximately 18.10% of the world, ranking second in the world, second only to the United States.
4. On January 5, the riots interrupted Kazakhstan's network several times, which "disconnected" 15% of Bitcoin miners around the world, and the global computing power of Bitcoin decreased by 12% for a short time.
5. According to the minutes of the December Fed meeting, released on January 5th, the probability of raising interest rates by 0.25 percentage points in March has reached 80%.
6. Under the impact of the news that mining enterprises in Kazakhstan were unable to connect to the Bitcoin network due to the disconnection of the network, the Fed's expectation of rising interest rates was significantly advanced, which made investors more pessimistic about the future situation.

The first week of 2022 is not calm for the encryption market. Bitcoin prices have plummeted since the 6th of January and reached a recent low of $41,220 for the first time at noon on the 7th of January, down 40% from the record high of $69,000 in November last year. Driven by Bitcoin, the whole cryptocurrency market also began to "drop endlessly".

At present, the spread of Omicron on the global scale has triggered another wave of COVID-19's peak, leading to the loss of confidence in various investment markets. On the other hand, the market's expectation of the Fed's interest rate hike was significantly advanced to April and even March this year, which has also become a major incentive for the selling of the encryption market. In addition to these two reasons, the civil unrest in Kazakhstan is also a trigger for this round of sharp tumble.


Affected by the rise in domestic prices of liquefied natural gas, protests and demonstrations have taken place in many places in Kazakhstan since January 2, and then evolved into large-scale riots. Due to the interruption of the domestic Internet in the riots, a large number of Bitcoin mining activities in Kazakhstan were forced to terminate, and the global Bitcoin computing power decreased by 12% for a short time. It is reported that Kazakhstan has the world's second-largest Bitcoin computing power after the United States.

Bitcoin Mining: Good Fortune and Misfortune Coexist

Located in Central Asia, Kazakhstan was a former Soviet country and the largest landlocked country in the world. Due to its unique domestic resources, Kazakhstan is one of the countries with the richest coal resources in the world. In addition, it is also rich in oil, natural gas and other natural resources. Thanks to the mature power infrastructure in Kazakhstan, especially thermal power plants, Kazakhstan's domestic power has always been in surplus, and the power price is lower than that in the world (only US $0.03 / kWh). On the other hand, due to the high dimension in the northern part of the territory, the climate in these areas is also relatively cool, which provides excellent conditions for the development of Bitcoin mining.

Since May this year, under the influence of the "carbon neutrality" policy, the Chinese government has once again begun to vigorously crackdown on and repatriate domestic Bitcoin mining enterprises. Many Bitcoin Mining enterprises distributed in China have to find another way out. In September 2019, China's global hash rate was once as high as 75%, which decreased to about 45% in May 2021 and almost zero in July. Compared with China's domestic ban on Bitcoin mining, the Kazakh government is more positive. Earlier, the Minister of digital development of Kazakhstan had said that the government planned to invest US $715 million to expand domestic crypto mining, and had previously completed an investment of US $190 million. The president of Kazakhstan once said that cryptocurrency was "absolute innovation". Blockchain has been regarded as an important direction of digital development in the country, and the legalization of relevant industries is also continuing.

Due to the above reasons, Kazakhstan has become a hot spot for investment in Bitcoin mining. Last June, Jianan Technology, China's first listed mining enterprise, launched its own mining business in Kazakhstan. Therefore, the proportion of Bitcoin computing power in Kazakhstan in the global computing power has gradually increased, reaching 8.2% in April last year, ranking third in the world. According to the data of Cambridge University, in August 2021, Kazakhstan's mining computing power accounted for approximately 18.10% of the world, ranking second in the world, second only to the United States.

But Kazakhstan is clearly not fully ready to become a global mining paradise. With the settlement of a large number of Chinese miners, Kazakhstan's domestic power consumption will increase by more than 8% in 2021, much higher than the average level of 1 ~ 2% in previous years. In October 2021, three major thermal power stations in Kazakhstan faced the risk of emergency shutdown due to excessive voltage. KEGOC, the country's power grid operation company, also warned mining enterprises that only 50 mines officially registered by the government are allowed to supply electricity to alleviate the shortage of electricity. In addition, according to a bill signed by the president of Kazakhstan in June last year, the country will charge one additional Tenge (Kazakh franc, approximately $0.0023) for the electric energy consumed by domestic mining from January 1 this year, raising the domestic mining cost of the country again.

U.S. Stocks Fell Due to the Superposition of the Computing Power Crisis

Since last year, by the impact of a series of crises brought by COVID-19, global commodity prices have skyrocketed and energy prices have already been so. EU countries such as Germany have increased natural gas prices by 800%. As an energy country, Kazakhstan finally failed to withstand the pressure of rising energy prices and announced the cancellation of domestic natural gas price controls at the beginning of the new year. Overnight, the domestic prices of liquefied natural gas in Kazakhstan increased from 60 Tenge per liter to 120 Tenge per liter. As local residents rely heavily on natural gas for their livelihood, this immediately aroused strong dissatisfaction among the domestic people. Even if the government announced on the 4th that it would partially restore the natural gas price and the president announced that he would accept his resignation the next day, it did not help. Demonstrations and violent protests have spread to many places in Kazakhstan. In fact, the public's resentment is not only due to the rise in natural gas prices, but also from the high unemployment rate, poverty rate and low spirited economy in COVID-19 since then.

By January 5, the riots interrupted Kazakhstan's domestic network several times (see the figure below), making it impossible for mining enterprises in the country to normally access the Internet. According to the estimation of mining enterprise Foundry, the disconnection makes 15% of Bitcoin miners in the world "disconnected", and the global computing power of Bitcoin decreases by 12% in a short time. This situation lasted for four days and did not really recover until the 10th.


Unfortunately, according to the minutes of the FOMC monetary policy meeting of the Federal Reserve in December released on January 5, the meeting members generally believe that the inflation level is more lasting and upward than expected. Therefore, we should speed up the shortening of the scale of asset purchase and the government should preliminarily arrange three tentative interest rate increases. It is reported that although the impact of Omicron has not subsided, the probability of the Fed raising interest rates by 0.25 percentage points at the March meeting has reached 80%. After the announcement of the minutes of the meeting, the capital market reacted quickly, and the three major stock indexes fell across the board, especially the Nasdaq, down 3.34%. Since the NASDAQ index is dominated by technology stocks, the index is considered to have a good correlation with Bitcoin.

Conclusion

Under the impact of the news that a large number of mining enterprises in Kazakhstan were unable to connect to the Bitcoin network due to the disconnection of the domestic network, the Fed's expectation of rising interest rates was significantly advanced, which made investors more pessimistic about the future situation. Under the influence of these dual factors,Bitcoin and the whole cryptocurrency sector fell sharply.

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Author: Edward.H, Gate.io Researcher
*This article represents only the views of the researcher and does not constitute any investment advice.
*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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