Bitcoin is becoming an increasingly important export product for Kyrgyzstan, a small mountainous developing country in the heart of Asia.
The country’s vast hydro resources and chaotic regulatory environment have led to a sizeable underground mining industry straining the country’s fragile grid by taking advantage of heavily subsidized electricity tariffs. Simultaneously, legal miners are helping finance desperately needed electricity generation capacity.
I recently spent some days in Kyrgyzstan and met with industry insiders. In this article, I explain what characterizes bitcoin mining in Kyrgyzstan and analyze what the future could look like for the industry.
One of the least-known countries in the world
Kyrgyzstan is arguably 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 consists of mountains, and most of the 6.6 million population live in valleys and lowlands in the north and west. The country has 1,923 lakes and more than 25,000 rivers, giving it a massive hydropower potential. These hydropower resources and favorable electricity subsidies have attracted a significant bitcoin mining sector.
Kyrgyzstan is the seventh-poorest country in Asia as measured by the GDP per capita. Like in most developing countries, the economy is growing fast, but the country’s poor electricity system could dampen this growth. More on that later in the article.
It is a politically unstable country with three political crises in the last 18 years. Like in many post-Soviet countries, the regulatory environment is chaotic, for better or worse. People doing business in Kyrgyzstan have to rely more on themselves and their network than in North America or Europe, where businesspeople can rest on a relatively predictable legal system. Still, this wild west environment can provide outsized opportunities for risk-tolerant entrepreneurs and investors.
The Bitcoin network is Kyrgyzstan’s seventh-biggest export partner
Kyrgyz insiders estimate the country's bitcoin mining industry to consume 80 MW. As usual in politically unstable countries with cheap electricity, Kyrgyz miners seek to minimize capital expenditures by using older-gen ASICs and rusty shipping containers. Therefore, Kyrgyz miners’ average energy efficiency is likely around 50 - 60 j/TH, a bit worse than the global average.
Given these assumptions, Kyrgyz miners should produce around 1.6 EH/s, corresponding to 0.5% of Bitcoin’s global hashrate.
At first sight, the Kyrgyz bitcoin mining industry might look microscopic. However, Kyrgyzstan is a small, developing country with meager exports, making bitcoin an increasingly significant export source. At the current daily mining revenue (hashprice) of $80 per PH, Kyrgyz miners generate around $47 million annually - 2.1% of the country’s total exports of $2.2 billion.
Generating 2.1% of Kyrgyzstan’s export revenues makes the Bitcoin network the seventh-largest export partner of this small economy. Kyrgyzstan has a high trade deficit and needs new export sources to diversify from its heavy reliance on gold mining, which historically has made up around 40% of total exports.
Could digital gold one day challenge physical gold as Kyrgyzstan’s most important export source? As you will learn later in the article, the country’s massive hydropower potential makes this possible.
A fragile electricity system with a lot of potential
As explained at the beginning of the article, Kyrgyzstan is among the poorest countries in Asia, so you can imagine the state of the country’s electricity system. Let’s just say it is in poor condition but has enormous potential.
The country is powered by the leftovers of an electricity system built during the Soviet era. Most electrical infrastructure, including power plants, substations, and the transmission network, is still running beyond useful service life after more than 30 years of underinvestment.
Meanwhile, as you can see on the chart above, the country’s growing population demands an increasing amount of electricity. From 2017 to 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 now running at maximum capacity to supply the country.
Kyrgyzstan, which historically enjoyed a considerable electricity surplus, is now struggling with periodic rolling blackouts due to the system’s inability to meet demand. The country will need an annual addition of 100 - 150 MW of electricity generation capacity in the coming years to meet demand, in addition to replacing old substations and transmission networks. Kyrgyzstan faces an enormous electricity challenge, but as you will learn later, bitcoin mining could be a solution.
Currently, 90% of the country’s electricity is generated by hydro, while the remaining 10% is produced by coal, mainly in the winter months when hydro production is low.
Hydropower has a low marginal cost of production and is, therefore, a magnet for bitcoin miners seeking to minimize electricity costs. It seems bitcoin miners are represented in all electricity systems with a considerable share of hydropower, and Kyrgyzstan is no exception.
Underground miners exploit electricity subsidies
Kyrgyzstan’s bitcoin mining industry comprises two groups: legal and underground miners.
While legal miners follow regulations and pay taxes, underground miners exploit electricity subsidies not meant for them by operating under the guise of other industrial activities. In some instances, they even steal electricity. Currently, most of Kyrgyzstan’s bitcoin mining industry consists of underground miners.
An example of an underground miner could be a bread factory that repurposed its production facilities to a mining site without registering as a miner. A bread oligarch can thus become a bitcoin baron by buying electricity at subsidized industrial electricity tariffs and using it to mine bitcoin while still pretending to produce bread.
These underground miners often have close ties to (or are themselves) government officials or other powerful people and can continue operating illegally in the wild west Kyrgyz business environment. Still, the central government is cracking down on these miners and has confiscated thousands of machines in the past few years.
Why is there so much underground mining in Kyrgyzstan? The answer is electricity subsidies. The Kyrgyz government heavily subsidizes electricity by setting some of the lowest tariffs globally. Electricity suppliers are not allowed to charge consumers more than these tariffs.
Residential and industrial electricity consumers pay only $0.025 and $0.033 per kWh, considerably lower than the median global electricity price for bitcoin mining at between $0.04 and $0.05 per kWh. These low electricity tariffs attracted an army of bitcoin miners after the bull run of late 2017. Fueled by cheap equipment flowing in from China, the industry peaked at around 200 MW in 2019. At this time, the industry was not regulated, and there was thus no separation between underground and legal miners.
The government and energy companies didn’t like that a new class of people suddenly got rich from turning subsidized electricity into bitcoin and imposed a temporary ban on granting technical authorizations for mining operations in 2019. From that point, many previously legal miners were forced to start operating in the shadows.
As if that wasn’t enough, the government created a special electricity tariff for miners at $0.066 per kWh and a miner-specific electricity tax of 15%. This electricity price places miners dangerously close to cash flow break-even levels in the current market environment. Of course, nobody is willing to expose themself to the high political risk of mining in Kyrgyzstan if they pay such high electricity rates, so almost the entire industry has gone underground to continue getting access to the much lower residential and industrial electricity tariffs.
The government is fighting against underground mining and has managed to reduce the industry’s size from 200 MW to around 80 MW. Still, the high financial incentives of arbitraging electricity subsidies by mining bitcoin will keep attracting operators, and the government will find it exceptionally difficult to get rid of these underground miners.
Underground bitcoin miners are challenging the viability of the Kyrgyz government’s electricity subsidies. Eventually, these miners could force the government to reduce or drop subsidies, which could lead to political turmoil in the short term. Still, reducing subsidies is likely to positively impact the Kyrgyz electricity system long term, as the low tariffs currently don’t allow electricity companies to recover investments, which has led to massive underinvestment in electrical infrastructure over the past 30 years.
Legal miners could help finance hydropower development
While most of Kyrgyzstan’s bitcoin mining industry consists of underground operators, some highly sophisticated players have started to use mining to finance electricity generation capacity. These miners operate directly at and buy electricity from hydropower plants and can thus circumvent the stringent regulation and high electricity tariffs applying to on-grid miners and take advantage of some tax breaks introduced to incentivize hydropower development.
Previously in the article, I mentioned how Kyrgyzstan desperately needs to build more electricity generation capacity. Luckily, with mountainous terrain and many rivers and lakes, the country is made for hydropower. It could generate up to 143 TWh annually - more than 10 times the current built-out capacity and almost twice the annual electricity consumption of the entire Bitcoin mining network.
As mentioned, the current low electricity tariffs don’t allow for recovering the buildout cost of electricity generation capacity and have severely held back investment. By selling part of the electricity to a co-located bitcoin miner paying in USD, hydropower projects increase revenues and reduce risk, making it considerably easier to obtain financing. These hydropower projects are also incentivized to sell part of the electricity to the utility to keep the government and local population happy—a win-win.
There exist plans to build nine additional hydropower plants with a total capacity of 8.4 GW, almost 2.5 times the country’s current capacity. These projects have been suspended for years due to a lack of funding. If the current small hydropower plant pilot projects work out, I wouldn’t be surprised if bitcoin miners could help bring these huge projects to life by providing the necessary financing.
Currently, Kyrgyzstan sells some of its massive water resources to Kazakhstan, which uses it to produce electricity that it sells back to Kyrgyzstan at a high margin. Bitcoin mining gives Kyrgyzstan the opportunity of building hydropower plants and monetize the generated electricity within the country.
Operating conditions for Bitcoin mining in Kyrgyzstan
A critical but often downplayed consideration in bitcoin mining is climate conditions. Generally, a cool operating environment allows you to overclock more often using firmware like LuxOS, increase your up-time, reduce cooling infrastructure requirements, increase machine lifespan, reduce maintenance requirements, and ultimately increase your bitcoin production and operating efficiency.
What are the climatic operating conditions like in Kyrgyzstan? The country’s rugged typography with large differences in altitude means climate conditions and temperatures vary wildly within the country.
The capital, Bishkek, is one of the warmer places in the country, with average daily mean temperatures varying from -2.7°C (27.1°F) to 25.5°C (77.9°F) between the coldest and warmest months. Periodically, the temperature can get up to 40°C (105°F) in the summer, which is too hot for bitcoin mining.
Still, most of the legal bitcoin mining activity in the country takes place in the mountains, where climatic conditions are highly benign. Therefore, legal miners can expect a high up-time and efficient operations. The underground miners down in the cities, on the other hand, will keep struggling with high temperatures in the summer months.
Bitcoin mining could spur development in Kyrgyzstan if done right
Kyrgyzstan has a complicated relationship with bitcoin miners. On the one hand, underground miners are taking advantage of heavily subsidized electricity tariffs and putting a strain on the country’s Soviet-era electricity system. The bulk of the country’s mining industry was forced underground when the government imposed intolerably high mining-specific electricity tariffs. The government has played whack-a-mole against the underground mining industry since.
On the positive side, legal miners could provide the financing needed to develop the country’s massive untapped hydropower potential. The country has the potential to produce 10 times more hydropower than it currently generates and desperately needs new electricity generation capacity to power the growing economy. So far, plans for hydropower development have reached a standstill due to a lack of financing, and the country has barely seen any electricity generation buildout since the Soviet era. Bitcoin miners have already financed a few smaller hydropower plants in the country and could help finance larger projects if these pilot projects are successful.
Kyrgyzstan also has a large trade deficit and primarily relies on gold mining for its export income. Diversifying the export base with digital gold may be a good solution.
If done right, bitcoin mining is a tremendous opportunity for Kyrgyzstan. But we must remember that this country is politically unstable, and anything can happen. The bitcoin mining potential in Kyrgyzstan is enormous, but so is the risk.
Are you scaling a Bitcoin mining operation and in need of mining software, services, or hardware? We can help. Feel free to DM me on Twitter.
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