What Do Mining Restrictions in Kazakhstan Mean for Bitcoin?

What Happened?

This January, Kazakhstan descended into deadly protests as angry citizens took to the streets to protest against increased fuel prices and economic woes compounded by Covid, per Human Rights Watch.

The protests resulted from bubbling anger in citizens that finally exploded, and the result was dozens dead, over a thousand injured, 6,000 detained, and the resignation of the country’s government.

The uprising has shocked the world not just for the unexpected riot in the Central Asian country that has, for the most part, avoided the civil unrest of its neighbors but also for the government’s “fire without warning” response to the protests.

The protests sparked at the remote town of Zhanaozen before quickly spreading to other parts of the country.

Kazakhstan is an oil-rich country with an impressive foreign direct investment (FDI) profile that has helped it transition from lower-income to upper-middle-income status, according to the World Bank. That has cemented it as the richest country in the region. However, inequalities remain, with a cohort of political elites benefiting the most from the country’s wealth.

Kazakhstan’s Role in Bitcoin

Kazakhstan had become a high-value piece on the Bitcoin chessboard. Plenty of miners rushed in after neighboring China, responsible for the highest percentage of Bitcoin miners, clamped down on the activity.

In 2021, it became the second largest mining location, second only to the United States. According to data from Cambridge University, it made up about 18% of Bitcoin’s hashrate. Like China, Kazakhstan is home to coal mines that provide cheap mining power.

But things took a turn when miners faced a ‘winter’ of power shortages. One of the country’s three power grids had gone down, which led the government to ration the power used by miners.

It began by limiting the amount of power to the largest consumers. This targeted crypto miners. An October 1st draft proposed such consumers be limited to only 1MW of power, with a national cap of 100MW.

Nur Sultan continues to struggle with the decision on a permanent crypto stance. In 2018, the National Bank of Kazakhstan was considering a ban on the trading and mining of such currencies.

Chairperson Daniyar Akishev told the Russian state-owned newspaper Sputnik that the bank was “taking a very conservative approach” toward cryptocurrencies” and wanted “to ban the exchange of digital currencies for the national currency.”

In 2020, the government seemed to tolerate crypto. Parliament passed a bill acknowledging the existence of digital currencies. The legislation laid the framework for crypto businesses and the rates for taxes on miners’ profits.

Why Could Kazakhstan No Longer Mine Bitcoin?

As protests raged, internet users saw an internet blackout. On January second, internet services were blocked by the government in an effort to restrict communications among protestors.

And while internet shutdowns are legal in the country, the economy is reeling from the loss of about $429 million due to this one, per London-based TOP10VPN. But another industry was also dealt a blow — cryptocurrency. Due to the internet blackout, miners had to mothball their tools and wait it out.

Hours after the blackout, Bitcoin’s hash rate had dropped by 12%. VP of Research at The Block Larry Cermak observed in a tweet , with his data illustrating the dramatic declines in hash rate mining pools experienced, including Binance Pool’s 14.6% and OKEX Pool’s 46.3% declines.

Hash rate is the measure of the computational power applied on a cryptocurrency network to mint new coins. The more such power is applied in a network, the safer the network.

Miner Didar Bekbau said on Twitter: “Internet is blocked in Kazakhstan…so no mining.” CNBC reports that 15% of the world’s Bitcoin miners were taken down due to the incident.

The leading crypto’s 8% value was wiped off the market as investors dumped their coins due to Kazakhstan and released US federal reserve minutes. The minutes indicated that the central bank might sell off some of its assets, triggering an increase in interest rates. The move might have led to traditional investors selling off their crypto in favor of less risky assets.

What Does This Mean For Bitcoin?

The Bitcoin network has always proved incredibly resilient. While Kazakhstan held a considerable percentage of all Bitcoin miners, there are many more spread out globally — with the US holding the majority. The Bitcoin network is decentralized so that no particular individual or group wields control or influence over its running.

Interestingly, when the mining market share is reduced, active miners benefit since there’s less competition. As such, a section of miners falling off the grid does not stop Bitcoin.

In addition, if Kazakhstan loses its luster as the second-best Bitcoin mining destination, it could trigger an influx in the next logical country for the practice: the US.

If using coal mines becomes even more unfashionable? As the politics about Bitcoin’s power hogging heats up, it will be politically unenviable to host coal-powered mines. This means Kazakhstan could — predictably — stamp out crypto activities at home.

Even so, less than good news about Bitcoin has never worked in its favor. Cue Elon Musk’s Tesla’s announcement that it was halting Bitcoin payments, and Bitcoin went on a freefall. Or China’s crackdown that would wipe off billions of dollars from the market.

Final Thoughts

When Kazakhstan went offline, it was a temporary blow to Bitcoiners — from traders, to miners, to proponents. Bitcoin is still searching for a stable mining home, although let’s admit it — there’s nothing stable about Bitcoin. This instability is the very thing that makes Bitcoin an attractive proposition for risk-tolerant types.

However, constant packing and moving for miners doesn’t bode well for the currency. As we’ve seen, January’s incident did put a damper on the market. But Bitcoin’s long term prospects are not affected by fleeting events. It will take more than an internet outage to bring Bitcoin down.