Bitcoin has been steadily growing in popularity and prevalence in the investor community since the cryptocurrency launched in 2009. Although many are still scratching their heads over what exactly Bitcoin is, with some arguing that it will be the future of finance and others dismissing it as fool’s gold, the digital currency is unlikely to disappear from the crypto conversation any time soon.
A key draw of Bitcoin is the idea that it is a decentralised currency, free from control of governments or central banks. However, the recent riots in Kazakhstan related to internet shutdowns caused by Bitcoin mining, and the resulting drop in the currency value show that it is not free from the impacts of volatile external forces, particularly in those countries where Bitcoin is being mined on a mass scale.
So where exactly does this decentralised currency market ‘live’, and why have certain countries emerged as Bitcoin mining hubs?
What environment do Bitcoin miners need?
Bitcoin mining is essentially programming computers to solve complex mathematics problems as a way of verifying transactions on a network. When the solution is solved, it secures the network and generates a new ‘bit’. There is a time pressure when it comes to Bitcoin mining too, as the resource is finite. The evasive and alleged creator, Satoshi Nakamoto, instilled a hard cap of 21 million Bitcoin when creating the source code. This means that as Bitcoin mining industries continue to grow in size and efficiency, the job of mining will also increase in difficulty. This also explains why the crypto mining industry is based around Bitcoin and not, for example, Ethereum or Tender.
Although Bitcoin mining started out with solo miners quietly building up reserves of the currency on their home computers, those days are long gone. In order to become a key player in Bitcoin mining, a substantial amount of space and computer equipment is needed, along with maintenance such as air conditioning for the equipment, a large energy source and a stable internet connection.
The scaling up of Bitcoin mining has been rapid and as a result has created concerns regarding the power required to maintain operations. In fact, energy consumption during the mining of the currency has been steadily building to a record-breaking peak in January 2022, following a decrease in July 2021. The increasing environmental cost of Bitcoin mining presents a new layer of considerations for those looking to source mine locations, such as how sustainable is this location and how ethical will this operation be?
Growing concerns around vast energy consumption have led to Bitcoin mining being banned from many countries that were considered to be welcoming environments for the activity, meaning that the hotspots are in a constant state of flux.
US fills China’s shoes
Many countries have decided to not just ban Bitcoin mining but outlaw cryptocurrency altogether, including Algeria, Bangladesh, Egypt, Iraq, Morocco, Oman, Qatar, Tunisia and, most notably, China. When China banned cryptocurrency in September 2021, the global hashrate – the level of computing power contributed to a network through Bitcoin mining – and the Bitcoin mining map shifted significantly.
Since China banned crypto, the US has quickly become the global leader for Bitcoin mining and the number one ranking country with regards to the hashrate. Key drivers for this are the country’s access to renewable energy sources, low energy prices (particularly in Texas) and pro-cryptocurrency policies.
For example, Texas has a deregulated power grid with spot pricing that allows for agility when choosing and changing energy providers. This means Bitcoin miners are offered a great degree of flexibility when it comes to the only real variable in crypto mining – energy consumption costs.
“There are two main inputs to production for Bitcoin mining: hardware and energy," says Stephen McKeon, an associate professor of finance at the University of Oregon. "The hardware can be used anywhere with an internet connection, so the best regions are those with the lowest energy costs. In the US this tends to be regions such as the Pacific Northwest, where renewables such as hydroelectricity are the dominant components in the generation mix.”
The widespread availability of renewables in the US means that Bitcoin mining is less controversial there when compared with countries that have been slower to embrace greener energy.
Can Kazakhstan continue as a Bitcoin mining hotspot?
Up until August 2021, Kazakhstan sat in second place globally as a Bitcoin mining hotspot, but now the country's future as a crypto mining hub looks uncertain following the aforementioned January 2022 riots.
The large expanses of space, low energy costs and favourable climate in Kazakhstan made an attractive offering for Bitcoin miners. However, following the internet shutdowns and power outages at the beginning of the year, its appeal may be wavering.
With the energy crisis showing no signs of abating in Kazakhstan, reports of a 500% tax on Bitcoin miners being considered by the Kazakh government have also created a cloud of pessimism over the country’s crypto industry.
Many experts expect that the Cambridge Bitcoin Electricity Consumption Index – due to be published in March 2022 – will reveal that Kazakhstan has lost its spot as the world's second-largest Bitcoin mining location.
Will Russia step in to the Kazakhstan void?
The third-largest Bitcoin mining location documented is Russia. In January 2022, the Russian central bank indicated that it may have followed in China’s footsteps and banned Bitcoin from the country, but a month later this stance has appeared to have softened, creating a will-they-won’t-they tension.
On 18 February 2022, the Russian Ministry of Finance introduced a cryptocurrencies bill that would see specific Bitcoin regulations introduced, and crypto payments still prohibited. This stance is in direct conflict with the Bank of Russia, however, which is calling for a complete cryptocurrency ban.
The bill proposed that cryptocurrencies be seen as an investment tool rather than legal tender, meaning they cannot be used as a payment method. The bill, if passed, would also initiate requirements for all crypto exchanges to be monitored and evaluated, as well as licensed and registered through the government. Such calls from governments for cryptocurrencies to improve their levels of visibility and transparency are becoming more and more frequent, and the countries making such demands could see their appeal as a Bitcoin mining hotspot dented.
Where is the future of Bitcoin mining?
Bitcoin mining hubs are continuing to adapt and change as countries develop differing approaches to regulating and facilitating the cryptocurrency and its mining. What is clear, however, are the requirements of a good Bitcoin mining location, with cheap (and preferably renewable) energy at the top of the list. “Mining is location agnostic so it can move to wherever the cheapest energy can be sourced,” says McKeon.
Given the events in Kazakhstan earlier in 2022, it does not seem to be too much of a stretch to imagine that the development of Bitcoin mining locations will run hand in hand with the availability of affordable sustainable energy (in vast quantities). The simple equation of what is required for Bitcoin mining means that any country fitting this criteria could cultivate a strong and robust mining hub. Cryptocurrencies seem to engender suspicion among many governments, however, and the outages in Central Asia caused by Bitcoin mining will have done little to assuage such scepticism. The benefits of holding the status of 'Bitcoin mining hub' for a country are also unclear (beyond showing off its robust digital infrastructure). This nascent industry already seems to be in a state of flux and mining operations seem to be a moveable feast. It may be some time before clear, long-term Bitcoin mining hubs emerge.
This article was first published on our sister website Investment Monitor by Ruth Strachan.