The Bitcoin’s Role Behind Political Turmoil in Kazakhstan

Kazakhstan has attracted the attention of the media around the world after the violent clashes that have swept over the government. The protests began after a rise in gas prices and gradually spread throughout the country. After days of chaos and instability, the government had to invoke an old agreement signed with Russia, to ask the neighboring country to intervene and stop the clashes. However, in this chaotic scenario, a more careful analysis reveals a disarming truth, and among the causes behind the protests there could be unsuspected perpetrators – bitcoins.

To make it clearer, we need to start from the beginning. The discontent of the population began in 2019, following the introduction of a liberal reform on energy and economy, which led to a progressive removal of subsidies on the costs of energy goods, and to the self-determination of market prices. Therefore, in the following months the price of energy and gas continued to increase. On January 2, 2021, after another rise in gasoline prices, demonstrations started, and a few days later, the riots became increasingly violent across the country, turning into a broader protest against the Kazakh President Kassym-Jomart Tokayev and its government. The situation worsened in the following days, when the authorities decided to cut the internet to prevent protesters from organizing new demonstrations. The decision didn’t bring the desired results, fueling the riots even more. The government, no longer able to guarantee stability and security, was forced to request the intervention of the Russian military forces, in the name of the Collective Security Treaty Organization – a 1992 agreement signed by post-Soviet countries. With the intervention of the Russian troops, the situation soon returned under control. However, the toll of these days of fire counts over 200 deaths between demonstrators and policemen, thousands of arrests and several cities destroyed.

In this scenario, what’s Bitcoin’s role behind these events? Kazakhstan is the second country in the world – behind the US, for bitcoin mining, accounting for more than 18% of global mining. For those who have never heard this word before, crypto mining is a process through which “blocks”, containing cryptographically verifiable data regarding transactions, are created by solving complex mathematical calculations. Eventually, these blocks are added to the “blockchain”, a decentralized and secure cryptographic structure, fundamental for the functioning of the entire system. These calculations are performed by very powerful devices, which are extremely energy costly and require expensive hardware and software. As an incentive, crypto miners receive a payment in cryptocurrency for each block they add to the blockchain. This reward generates new coins which are put into circulation.

The growth in cryptocurrency mining operations is due to China’s decision to ban cryptocurrency mining. As a result, the Financial Times reports, more than 88,000 crypto-mining machines have moved from the Chinese provinces, to Kazakhstan. Reasons why the country is conducive to miners’ activities, along with the ease of moving the computers thanks to the proximity of the two countries, are due to both low electricity prices and its cold climate that favors the functioning of the extraction machines.

As affirmed before, these machines require huge electricity consumption. The amount of energy it takes to mine a bitcoin is estimated to be between 86,000 – 286,000 kWh, and the whole Bitcoin’s network consumes around 128 GWh a day in order to produce 900 bitcoins. In order to understand the magnitude of these numbers, it could be helpful to keep in mind that the 2020 average daily energetic consumption of Italy, which counts almost 60 million people, was 824 GWh. In proportion, Bitcoin takes just over six days to consume the same amount of energy spent in 24 hours by 60 million people. Hence, if you apply these numbers to a smaller country, such as Kazakhstan – which counts about 18,5 million people, you can easily realize how the surprising diffusion of mining activities in the country has strongly contributed to the energetic crisis. As reported by The Guardian, Kazakhstan’s crypto mining farms are mostly powered by ageing coal plants which themselves – along with coalmines and whole towns built around them – are a headache for authorities as they seek to decarbonize the economy. Since the old plants are inefficient and carbon-heavy, they generate an outsize amount of pollution.

Electricity consumption grew by more than 8% in 2021, and this growth in demand led to higher prices, no longer controlled by state subsidies. The official version of the Kazakh government is that the problems with the electricity grid are caused by “grey” miners, small groups that work in the mining of bitcoin without paying taxes and using energy sources illegally, which might be consuming twice the energy used by the officially registered ones. The Kazakh minister of Energy has promised efforts will be made to fight the phenomenon. Meanwhile, after the outbreak of the protests, the government was forced to implement a law to introduce extra taxes from crypto mining, which will take effect this year. Nevertheless, miners are optimistic the political storm will blow over soon.

If the bitcoin mining activity was undoubtedly one of the reasons behind the energetic crisis and the following political turmoil, it is also true that this cause-effect relationship is reciprocal. In fact, after the government’s decision to shut down the internet to prevent the protests, bitcoin’s computational machines sank. As reported by the mining firm BTC.com, the hashrate – unit of measure of bitcoin’s production, was down 14% during the 72 hours of the internet outage. Consequently, Bitcoin’s price dropped under $41,000, hitting multi-month lows.

A few weeks have passed since the violent clashes in the country. The situation seems to be under control, and Bitcoin’s growth is steadily returning. Nevertheless, the political turmoil in Kazakhstan has shown worldwide the serious environmental, and economic problems related to the cryptocurrencies. We could provocatively say that this was the first political crisis ever caused by Bitcoin. And as the cryptocurrencies methods of payment are expected to grow, it is predictable others will come. 

 

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