Kazakh Mining Slide Offers Lesson for US Lawmakers

A big disruption in Bitcoin’s hashrate this week can be pinned on one man: Kazakhstan President Kassym-Jomart Tokayev, who after declaring a state of emergency during opposition protests ordered telecom carriers to impose an internet blackout, which meant Kazakh-based Bitcoin miners couldn’t operate.

Does this indicate that Bitcoin is becoming vulnerable to geopolitical risks? Not really. In many other ways Bitcoin has become more resilient after China’s crackdown last year led to a diversification of mining around the world. Bitcoin’s recent performance reinforces that dynamic adaptability.

Still, there are vital lessons to draw from the fact that the Bitcoin mining economy was materially impacted by the actions of a single dictator, one whose Central Asian country now occupies a large post-China place in that economy, to which it supplies cheap-but-dirty coal-based power.

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The U.S. Congress, which is now reportedly planning hearings to address some lawmakers’ concerns about energy usage by Bitcoin mining, should heed those lessons.

A draconian response in Washington (e.g. in limiting miners’ energy access) would encourage U.S.-based miners to move to countries like Kazakhstan that are doing close to nothing to expand renewable energy. Alternatively, if Congress was to seize this moment – when the appeal of authoritarian states as homes for crypto businesses has been tarnished – it could craft a constructive policy framework that aligns Bitcoin mining with green energy expansion and supports the kind of democratic freedoms Kazahks deserve.

How great is the Great Hashrate Migration?

According to MiningPoolStats, hash power commanded by the largest mining pools – a reasonable proxy for overall Bitcoin hashrate – shrank by a hefty 12.7% on Wednesday.

To be sure, the decline was likely exaggerated by other factors. First, it came just after network capacity reached a new all-time high early in the new year. Second, it coincided with a sharp plunge in bitcoin’s price – induced by news of tighter U.S. monetary policy – which likely led some miners to power down their more inefficient, loss-making machines.

Still, it was an especially pronounced decline. And unlike the seemingly anomalous occasional blips – such as the Nov. 24 fall in hashrate, apparently caused by a technical outage at the Binance mining pool, seen in the chart below – this one’s main cause was a political event.

This was also the first, tangibly negative aspect of what has otherwise been a positive story: that the Bitcoin network not only took just six months to recover from China’s crackdown on miners in May and June but did so with far greater geographical diversity than was previously the case.

After Chinese authorities shuttered a massive 90 terahashes per second (TH/S) of hashpower – then half of Bitcoin’s global capacity – miners ended up relocating across a range of countries with a variety of political systems and energy mixes, ranging from renewables-centric economies to coal-dependent. As of August, the U.S. was the largest player, accounting for 35% of total capacity, according to the Cambridge Center for Alternative Finance, with Kazakhstan in second place at 18.1%.

That a dictator from the latter could single-handedly cause such a contraction in the network doesn’t necessarily undermine the thesis that this more decentralized, diversified geographic spread is more secure. After all, the Kazakh hashrate closure – most likely temporary – was nowhere near as disruptive as China’s more permanent move to shut down 50% of the network. Nonetheless, it brings home certain grounded realities often overlooked by crypto utopianists, who portray Bitcoin as an unstoppable, independent system for human beings to autonomously store and exchange value.

One is the continued importance of nation-states and of the capacity of their leaders to set rules that impact Bitcoin. (This can be positive as much as negative – witness bitcoiners’ enthusiasm for Salvadoran President Nayib Bukele’s move to make the cryptocurrency legal tender in his country.)

The other was that access to Bitcoin depends on internet availability. It’s true that the private and public keys with which people control their bitcoin balances can exist offline and survive outages. But if there’s no access to the internet in a certain location, users there can’t exchange funds and miners can’t participate in generating and validating blocks of transactions.

Still, you’d be foolish to see this as a sign of Bitcoin’s fatal flaw. The bigger story of the past year was that the Bitcoin ecosystem proved remarkably adaptable. In the wake of the China shutdown, miners showed an openness to new frontiers, both toward geographical locations and toward new, nimble business models that made it profitable to mine with renewable energy in places where it previously wasn’t. (I again urge you to read this CoinDesk column by Nic Carter on the ways in which mining has evolved this past year.)

Pay attention, Congress

All of this is greatly relevant to members of the Oversight and Investigations subcommittee of the U.S. House of Representatives’ Energy and Commerce Committee, which is expected to soon hold hearings on the environmental impact of Bitcoin mining.

There are concerns – quite legitimate, I’d say – that the surge in U.S. mining has in some places led owners of previously shuttered coal plants to start servicing Bitcoin miners. That is inflating the price of electricity in communities where it is scarce. But if a knee-jerk instinct among Democrats is to follow China’s book and ban mining, they will only drive the industry offshore, to places where fossil fuels are more readily and cheaply available – places like Kazakhstan.

Right now, miners are likely weighing whether the costly disruption from the Central Asian country’s political crisis is worth the benefits that accrue from the subsidies its government provides to the local coal industry to keep power cheap. Why give them a reason to overlook such political risks?

Policymakers should think holistically about three realities. One is that climate change is not going away. The other is that Bitcoin is not going away. The third is that Bitcoin’s geography-agnostic miners are highly adaptable and will continue to seek out the most cost-effective energy sources anywhere and anyhow.

How to marry those realities? With policies that incentivize miners to use green energy and, with the perpetual revenue stream they generate, to underwrite the development of renewable energy infrastructure for the benefits of society at large.

Do that and you’ll not only have a net carbon-negative impact, you’ll be denying dictators like Tokayev an investment source with which to finance the planet-destroying industries that fund the apparatus with which he oppresses his people.