Why Kazakhstan has become a top destination for Chinese bitcoin miners in search of a new home

The era of China’s dominance over the bitcoin mining industry appears to be coming to a close. How big of a role will Kazakhstan, China’s neighbor to the west, play in the next era?

Since China’s government began cracking down on bitcoin mining activities in mid-May, roughly 90 exahashes per second of computing power — representing around 50% Bitcoin’s mining network — has gone offline in Inner Mongolia, Xinjiang, Qinghai, Sichuan combined.

In Xinjiang alone, bitcoin miners that until June 9 had been operating with nearly two gigawatts of capacity were shut down.

This has led to a spiking supply of millions of secondhand bitcoin mining machines in China that need new homes or owners. That’s created an opportunity for other countries to step in and fill the void.

The U.S. and Russia have long been considered as destinations to decentralize the hash rate away from China geographically due to their well-built mining infrastructure and institutionalized capital. Now, the central Asian country of Kazakhstan, with its abundant coal-based energy, has also emerged as one of the top destinations for miners who until recently were based in China.

Already, prominent mining companies Canaan and BIT Mining, formerly known as 500.com, have deployed machines in Kazakhstan and have long-term plans to scale up self-owned capacity through joint ventures. 

It makes sense in theory, given the nation’s energy surplus and its vicinity to China — and particularly Xinjiang, the coal-rich province that until last month was the world’s top mining hub. 

But in practice, the journey to the old Silk Road may not be any easier than migrating across the Pacific.

Pros and cons

The most obvious selling point for Kazakhstan is that its geographic vicinity to Xinjiang makes it easier for Chinese miners to travel by railway or air, said Li Xiaotong, who oversees European business development at Bitmain.

The country has also become more open to more miners coming in. Last year, its government passed a law that formally recognized digital asset mining as a legal form of business. Kazakhstan also doesn’t impose steep tariffs against Chinese imports the way the U.S. does.

“While the U.S. is a primary consideration for everyone because of the mining capacity and the likelihood of political and regulatory risks is low,” said Li, “the 25% tariff from the U.S. imposed on imported made-in-China electronic devices does pose a serious concern for many miners.”

The fact that moving equipment to Kazakhstan has a maximum 12% import tax hence does appeal to Chinese miners, she said. Besides that, there are ways to reduce such taxation.

“A big portion of the 12% is the value-added tax. If you report the miner import for self-using purposes instead of reselling, you can get rid of the VAT,” she said. “So the import tax could be reduced to around 3%.”

Didar Bekbauov, the co-founder of Hive Mining, a hosting facility in Kazakhstan, added that there are ways to get tax exemption by setting up local entities under certain business categories and having a registered residence in specific financial and technology zones.

That being said, lawmakers in Kazakhstan just passed a bill to charge bitcoin mining facilities in the region a tax over their operations. The tax, which the country will start enforcing in January, charges bitcoin mining farm operators one Kazakhstan tenge (around $0.0023) per kilowatt-hour of energy consumption. 

But to Bekbauov, the tax could be a good thing because it shows the sector is under the government’s protection.

“It’s not a grey area anymore, you do business activities and nobody will crack it down in the near future because the president signed the taxation,” he said.

Based on bitcoin’s current price and mining difficulty level, the cost mark-up of $0.0023 per kWh is almost negligible to the profit margin of the latest generation of mining equipment. It would only have a stronger impact on much older models.

For instance, an increase in electricity cost from $0.05 to $0.0523 per kWh could reduce the profit margin by 2% for the AntMiner S9, which first went on the market five years ago.

Capacity shortage

Although the mining hosting prices in Kazakhstan can be more competitive than those in the U.S, the recent shutdown orders in China that resulted in spiking hosting demand have already changed the market dynamics.

Before Chinese farms were shut down, hosting prices in Kazakhstan were generally below $0.05 per kilowatt-hour, according to Bekbauov. That was even after the Kazakhstan government increased the electricity rate by 15% in April for all energy businesses in the country.

But hosting availability has dried up since China’s crackdown order kicked in. According to Li, hosting prices have gone risen over 10% to around nearly 0.4 yuan per kWh (around $0.06), depending on the profit-sharing terms agreed to with hosting facility operators. 

“With bitcoin’s price decline and the hash rate plunge in recent weeks, some mining farms would want to have a joint mining model rather than charging a fixed hosting rate,” Li said.

Bekbauov said that over the past several weeks, Chinese miners have been booking capacity wherever possible in the country. Requests have ranged from 50 megawatts all the way up to 200 megawatts. 

He said his firm is running at full capacity — 50 megawatts — and in recent weeks has signed up new Chinese clients to use five megawatts. “We just don’t have any more capacity [for them],” he said. 

That perhaps reflects the challenge in Kazakhstan – and worldwide too – that could hold back potential miner customers who don’t want to invest in additional mining infrastructure even though Kazakhstan has the energy surplus.

According to the mining map compiled by Cambridge University, as of April 2020, Kazakhstan accounted for around 6% of bitcoin’s total hash rate, after Russia and the U.S.

“I believe that [percentage] was true. We could potentially increase that to 10% but a max of 15% is my estimation,” Bekbauov said. “But it’ll be good for the network. Imagine all of the unplugged hash rate from China goes to the U.S. and we will have the same issue again.”

Bekbauov estimates that existing mining facilities in Kazakhstan are running at full capacity, which amounts to between one and 1.5 gigawatts.

“Maybe having another one gigawatt of capacity is realistic,” Bekbauov said. “But someone needs to build the infrastructure.” 

“The problem is that the energy surplus just hasn’t been transformed into enough usable mining facility capacity,” Li said.

That appears to be an issue that mining facilities in the neighboring country Russia have managed to capitalize on so far.

Igor Runets, CEO and founder of Russia-based bitcoin mining hosting firm BitRiver, told The Block that in the past few weeks Chinese miners have signed on to use 150 megawatts that his firm will provide. 

“This is in addition to our ongoing expansion of green colocation capacity from 150 megawatts to 330 megawatts by year-end,” Runets said.

Meanwhile, industry leader Bitmain is encouraging customers and partners to take a more long-term perspective on the industry by investing in infrastructure construction in Kazakhstan rather than just hosting machines to make quick returns.

“Based on the math we did, the construction investment for each 10 megawatt of capacity in Kazakhstan may be twice to three times of that in China. But the overhead in the U.S. would be at least three times that at home,” Li said.

She said Bitmain is now sourcing available electricity worldwide and is willing to invest in additional mining infrastructure through joint ventures with itself taking up to 20% of the stake.

“What we ultimately hope for is that the supply and demand in the mining ecosystem can reach a balance again,” she said.