beginingBlockchainAnalyzesDeadly protests in Kazakhstan hit bitcoin after the second-largest hub…

    Deadly protests in Kazakhstan have hit bitcoin after the world's second-largest mining hub shut down

    • The second largest Bitcoin mining country lost its internet access, taking a full 15% of the network offline.
    • Kazakhstan is home to coal mines that provide a cheap and abundant supply of energy, a major incentive for miners competing in a low-margin industry where their only variable cost is usually energy.
    • Bitcoin fell below $43,000 for the first time since September in Thursday's trading, falling over 8% at one point.

    As the Central Asian nation of Kazakhstan plunged into chaos this week, internet outages hit the country's second-largest mining hub bitcoins in the world, as another blow to miners looking for a permanent and stable home.

    Less than a year ago, China expelled all of its cryptocurrency miners, many of whom sought refuge in neighboring Kazakhstan. But months after these crypto migrants set up shop, protests against rising fuel prices have become the most -the worst unrest the country has seen in decades , leaving crypto miners in the middle.

    After dismissing his government and enlisting the help of Russian paratroopers to curb the deadly violence, Kazakhstan's President Kassym-Jomart Tokayev ordered the national telecommunications provider to suspend internet service. According to Kevin Zhang of digital currency company Foundry, this shutdown took about 15% of the world's bitcoin miners offline, which helped ship more than $400 million worth of mining equipment to North America.

    As Kazakh miner Didar Bekbau said: "No internet means no mining".

    Bitcoin fell below $43,000 for the first time since September in Thursday's trade, falling more than 8% at one point.

    Internet service was briefly restored in the country, but data from the watchdog group NetBlocks Internet Observatory shows that connectivity levels continue to be just 5% of normal levels across the country.

    "It is now Friday morning in Kazakhstan, where the internet has been shut down for approximately 36 hours, putting public safety at risk and leaving friends and family disconnected," NetBlocks tweeted.

    The entire episode reveals two important facts about the state of the Bitcoin mining industry. For one thing, the Bitcoin network is resilient to the point that it doesn't miss a beat even when a significant number of miners are unexpectedly taken offline. Second, the US may soon see a new influx of crypto miners looking to avoid future disruptions.

    Kazakh law enforcement officers block a street during a protest sparked by fuel price hikes in Almaty, Kazakhstan, January 5, 2022.

    Kazakh law enforcement officers block a street during a protest sparked by fuel price hikes in Almaty, Kazakhstan, January 5, 2022. Pavel Mikheev | Reuters

    The question now is whether the US, which overtook China as the planet's largest bitcoin mining center in 2021, has room to accommodate more miners.

    "The worry is that the previous bottlenecks and bottlenecks around hosting capacity (readily available space to plug in machines) will be squeezed much harder," Zhang explained.

    "There is huge pressure and demand for hosting capacity," he said.

    Bitcoin mining in Kazakhstan

    When Beijing kicked out all its Bitcoin miners in May 2021, Kazakhstan seemed like a logical destination. Besides the fact that it was next door, the country is also a big energy producer.

    Mining is the energy-intensive computing process used to create new coins and maintain a log of all transactions. Kazakhstan is home to coal mines that provide a cheap and abundant supply of energy, a major incentive for miners competing in a low-margin industry where their only variable cost is usually energy.

    It also helps that the Kazakh government tends to take a more casual approach to construction, which is good for miners who need to build physical installations in a short period of time. 

    Bekbau runs Xive, a company that provides hosting services to international miners and sells specialized equipment needed for mining. Over the past few months, it has fielded countless inflows from Chinese miners looking for a safe place to plug in their equipment.

    Kazakhstan is just behind the US in terms of its share of the global bitcoin mining market, with 18.1% of all cryptocurrency mining, according to The Cambridge Center for Alternative Finance .

    But the government isn't exactly excited about its booming crypto mining industry.

    For months, Kazakhstani lawmakers have established new rules to discourage mining, including  law, which will introduce additional taxes for crypto miners from 2022. Experts expect that this move will significantly change the incentives for people who want to invest capital in Kazakhstan.

    "The internet outage comes on the heels of efforts to impose a de facto ban on new mining in the country, so miners will be well aware of the political risk there," said Nick Carter, co-founder of Castle Island Ventures.

    "These bans simply highlight why miners are increasingly located in politically stable jurisdictions," Carter continued.

    Several mining experts also told CNBC they believe Kazakhstan was always meant to be a stopover on a longer migration west.

    Alex Brammer of Luxor Mining, a cryptocurrency pool built for advanced miners, said big miners are going to Kazakhstan in the short term with older equipment.

    "But as older-generation machines reach the end of their useful lives, these companies will likely deploy new machines in more robust and energy-efficient and renewable jurisdictions," Brammer said.

    The US has quickly become a mecca for crypto mining , in part because they are home to some of the cheapest energy sources on the planet, many of which are renewable.

    If miners make their way west, it could foreshadow the larger debate surrounding bitcoin's carbon footprint.

    Carter points out that Kazakhstan's energy is carbon-intensive, so just like China's ban, a prolonged outage in the Central Asian country would likely have the net effect of further decarbonizing bitcoin mining.

    But not everyone is convinced of the impending exodus of crypto mining from Kazakhstan.

    Alan Dorzhiev is the president of the National Association of the Blockchain and Data Center Industry in Kazakhstan, whose membership consists primarily of mining companies. Dorzhiev tells CNBC that after talking to mining farm owners across the country, he understands that most data centers are safe because they are located in regions where there are no protests.

    Backbau also remained optimistic, tweeting that he hopes by next week "everything will be fine".

    Whether miners are moving out of Central Asia or not, industry experts tell CNBC that the biggest takeaway from this whole ordeal is the fact that bitcoin mining once again survived another stress test with little drama.

    " As we saw with China, when a country demonstrates that it is unstable for bitcoin mining, miners in that country will move elsewhere,” said bitcoin mining engineer Brandon Arvanagi, who now runs Meow, a company that enables corporate treasury participation in the crypto markets.

    “This is how the Bitcoin network becomes more resilient over time. Miners are migrating to the most favorable jurisdictions, making outages less and less common.”

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