No Internet – no mining

19 January, 2022

Network data from NetBlocks confirms a significant Internet service failure in Kazakhstan since the evening of January 4, 2022, which escalated into a nationwide disconnection in the following days. The disruption occurred against the backdrop of growing protests against the sudden increase in energy prices that began over the weekend in Zhanaozen, in the west of the country.

The Law of the Republic of Kazakhstan «Communication» states that in case of a dangerous situation the authorities of the country are entitled to suspend the operation of communication networks as well as access to the Internet. In other words, there was a shutdown in the country.

The Internet Society defines shutdown as a deliberate disruption of Internet communications that renders them inaccessible or virtually inaccessible to a certain population, location, or access mode, often to control the flow of information.

The blocking of access to the network is related to the fact that «terrorist groups use communication means for coordination and planning of actions», stated the Minister of Digital Development, Innovation and Aerospace Industry of Kazakhstan Bagdat Musin. He promised that a mechanism would be developed whereby access to vital resources, such as payment services, would be preserved even when the Internet was disabled.

Kazakh President Kasem-Jomart Tokayev announced on 7 January that, because of the stabilization of the situation, he had decided to include the Internet in certain regions of the country at specific time intervals.

Bitcoin Drop

To some extent, the Internet shutdown in Kazakhstan has contributed to the fall in the value of Bitcoin, as the country has 18% of the world’s major mining capacity. On January 10, the course fell below $40,000 for the first time since September 2021. In addition to the fact that without a stable Internet connection, cryptocurrency generation is not possible in principle, traders from Kazakhstan have also lost the ability to manage their accounts.

Bitcoin is the first and most popular cryptocurrency generated in 2009. All cryptocurrencies operate based on blockchain technology – a decentralized way of storing information in a chain. The extraction of cryptocurrency is done by mining, a process of generating virtual currency that is produced by a distributed network of computers connected into a closed Internet community; computers perform a complex set of cryptographic algorithms, giving out cryptocurrency in the form of digital currency units.

In the few hours without the Internet in Kazakhstan, the bitcoin hedge – the total amount of power that computers spend on mining cryptocurrency – fell by 12%, according to Larry Cermak, an analyst of The Block. 

The pools most affected 1THash (82% reduction), OKEx Pool (46%), and KuCoin Pool (23%).

In 2021 China’s share of global bitcoin mining plunged while Kazakhstan rose to become one of the world’s largest players in the industry, according to research from Cambridge University. Kazakhstan saw an almost sixfold increase in its share of global bitcoin mining in 2019-2021, climbing to 8.2% from 1.4%.

Bitcoin mining, where transactions are validated and new units produced, is a highly energy-intensive process. Due to limited energy resources in China, the Chinese government has clamped down on crypto mining. Many bitcoin miners had fled China for neighboring Kazakhstan. According to Bloomberg, Kazakhstan has more than 22 gigawatts of electric power capacity, most of which comes from coal and gas stations.

«The situation in Kazakhstan is a catalyst rather than a cause of the fall – senior analyst Nikita Zuborev assures. – Now, against the background of protests in the country, authorities shut down the Internet, which has led to a decrease of the hash rate of Bitcoin from raw data by about 15-20%».

The second event that affected the Bitcoin depreciation is important macroeconomic news from the US. According to the published minutes of the December Fed meeting, the American regulator is willing to raise interest rates faster and begin to do so earlier. The stock market has responded with a sharp fall, and lately, it’s correlated with cryptocurrencies. 

However, as Bitcoin declined, alternative coins collapsed. For example, Ethereum depreciated to $2.9,000, and the price of Binance Coin and Solana dropped to $420 (a drop of almost 20% from the beginning of the year) and $133 (a fall of 24% from the beginning of the year), respectively. The overall capitalization of the cryptocurrency market fell below $2 trillion since late September.

As the Kazakh miner, Didar Bekbau said, «no Internet, no mining». Experts predict that miners will leave the country as soon as possible. That is what happened. For several days while the Internet shutdown continued in Kazakhstan, the miners shipped cryptocurrency equipment worth over $400 million to North America.