Crisis in Kazakhstan impacts on Bitcoin prices

Internet outages in the Central Asian country have led to the loss of 12% of the value of the market's main cryptocurrency

REUTERS/CHRISTINNE MUSCHI  -   A worker checks the miners' fans at the cryptocurrency farming operation

On 4 January, bitcoin recorded a dizzying fall that set off alarm bells for millions of investors globally. The market's main cryptocurrency has lost 12% of its value since the beginning of the year, from around 42,000 euros to over 36,500. These figures seem to have stabilised. Organisations such as the International Monetary Fund (IMF) are warning about the volatility of the currency, which is capable of destabilising the stock markets and affecting the markets, and are calling for the imposition of a regulatory framework that has so far been non-existent.

The setback for bitcoin has much to do with the crisis in Kazakhstan. The vast Central Asian country is home to the world's second-largest cryptocurrency reserves after the United States, a position it has held since China banned the practice in June. Kazakhstan then took advantage of the flight of miners in its eastern neighbour to establish favourable legislation and capture all the activity for itself, which has recently suffered with the outbreak of protests.

Peaceful demonstrations in the western town of Khanaozen, protesting against the exponential rise in the price of liquefied gas, spread across the country and gave way to violent riots in the enclaves of Nur-sultan and Almaty, involving security forces and protesters. At least 164 people were reportedly killed and another 1,300 injured in the clashes, according to official figures. Government buildings razed to the ground and vehicles reduced to ashes reflected the aggressiveness of the protests.

Tokáyev y Nazarbáyev
AFP/STANISLAV FILIPPOV  -  Former Kazakh President Nursultan Nazarbayev shakes hands with President Kassym-Jomart Tokayev during a congress of the ruling Nur Otan party in the capital Nur-Sultan

One of the first decisions of the Kazakh president, Kasim-Yomart Tokayev, was to order the internet and telecommunications services to be cut off in order to silence the riots. A blackout that caused the immediate disconnection of 18% of the world's bitcoin mining, the volume that is concentrated in Kazakhstan. The cryptocurrency 'farms' present in the country, which are huge enclosures where thousands of pieces of equipment responsible for creating bitcoin are stacked, were unable to continue their activity, affecting its price.

A week after the blackout, internet connectivity continues to be affected despite the apparent dissolution of the unrest. Without access to the network it is impossible to mine cryptocurrencies, so the instability is expected to continue in the coming hours, depending on how the crisis evolves. Tokayev has assured his partners that the situation is stabilising, and has already taken steps to regain control of the country.

Previous problems

Kazakhstan absorbed 8% of the global cryptocurrency market, which was concentrated in Beijing. A volume of activity that requires powerful computers capable of solving encryption problems, the process through which cryptocurrencies are obtained. These in turn need to have access to the grid and consume a large amount of electricity, a problem 'a priori' solved by the country's vast energy reserves. However, this forecast has not been accurate.

Since the end of 2021, Kazakhstan has been registering a significant increase in electricity consumption in various regions of the country due to the proliferation of activity in the country, where illegal cryptocurrencies also operate. An increase that has caused power outages and has pushed the Kazakh government to turn to Russia for energy assistance. In fact, the local mining company was forced to dismantle its 2,500-equipment farm. This situation puts a strain on cryptocurrency activities in the country.

Alijan Smailov
REUTERS/ANDREA VERDELLI  -  Alikhan Smailov, nuevo primer ministro de Kazajistán
New government

Tokayev on Monday appointed Askar Mamin, the former head of government's 'number two', as the new prime minister. Alikhan Smailov takes over the post after the previous government was dismissed en bloc following the outbreak of protests. Smailov, who served as finance minister and advisor to former president and "father of the fatherland" Nursultan Nazarbayev for four years, has received parliamentary approval.

The new prime minister must present his government's action plan within three weeks. Tokayev thus begins his reshuffle at the head of state after three years of two-headed administration, where he has had to share power with his predecessor in office. The internecine struggle for control between the current president and Nazarbayev has resulted in the latter's dismissal as head of the Security Council, as well as the arrest of profiles close to the former president.

However, with Putin's political and military backing by sending 2,500 troops to deal with the revolts, Tokayev has increased his dependence on the Kremlin, on which he also depends at the energy level to cope with the exponential growth in electricity consumption in the country and to sustain activities related to cryptocurrencies. In this regard, Turkish analyst Karim Has, an expert on the region, argues that Russia "has taken very serious new positions in Kazakhstan".