Ethiopia, which allowed bitcoin mining starting in 2022 although it still bans cryptocurrency trading, has strengthened ties with China over the past decade, and several Chinese companies have helped build the $4.8 billion dam from which miners plan to draw their energy.
Ethiopia has become a rare opportunity for all companies mining the original cryptocurrency, as climate change and electricity shortages fuel a backlash against a $16 billion-a-year industry (at today’s price). bitcoin) elsewhere.
It is also a risky bet, both for businesses and for Ethiopia.
A succession of developing countries like Kazakhstan and Iran initially embraced bitcoin mining, only to turn to the sector when its energy consumption threatened to fuel domestic discontent.
“First, countries may lack available electricity, leaving no room for mining companies to expand,” said Jaran Mellerud, managing director of Hashlabs Mining. “Second, minors may suddenly be considered undesirable by the government and be forced to pack up and leave. »
Ethiopian officials are wary of the controversy that accompanies bitcoin mining, according to industry executives who spoke on condition of anonymity to avoid jeopardizing government relations.
Even after new production capacity comes online, almost half of the population lives without access to electricity, making mining a delicate subject. At the same time, it represents a potentially lucrative source of foreign exchange earnings.
Ethiopia has already become one of the world’s top recipients of bitcoin mining machines, according to an estimate by mining service provider Luxor Technology. That’s even as Luxor’s first major contracts to ship equipment there took place in September, said Ethan Vera, director of operations.
The state-owned electricity monopoly claims to have entered into electricity supply agreements with 21 Bitcoin miners. All but two are Chinese.
“Ethiopia will become one of the most popular destinations for Chinese miners,” said Nuo Xu, founder of the China Digital Mining Association, which organizes exhibitions and facilitates trade in mining machines. He is organizing a trip to Ethiopia for a group of Chinese mining executives to visit potential sites.
It is a testament to the environment that Bitcoin miners are willing to ship equipment worth tens of millions of dollars to a country that emerged just two years ago from a civil war in its north. tense political and economic environment in which they operate.
Companies play a crucial role in maintaining the Bitcoin network by using powerful computers, or “rigs” in industry slang, to solve mathematical puzzles and validate encrypted transactions on the blockchain. In exchange, they receive rewards in bitcoins issued by the network.
This is a volatile business, with revenues following the rise and fall of the token. Miner Core Scientific plunged into bankruptcy in December 2022 as cryptocurrency markets collapsed; 13 months later, the court was granted permission to exit Chapter 11 after the price of bitcoin jumped nearly 150%.
Platforms consume large amounts of energy, so access to cheap electricity is a key competitive advantage. Bitcoin mining consumed 121 terawatt hours of energy in 2023, the Cambridge Center for Alternative Finance estimates – consumption similar to that of Argentina. Electricity can account for up to 80 percent of miners’ operating costs, according to Mellerud.
This explains why low-cost electricity has largely dictated where miners install much of their equipment in recent years: first in China, then in countries like Iran, Kazakhstan, Russia and northern Sweden, and more recently in Texas. What these places have in common is relatively cheap energy.
Dependence on abundant electricity is also a major vulnerability, as it can put miners in competition for electricity with factories and households, exposing them to political backlash.
When Kazakhstan imposed new restrictions and taxes on miners, “it basically killed the industry,” said Alen Makhmetov, co-founder of Hashlabs. Two years after the crackdown, its 10 megawatt installation remains unused.
And at a time when rising temperatures are wreaking havoc around the world, Bitcoin mining is increasingly seen as a contributor to global warming that serves no productive purpose — even though miners say they exploit more and more clean energy.
A United Nations University study released in October estimates that two-thirds of the electricity used for bitcoin mining in 2020 and 2021 was produced from fossil fuels.
The Ethiopian government has allowed bitcoin mining mainly because companies pay in foreign currencies for the electricity they consume, Yodahe A. Zemichael, deputy director of the Information Network Security Administration, said in response to questions from Bloomberg News.
In the written response, he used terms like “high-performance computing” and “data mining” instead of “bitcoin mining.”
“Ethiopia is heavily regulated,” said Nemo Semret, CEO of local mining company QRB Labs, who helped lobby authorities to allow bitcoin mining. “Introducing a new sector like this has been a big challenge, and we have worked over the last two years to obtain all the necessary permissions from the government.”
The government has adopted a directive to regulate “crypto products,” including mining, according to Yodahe. He added that licensing “is happening in a sandbox and is in its early stages,” declining to say how many permits have been granted so far.
Semret said uncertainty remained among miners over how authorities would monitor them in the long term, and Yodahe declined to say whether the directive was shared with industry players.
Yet for Bitcoin miners – especially Chinese – Ethiopia represents a unique blend of economic and political advantages. Some leaders are even talking about it as a possible rival to Texas, which represents up to a quarter of the world’s bitcoin creation capacity.
Ideal climatic conditions
The African country’s ability to supply electricity to create bitcoin could rival that of Texas within a few years, according to a senior executive at Bitmain, the Beijing-based company that is the main platform provider. The opening of the GERD project increased Ethiopia’s installed generation capacity to 5.3 gigawatts, of which 92% comes from hydropower, a renewable energy source.
Once the GERD is fully completed, Ethiopia’s generation capacity will double, according to Ethiopian Electric Power (EEP). It charges Bitcoin miners a flat rate of 3.14 US cents per kilowatt hour for electricity from substations, Director of Marketing and Business Development Hiwot Eshetu said in an interview.
While that’s similar to the Texas average, rates in the Lone Star State can vary wildly, Luxor’s Vera said, making profits less predictable. In Ethiopia, the price will drop once miners connect directly to power plants, according to Hiwot. He added that EEP had suspended the signing of new contracts “to ensure a well-controlled and managed process”.
BWP, which hosts machines operated by miners from China and other countries, began shipping equipment to Ethiopia early last year. In December, the company announced on X that it was opening a 120-megawatt data center for mining equipment – a size even by Texas standards – in Addis Ababa, the capital.
CEO Vitaliy Borshenko said Ethiopia’s advantages go beyond cheap, renewable energy.
“The ideal temperature for miners is 5 to 25 degrees” Celsius (41 to 77 Fahrenheit), he said, citing recommendations from rig maker Bitmain. “This is exactly within the average temperature range in Ethiopia.” Addis Ababa sits at almost 2,400 meters above sea level, much higher than most alpine ski resorts.
The appeal is such that some Chinese companies are not waiting for the official green light before starting operations, said Xu of the China Digital Mining Association.
“Miners are posing as factories or agricultural businesses” to obtain electricity rather than seeking government approval to create bitcoin, he said without naming them. Yodahe did not respond to a request for comment on such practices.
Their confidence is underpinned by geopolitics. China is the largest source of foreign direct investment in Ethiopia as well as its largest bilateral creditor. The Chinese government and financial institutions lent nearly $15 billion for 70 “megaprojects” in the African country between 2006 and 2018, Ethiopia’s Finance Ministry said in December.
The Horn of Africa country is in desperate need of foreign currency inflows. The country is currently negotiating a bailout plan with the International Monetary Fund after failing to pay interest to its private creditors in December. The previous month, it had reached an agreement with its bilateral creditors to suspend payments.
Encouraged by China’s growing stature in Africa, Chinese bitcoin miners are also starting to show interest in countries like Angola and Nigeria, Xu said.
“Chinese miners have no problem building sites in Africa,” he said. “It’s like another Chinese province.”