Bitcoin mining has grown considerably from its humble beginnings, starting as a hobbyist activity where individuals who wanted to support network decentralisation would provide hashing power on their desktop or laptop computers and net 50 BTC every 10 minutes with very little competition.
A decade later, those initial CPU miners have been priced out, and so have GPU miners and today, the only way to effectively have a chance of mining Bitcoin is to have specialised computers known as ASICs. Even with a couple of ASICs as an individual miner, you’re still up against massive operations distributed globally, all competing for 6.25 BTC every 10 minutes and the game has gotten harder by several orders of magnitude.
The race to acquire Bitcoin has moved from the retail level to the institutional level, with large-scale miners raising capital and starting mining operations colocating with the cheapest electricity they can find. The institutional mining landscape is filled with both private companies and publicly listed companies mining Bitcoin.
Public miners were the heavy hitters on the block, with the ability to sell stock and raise capital or issue debt; these companies can purchase large amounts of ASICs, secure the best energy contracts, or quickly move operations to places where energy is cheapest and it shows.
Public miners generate a considerable portion of the global hash rate today, and while more private and public companies are coming online with the intention to compete for this shrining supply of new Bitcoin, there’s now a new 800-pound Gorilla entering the ring.
Bitcoin mining has started to creep into a new adoption wave as a method for nation-states to generate revenue and diversify their economies. Countries like El Salvador, Bhutan and Oman have all started nationalised mining operations, and more are likely to follow suit in the future.
Enter the nation-state
Nation-state Bitcoin mining is the practice of a government or state-owned entity mining Bitcoin. This can be done through the government setting up a specific mining operation wholly owned by the state or by nationalising private Bitcoin mining operations that have been set up in the country.
There are several reasons why nation-states are interested in Bitcoin mining.
- It can be a way to generate revenue. Bitcoin mining requires a lot of computing power, and countries with access to cheap electricity can make a lot of money by mining Bitcoin. Governments could use the proceeds to fund their operations or other projects.
- Bitcoin mining can help diversify a country’s economy. If a country is heavily reliant on one or two industries, then Bitcoin mining can help to reduce its economic risk.
- Bitcoin mining can help to promote financial inclusion. In many countries, people do not have access to traditional financial services. Bitcoin mining can provide them with a way to earn money and store value.
- By controlling a large amount of the hash rate and pooling the hash rate locally, a government could potentially influence the direction of capital generated locally instead of seeing it sold on the global market.
- Protect against sanctions. Bitcoin is a decentralised currency that is not subject to government control. This makes it an attractive option for countries that are subject to sanctions from other countries.
- Disrupt the financial system. Bitcoin could be used to disrupt the traditional financial system by providing a way to transfer value that is not subject to international bodies or foreign government control.
- Bootstrap new energy production. In many nations around the world, energy production and exploration are left to the state if they are going to justify expansion into new energy sources. Bitcoin provides a first-time buyer for that energy while production is ramping up and being connected to the grid for wider resale.
Nationalising Bitcoin mining is a commodity trend.
If there was ever a case for Bitcoin being a commodity, then it has to be the trend of nationalised mining operations. Nationalising local resources has been a trend in the commodity sector, and Bitcoin mining is just the next to fall in line.
Throughout history, private individuals have spent money and time and taken risks to find deposits of commodities only to see their right to extract it taken away by governments should their possible payday be large enough.
Governments want to benefit from commodities but hope others will take the risks for them, only for them to assert control over strategic resources if they are found. If a private entity fails, too bad that’s capitalism.
If they succeed, great; keep going but hand over equity or kick up revenues to fund the state.
Commodities such as oil, gas, and minerals are often considered to be strategic resources, meaning that they are essential to a country’s economy and security. By nationalising these resources, a government can ensure that they are controlled by the state and not by foreign interests.
Governments need sources of revenue outside of taxing their citizens, and nationalising a commodity that is available within their borders is a great way to do that. Commodities can be a major source of revenue for a government.
By nationalising these resources, a government can capture a larger share of the profits.
- Buy votes: The income from these commodities can be particularly important for developing countries that are seeking to raise revenue to fund social programs and infrastructure projects, create jobs and thus buy votes from their citizens.
- To redistribute wealth. Nationalising commodities can be a way to redistribute wealth from foreign companies to the local population. This can be seen as a way to achieve greater economic justice and equality, again just a way to buy votes to remain in power.
- To protect the environment. By nationalising resources under green legislation, a government can kick out the competition and claim only that they know how to extract wealth without ruining the environment.
- To promote national development. Nationalising commodities can be a way for a government to promote national development and sovereignty. By controlling these resources, the government can claim independence from global supply chains for that item.
It is important to remember that governments are not renowned for their IT, ability to read trends and work ethic, and Bitcoin doesn’t fix this. Despite the size of countries’ resources they can deploy and the advantage they have with manipulation laws in their favour, there are some potential drawbacks to nationalisation.
For example, it can lead to decreased efficiency and investment, as well as political instability, if Bitcoin mining investment is prioritised over other government promises like social housing or sanitation.
Governments might be able to stamp out local competition, but they still have to compete on a global market, and if they slip up, can’t keep operations running properly, retain talent to run operations, do maintenance and procure the correct supply channels, they can get crushed.
Which countries have started nationalised mining operations?
Countries that have taken a shine towards Bitcoin mining are not exactly household names, but if their bets pay off, they could very well become the poster children for nation-state adoption of this new commodity.
El Salvador
El Salvador, the first country to add Bitcoin as a form of legal tender, needed to find ways to bring more Bitcoin into the country for circulation, and since you can’t print Bitcoin, you either need to attract investment or mine.
Fortunately for El Salvador, they are situated close to vastly untapped geothermal energy in the form of Volcanos. The country has started setting up mining operations but looks to expand over the next few years.
A public-private partnership in El Salvador will pump $1 billion into creating one of the world’s largest bitcoin mining farms, the group called Volcano Energy. The El Salvador government will have “a preferred participation equivalent to 23% of the revenues” in the project, Volcano Energy said, with private investors holding 27%. The remaining 50% will be reinvested back into infrastructure, the statement said, without clarifying the overall ownership structure.
Bhutan
The tiny kingdom of Bhutan, like El Salvador, is fortunate enough to have a wealth of energy resources that remain untapped; their stores come from the various glaciers feeding rivers in the region and can be used to generate hydroelectricity. These natural resource has become an economic engine, accounting for 30% of the country’s gross domestic product and fueling the homes of nearly all of its 800,000 residents.
But for the past few years, some of that energy has been directed into a quiet operation. Bhutan’s royal government has been quietly diverting reserves into powering its very own Bitcoin mine to build a national treasury and to invest in the wider digital asset ecosystem.
Bhutan also has plans to expand its operations, engaging in negotiations with Nasdaq-listed mining company Bitdeer, which was founded by former Chinese billionaire Wu Jihan.
Oman
The latest country to make a bid for Bitcoin mining on the state level is the Gulf state of Oman. Oman, like many of its neighbours, is oil-rich but has the lowest GDP among the oil-rich Gulf Cooperation Council countries.
The country is now looking for new ways of leveraging its vast energy reserves; instead of competing with other Gulf states for exporting oil, they are actively looking for ways to enrich energy within their borders.
H.E Sheikh Mansour Bin Taleb Bin Ali Al Hinai, Chairman of Oman’s Authority for Public Services Regulations, publicly commented in a press statement about his nation’s government support of privately-owned bitcoin mining facilities, which are set to attract a total investment of over $1.1 billion
Nationalisation without compensation
It’s not all smooth sailing and pots of digital gold at the end of the cryptographic rainbow when it comes to nation-states getting involved in Bitcoin. Nation states don’t often play by the rules since they have the monopoly of violence within their borders, and if they decide that they won’t want any competition for Bitcoin revenue, you’re out of luck.
A prime example of this is Venezuela; the hyperinflation of 2018 caused irreparable damage to their economy, destroying savings and businesses and driving many into poverty. Some Venezuelan companies and individuals decided to leverage their local energy market and turn that energy into Bitcoin, which they could then sell to fund operations and net a healthy profit.
Business was booming, but not for long; as 2020 rolled around, the Bolivarian National Guard of Puerto Ordaz, Venezuela, seized 315 ASIC mining machines manufactured by Bitmain. The owners of the mining rigs were told that they did not possess the necessary permits to own and operate the machines. They also were not authorised to be transporting the machines during the COVID-19 quarantine.
Bitcoin mining was explicitly made legal in Venezuela, but the government has sent out a clear message of how far they are willing to go to drive compliance. Instead of entering a global free market for your hash rate, local miners have to KYC register their business with the National Registry, just like any other entrepreneur would do before starting any business in the country.
If doxing your operations isn’t enough of a pain for miners of all sizes, then the next rule surely is, according to Venezuela’s new law, Article 19, obligates miners to participate in a national digital mining pool under the direction of SUNACRIP, the National Superintendency of Cryptocurrencies.
Every time the Venezuelan national pool mines a block, earnings must be distributed among all its members. There is also strict monitoring of the pool’s income with threats of blacklisting anyone who doesn’t comply, effectively nationalising operations.
