By Zelalem Takele @ZelalemTakelee
Addis Abeba – In the heart of East Africa, a surprising powerhouse is rising in the world of cryptocurrency.
Ethiopia, long overlooked in the tech world, is suddenly capturing global attention as a powerhouse on the cryptocurrency frontier.
With vast untapped renewable energy resources, rock-bottom electricity costs, and a government hungry for foreign direct investment (FDI), Ethiopia is becoming a magnet for Bitcoin miners worldwide.
In recent times, renowned international media outlets have been reporting regarding Ethiopia’s emergence as a focal point for Bitcoin miners worldwide.
Last month, Bloomberg reported that 21 Bitcoin miners, of whom 19 hail from China, have successfully procured cost-effective power supply agreements within the confines of the East African nation.
These miners are aligning themselves with other cryptocurrency enterprises that are already leveraging Ethiopia’s significant hydroelectric resources, as well as those intending to relocate their mining operations from various regions across the globe.
In an interview with Bloomberg, Nuo Xu, the founder of the China Digital Mining Association, expressed his optimism, stating, “Ethiopia is poised to emerge as one of the most sought-after destinations for Chinese miners.”
In mid-February 2024, Ethiopian Investment Holdings, a state-owned entity, entered into a Memorandum of Understanding (MoU) with Data Center Service, a subsidiary of the West Data Group based in Hong Kong.
The MoU outlines collaboration on a project valued at $250 million aimed at developing advanced infrastructure to support data mining and artificial intelligence training operations in Ethiopia.
A recent announcement by Ethiopian Electric Power (EEP) has revealed that the state utility has garnered in excess of $2 million in foreign currency payments from merely two recently sanctioned Bitcoin mining enterprises.
This influx of financial resources signifies a growing trend, as EEP has disclosed that 25 mining firms have petitioned to collaborate with the state electric utility. Among them, four companies have initiated operations, five are in the process of constructing data centers, and ten others are in the preparatory stages for launch.
Of considerable significance within the forthcoming investments in the cryptocurrency sector, which exemplify the profitability of the endeavor, is the planned development of a $250 million Bitcoin mining facility on the outskirts of Addis Abeba by the Russian company BitCluster.
Ethiopia is poised to emerge as one of the most sought-after destinations for Chinese miners.”
Nuo Xu, the founder of the China Digital Mining Association
However, the concepts of Bitcoin and cryptocurrency mining remain unfamiliar to most Ethiopians.
What precisely is this digital currency that has garnered significant international interest and investment?
Moreover, how does the “mining” process function to generate valuable digital assets from computational power?
Lastly, what implications does this hold for Ethiopia?
Delving into Bitcoin mining
Fundamentally, Bitcoin embodies a significant departure from conventional fiat currencies such as the Ethiopian birr or U.S. dollar. While these currencies are issued and regulated by central authorities, Bitcoin operates as a decentralized digital currency within a peer-to-peer network, devoid of any overarching governing body.
Kal Kassa, CEO of Hashlabs Mining in Ethiopia and Bitcoin educator at BitcoinBirr, elaborates, “Bitcoin signifies a paradigmatic shift from traditional fiat currencies.”
It is a protocol-based digital asset characterized by a finite total supply of 21 million bitcoins, each divisible down to 100 million smaller units known as Satoshis.
The origins of this revolutionary technology can be traced back to the 1970s and the emergence of cryptography, the field of mathematics governing secure communications.
“During this period, computer scientists began exploring the potential applications of cryptography beyond mere encryption,” explains Kal. “This included early experiments aimed at developing digital cash systems founded on cryptographic principles.”
It wasn’t until nearly four decades later, in 2009, that these endeavors culminated in the inception of Bitcoin by the enigmatic figure known as Satoshi Nakamoto.
“After years of unsuccessful endeavors, Nakamoto ultimately deciphered the code and disseminated the original Bitcoin white paper, heralding the advent of the world’s inaugural decentralized cryptocurrency,” remarks Kal.
In stark contrast to fiat currencies, which derive value from the credibility of their issuing governments, Bitcoin’s value stems from its scarcity, decentralized architecture, and widespread acceptance as both a store of value and a medium of exchange on a global scale.
“With its finite supply and absence of centralized governance, Bitcoin presents a distinct value proposition—a seamless, permissionless mechanism for transferring value directly between parties without the need for intermediaries,” asserts Kal.
At the foundation of this peer-to-peer system lies blockchain technology—a publicly accessible, decentralized ledger designed to record and verify all Bitcoin transactions within the network.
As Kal elucidates, “The blockchain performs the functions of conventional record-keepers such as banks and accountants by authenticating and documenting transactions.”
Kal continues, “However, instead of relying on a central authority, it accomplishes this through an extensive network of interconnected computers.”
Nonetheless, ensuring the validation of these transactions and upholding the integrity of the blockchain necessitates a sophisticated incentive mechanism; herein lies the role of Bitcoin mining.
Miners assess whether new transactions comply with the network’s regulations by verifying their legitimacy, the sender’s solvency to complete the transaction, adherence to specified formats, and possession of valid signatures.
However, unlike traditional accountants, Bitcoin miners employ specialized computer hardware and consume significant amounts of energy as they endeavor to solve cryptographic puzzles and validate transactions.
Ibsa G, a Bitcoin enthusiast, explains, “Miners aggregate pending Bitcoin transactions from across the network and consolidate them into blocks for validation through an intensive computational process known as Proof of Work.”
The process of mining in the context of cryptocurrencies bears little resemblance to traditional resource extraction industries such as gold, oil, or coal mining.
While these industries primarily generate value through the provision of raw materials, Bitcoin miners engage in computations aimed at securing and preserving the decentralized network of the cryptocurrency.
“Bitcoin miners employ specialized hardware to compete in solving highly intricate cryptographic puzzles,” explains Ibsa. “The first to successfully solve the puzzle earns the privilege of appending a new block of authenticated transactions to the blockchain and is rewarded with newly generated bitcoins.”
This mining process is exceedingly energy-intensive, necessitating miners to consume substantial quantities of cost-effective and reliable electricity to power their mining equipment continuously.
“Regions endowed with abundant renewable energy sources like hydroelectric power, such as Ethiopia, possess a significant competitive advantage in attracting mining operations,” observes Ibsa.
It is this relentless demand for computational power and electricity that has drawn miners to exploit Ethiopia’s plentiful renewable energy potential.
Miners flock to Ethiopia amid global shift
In September 2021, regulatory authorities in China imposed a comprehensive ban on all cryptocurrency transactions and mining activities, subsequently intensifying their crackdown on the digital currency industry.
The regulators cited Bitcoin’s energy-intensive operations and their potential to undermine the nation’s environmental objectives as primary reasons justifying the stringent measures.
As a result of the ban, Bitcoin miners were compelled to either permanently cease their operations or relocate to jurisdictions more favorable to cryptocurrency activities.
With China housing roughly half of the world’s Bitcoin mining capacity before the ban came into effect, the global Bitcoin economy unavoidably felt the impact of China’s mining prohibition, whether positively or negatively.
Following China’s crackdown on cryptocurrency mining, certain countries stand to benefit, with Ethiopia notably emerging as a new frontier for this energy-intensive industry in Africa.
With its abundant renewable energy potential, low electricity costs, and cash-strapped governments keen on investment, the continent presents an enticing prospect for the energy-intensive process of mining digital currencies such as Bitcoin.
At the core of the exodus lies an immense appetite for cheap and abundant electricity to power the colossal computational demands of mining bitcoin and other cryptocurrencies.
“Within prominent mining centers, such as the United States, electricity expenses tend to be high. However, in Ethiopia, the rates for electricity are considerably more affordable,” elucidates Kal Kassa, CEO of Hashlabs Mining.
According to a recent report by Bloomberg, electricity in Ethiopia costs approximately 3 cents per kWh, whereas in the United States, it reaches a maximum of 10 cents per kWh.
Beyound the 2021 Chinese ban on all cryptocurrency transactions and mining activities, Kal highlights the latest economic incentives motivating Bitcoin miners to seek new destinations, such as Ethiopia. He asserts that this motivation arises from the fundamental architecture of Bitcoin’s code.
“Every 10 minutes, mining operations that successfully validate and append new transaction blocks to Bitcoin’s blockchain are rewarded with newly minted bitcoins,” he explains. “However, this reward is programmatically halved every four years through an event dubbed ‘the halvening’, ensuring scarcity.”
The impending Bitcoin halving, a highly anticipated event within the cryptocurrency community slated for April 2024, is forecast to halve mining rewards on the Bitcoin network, thereby diminishing the profitability associated with transaction validation.
Recent reports suggest that the Bitcoin halving possesses the capacity to substantially alter the landscape of global cryptocurrency mining.
These reports propose that this alteration could lead to the obsolescence of older mining machinery, especially in regions characterized by elevated operating costs, such as the United States. Consequently, this could trigger a broad relocation of mining equipment on a global level.
A recent article by Bitcoinist, a reputable platform specializing in decentralized digital currency, blockchain technology, and financial technology, delved into how the Bitcoin halving phenomenon is poised to benefit developing nations such as Ethiopia, while many miners in the United States are already adapting their strategies in response to this impending event.
According to the report, due to the effects of the Bitcoin halving, a considerable quantity of mining rigs from series like the S19, which presently form a substantial portion of the machinery utilized in the United States, are being sold to investors already present in Africa and considering investments in countries such as Ethiopia and Tanzania, along with South American nations like Paraguay.
Bloomberg has estimated that the potential exodus of S19-series machines from the United States could reach approximately 600,000 units.
In light of this recurrent decline in mining rewards, industry stakeholders underscore the critical significance of access to low-cost electricity for ensuring sustained long-term profitability.
They highlight Ethiopia’s hydroelectric generating capacity, currently surpassing 4,500 megawatts and projected to expand by an additional 6 megawatts upon the completion of the Grand Ethiopian Renaissance Dam, as presenting a compelling value proposition.
Kal estimates, “If the Ethiopian government were to allocate its existing 2,000-megawatt energy solely to cryptocurrency mining activities, it could potentially generate annual revenues of $1.8 billion.”
This potential revenue surpasses earnings from key exports such as coffee, which amounted to a maximum of $1.1 billion annually.
Kal indicates that a considerable portion of these mining revenues would directly enhance the financial resources of Ethiopia’s electric utility.
In addition to cost-effective energy, Ethiopia’s elevated terrain and moderate climate alleviate the cooling expenses associated with heat-producing mining equipment. “The optimal temperature range of 5–25 °C is readily provided by Ethiopia’s highlands,” observes Ibsa G, a Bitcoin enthusiast.
For the financially constrained Ethiopian government grappling with acute foreign currency shortages amid ongoing internal conflicts, the economic advantages of embracing cryptocurrency mining are too substantial to overlook, according to Ibsa.
“Cryptocurrency mining enterprises typically remunerate for electricity in U.S. dollars, thereby furnishing a consistent influx of foreign currency, which Ethiopia is in dire need of,” elucidates Kal.
Ethiopia enters the crypto sphere amid environmental, regulatory worries
According to Statista, a German online platform specializing in data aggregation and visualization, the global user base of cryptocurrencies experienced a surge of nearly 190% between 2018 and 2020, followed by a further acceleration in 2022.
Currently, there are over 295 million cryptocurrency users worldwide, with approximately 33 new cryptocurrencies being introduced each week.
The value of Bitcoin has exhibited a resurgence since last year, following a decline in 2022 triggered by the notorious bankruptcy of FTX, a cryptocurrency exchange based in the Bahamas.
As of now, the price of Bitcoin hovers around $69,000, while research conducted by the firm Bernstein suggests that the price may escalate to $90,000 by the conclusion of 2024.
While the economic incentives are considerable, this surge in digitized resource extraction is not immune to scrutiny.
Environmental activists have articulated concerns regarding the carbon emissions and strain on resources resulting from large-scale Bitcoin mining operations.
Lingering issues concerning regulation, taxation, and broader economic instability stemming from internal conflicts further compound the complexity of the situation.
Ibsa acknowledges the environmental apprehensions surrounding the carbon footprint of mining activities and the intensive utilization of energy, potentially exacerbating pressures on the national grid.
“Despite the renewable nature of hydropower, the substantial energy requirements of large-scale mining operations could inadvertently impede domestic energy accessibility if not subject to appropriate regulation,” he remarks.
Ethiopia’s current infrastructure constraints and absence of advanced digital expertise pose challenges in the establishment and maintenance of large-scale mining facilities.”
Ibsa G, a Bitcoin enthusiast
Moreover, infrastructural deficiencies and shortages in skilled labor present additional hurdles.
“Ethiopia’s current infrastructure constraints and absence of advanced digital expertise pose challenges in the establishment and maintenance of large-scale mining facilities crucial for this sector,” notes Ibsa.
For Kal, effective governance is pivotal in mitigating risks while maximizing benefits.
He contends, “Instead of directly competing with the populace, responsibly regulated mining endeavors could efficiently capitalize on Ethiopia’s surplus energy while stimulating investments in power infrastructure enhancements to bolster domestic accessibility over time.”
Kal attributes past instances of outright bans in other nations, like China, to misunderstandings and inadequate regulatory frameworks.
“Many countries reversed their stances after realizing the missed economic opportunities and domestic discontent triggered by energy demands,” he noted.
Kal argues such missteps are the result of a disconnect between generations, with policymakers grappling to comprehend emerging technologies. “The age disparity contributes to this phenomenon, with older leaders hesitating to embrace innovations like Bitcoin due to a lack of comprehension.”
Legal experts such as Geda Yoseph, Associate at Dagnachew & Mahlet Law Firm Limited Liability Partnership (LLP), also point out another obstacle, highlighting deficiencies in Ethiopia’s legal framework to regulate Bitcoin.
“Ethiopia has yet to pass legislation permitting the use of cryptocurrencies. Nevertheless, individuals involved in Bitcoin activities are actively expanding their operations within the country,” remarked Geda in his commentary published in February 2024.
The utilization of Bitcoin and other digital currencies for transactions is prohibited in Ethiopia, as stipulated by a directive issued by the National Bank of Ethiopia (NBE) in 2022. Violators of this regulation are subject to severe legal repercussions.
However, Kal reveals that the Information Network Security Administration (INSA) and other entities are in the process of formulating guidelines aimed at providing comprehensive supervision over the operations, economic ramifications, and environmental implications of this sector.
Ibsa corroborates the burgeoning interest, acknowledging the enthusiasm within the private sector as well as the endeavors of the government to establish a regulatory framework. “There is a growing curiosity among developers, entrepreneurs, and government officials regarding the fundamental technologies underlying Bitcoin and their potential applicability across sectors beyond the realm of finance.”
However, Ibsa cautions that ongoing unrest poses risks to the sustainability of mining operations and complicates regulatory oversight. AS