FILE PHOTO: The representation of the virtual Bitcoin currency on the PC motherboard can be seen in this picture on February 3, 2018. REUTERS / Dado Ruvic / Illustration / File Photo
Georgia’s breakaway region of Abkhazia is isolated from much of the world and has become a cryptocurrency hotspot – albeit at a price
* A bitcoin craze has caused an energy crisis in Abkhazia
* Authorities considering severe penalties for miners
* Miners complain of missing riches as prices rise
By Umberto Bacchi
TBILISI – (Thomson Reuters Foundation) – When Bitcoin hit record highs last month, Inal’s heart sank.
The unemployed 30-year-old had spent his savings last summer on setting up a system to generate the cryptocurrency, but due to power outages and police action in his home country of Abkhazia, he had to pull the plug early and miss out on a potential fortune.
“I’m looking at Bitcoin prices now and I want to cry,” Inal said in a telephone interview who asked not to use his real name to protect his identity.
Inal is one of an estimated hundreds of Abkhazians who have joined a cryptocurrency craze that has gripped the Black Sea area over the past year and sparked an energy crisis that local authorities are grappling with.
The blackouts have highlighted the energy costs of cryptocurrencies at a time when global interest in virtual cash is booming and Bitcoin, the original and most popular virtual currency, is gaining acceptance with mainstream investors.
Bitcoins are generated in a process called “mining” in which a global computer network competes to solve complex algorithms.
These computers require an enormous amount of energy to operate. Climate experts have raised concerns about the potential of cryptocurrencies to derail efforts to combat global warming.
The problem of high energy consumption has recently come to the fore in Abkhazia, a lush strip of land that was once the playground of the Soviet elite and broke away from Georgia in the early 1990s after the collapse of the Soviet Union.
“They really had some kind of power crisis because of the ongoing crypto mining,” said Maximilian Hess, a research fellow at the Foreign Policy Research Institute, a US think tank.
According to estimates by the Ministry of Economic Affairs, Abkhazia has set up at least 625 crypto farms with around 240,000 inhabitants in recent years.
However, locals believe the number is much higher as many families perform small surgeries that are difficult to track.
The government initially tried to curb activity in 2018, but a ban didn’t have much of an impact as the import of the hardware used for crypto mining remained legal, Economy Minister Christina Ozgan said in a September statement.
According to Hess, the crypto boom that began in Abkhazia in 2016 is due to its special geopolitical situation.
The territory is recognized as an independent state only by Russia, which has a military presence there, and a handful of other nations. The rest of the world still considers it part of Georgia.
This has largely isolated and underdeveloped it, said Hess.
“Abkhazia faces significant problems when it comes to attracting foreign investment or strengthening the local economy,” he told the Thomson Reuters Foundation.
As a result, cryptocurrencies that operate outside of the traditional banking system have become “very popular” due to the extremely low energy prices in Abkhazia, Hess said.
The cost of a kilowatt-hour (kWh) in Abkhazia, which gets most of its energy from a massive Soviet-era dam it shares with Tbilisi, is about $ 0.005, more than 10 times cheaper than Georgia and 20 times less than the one in Georgia USA average.
“Mining, it’s a very profitable business,” said Inal, who found his mining company grossed nearly $ 5,000 a month while it was running.
“In Abkhazia there is no alternative to making this kind of money.”
Inal had been unemployed for more than two years when he and two friends raised $ 20,000 in August 2020 to buy 50 computer processors and set up a business in an abandoned house near Sukhumi.
The government lifted its ban on cryptocurrency mining in September and urged miners to register and pay higher electricity fees instead – something that, along with soaring bitcoin prices, led many others to join the crypto gold rush, Inal said .
By November, Inal and its partners had covered around 80% of their investment.
Then things took a dark turn – literally.
In mid-November, the Abkhazian energy company Chernomorenergo had to introduce rolling power outages to avoid what its chief engineer referred to as an “energy collapse”.
Government figures show that energy consumption in 2020 increased by an estimated 20% year over year, adding to a 30% increase seen since 2016.
As winter approached, the power lines became so overloaded that some power plants caught fire – in one case they left large parts of Sukhumi in the dark for more than a day, according to Chernomorenergo.
“It was the toughest time for all of us,” said Dimitry, a Sukhumi resident, who asked not to give his full name. “Sometimes we had electricity for an hour and then there was no light for four hours.”
In December, the government made a second U-turn as the dam, which provides most of its power to the territory, is due to be closed for repairs, and again banned the mining of cryptocurrencies.
Law enforcement agencies searched for crypto farms, raided homes, attics, shutters, garages and even restaurants, and cut the power cables to the mining processors that found them, the Home Office said.
Inal said he and his partners pulled the plug before crackdown in late November as public anger over the ongoing blackouts increased.
That left them with a few thousand dollars to offset their investment. Others face even greater losses, he said.
“Some people were spending a lot of money buying (processors) when business was legalized in September. Some have sold their cars, others have incurred debts that they cannot repay. That’s a really big problem, ”he said.
While law enforcement raids in January brought relief and reduced energy needs, consumption rose again, President Aslan Bzhania told a cabinet meeting in February.
“Nobody has the right to relax. We have an obligation to rectify the situation, ”he said in a statement posted on the Presidency website.
Some miners simply reconnected their farms to power after a police raid as there are currently no penalties for illegal mining, Inal said.
Local parliament is debating a new law that will allow police to seize cryptocurrency mining equipment, impose heavy fines on anyone who violates the ban, and bring criminal charges against those who consume more than 1 megawatt of energy .
Meanwhile, Bitcoin surged over $ 50,000 to a new record high last month – roughly three times what it was when Inal stopped mining.
“First (the government) legalized the business and now they want to make people who cut down criminals,” he said. “It’s unfair, it’s very unfair.”
(Reporting by Umberto Bacchi @UmbertoBacchi, Editing by Jumana Farouky and Zoe Tabary. Please credit the Thomson Reuters Foundation