Research & Proposal

Research & Proposal 1

Research 1
Model variables 1
Network hashrate and difficulty 2
Mining equipment hashrate 2
Efficiency 2
Mining pool fees 2
Revenue calculation 3
Cost calculation 3
Summary 3
Modeling analysis 4
Basic assumptions 4
Profitability analysis 4
The State of Bitcoin Mining in Kazakhstan 5
Abstract 5
Hardware Logistics 6
Regulatory Stance 7
Business Setup 7
Key Domestic Firms and Institutional Presence 9
Conclusion 9
Proposal 10
Mining strategy 10
Deliverables and Timeline 10
Timeline 11
Our roles 12

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Research

The idiosyncrasies of cryptocurrencies and mining operations demand sophisticated and

efficient hardware. In that respect, Bitmain and MicroBT emerge as clear short-term winners

Model variables

While many believe that cryptocurrency prices and electricity costs are the only factors
contributing to miner profitability, other variables need to be taken into consideration. Among
these are the overall network hashrate and difficulty, mining equipment hashrate, efficiency, and
mining pool fees.

Network hashrate and difficulty

Network hashrate refers to the combined hashrate of all miners in a given network, which
means that the higher the network hashrate, the higher the overall network effort to solve the
mathematical puzzle aimed at adding a new block to the blockchain. The Bitcoin protocol has
been designed to add a new block to the blockchain every 10 minutes, but, if the network
hashrate spikes, it is likely that the time to add a new block will be lower than that. Conversely, if
the network hashrate drops, then new blocks will be created in more than 10 minutes. This is
where difficulty, a measure of how difficult it is to mine a new block, comes into play. The lower
the target, the 3 higher computational power requirements to find a new block are. As the
network hashrate increases, the difficulty is adjusted upwards so that new blocks are again
added every 10 minutes on average, and vice versa. In the Bitcoin network, the difficulty is
adjusted every 2016 blocks or, using the 10 minutes average per block, this should translate
into roughly once every 14 days.

Mining equipment hashrate

This measure relates to how many calculations per second a miner can make, measured in
hashes per second (H/s). The higher an equipment’s hashrate, the more calculations it can
perform and the quicker it can solve the mining mathematical functions. Early ASIC miners
could perform around 100 gigahashes, or 10 9 hashes per second (GH/s). This compares with
current generation miners achieving nearly 100 terahashes, or 10 12 hashes per second (TH/s).
The increased computational power of current generation miners means that mining operators
can achieve very high capacities at a reduced footprint, using less power and, consequently,
higher efficiency rates.

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Efficiency

We refer to efficiency as mining equipment’s ability to perform calculations using a given

amount of power. Efficiency can be measured as joules per hash, usually scaled up to
gigajoules per hash (Gj/H), or the equivalent measure, watts per terahash (W/TH). Efficiency is
a crucial variable in miners’ profitability and factors such as the latest Bitcoin halving meant that
some older, less efficient equipment went out of the market as they would not be profitable even
at the most aggressive assumptions.

Mining pool fees

A cost element that usually gets overlooked is cryptocurrency mining pool fees. While it is
possible to independently mine crypto assets, the minuscule computing power in relation to
mining pools would likely result in unsuccessful attempts to mine new blocks. To achieve critical
mass, miners organize themselves at pools that group together computing power (hash power)
to increase their odds of fetching the next block and reduce the volatility of their earnings.
Setting up a new pool that quickly reaches the scale of established larger operators is unlikely,
which results in high barriers to entry. As a result, pool administrators retain some considerable
pricing power and can charge fees varying from 2% to 4%. Below we show the largest mining
pools as well as their mining fees.

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Revenue calculation

To keep calculations concise, we have chosen PPS as our reward method. A further
assumption has been made that the mining pool’s share among total hashrate is the same as its
revenue share within the broader network.

As a result of the assumptions above, in this model, miners receive the same proportion of
revenues as their hashrate contribution within the network, i.e., if a miner has a hashrate of 100
TH/s and the network is running at 100 exahashes per second (EH/s, 10 18 hashes per
second), then the miner will be entitled to 0.0001% of the network’s revenue at any given point.
Hence, to calculate the dollar revenues in our model, we take the miner’s hashrate share within
the network, multiply by the average number of blocks mined by the whole network during the
day (1 every 10 minutes, or 144 during the day), multiply by the number of bitcoin awarded at
each block (6.25 since May 2020) and finally multiply the amount by the Bitcoin price.

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Cost calculation

The cost side of our model is made up of electricity costs and pool fees. Electricity costs are
calculated by multiplying the miner’s power consumption by the electric charge, while pool fees
are calculated as a percentage of total revenues generated by the miner on a given day or
period.

Summary

Based on the two subsections above, we can summarise the profitability model with the
expression below:

DMP = 144 × 6.25 × (1 − f) × 4 m N × P − 2 × m × e × E

Where:
DMP = Daily mining profit
m = Miner’s hashrate
N = Network hashrate
P = (Bitcoin) price
f = Pool fee
e = Efficiency rate
E = Electricity charge

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Modeling analysis

Based on the assumptions laid out above and each of the main equipment manufacturers' data.
We have shortlisted manufacturers that are still in business and that have released machines
since 2017, as per below:

Basic assumptions

Although there are several variables in the model, some of them are fairly similar across various
operators. Electricity charges tend to be low since cryptocurrency mining companies seek to
choose jurisdictions that offer low electricity prices, and in previous management calls, we have
been told that electricity costs range around US$0.03/kWh. Mining pools are fairly concentrated,
with the top 10 largest providers accounting for nearly 90% of the mining hashing power. This
has led to uniform fees being charged across the board, ranging between 2% and 4% of
revenues. Based on the assumptions above, on the average trading range of bitcoin over the
last 12 months and network hash rate variability over the same period, we have proposed the
following scenarios for our analysis:

● Base case scenario: assumes a network hashrate at a similar level as of the time of writing,
Bitcoin price slightly below the last 12-month average, electricity charges in line with reported by
company management teams, and pool fees at the mid-range between the highest and lowest
fees observed in the market.
● Low-profit scenario: assumes the network hashrate to continue increasing, reaching 150 EH/s,
as well as a Bitcoin price slightly lower than the minimum observed over the last 12 months. In
this scenario, we add 1 cent to electricity charges and assume pool fees at the higher end of the
observed range among the largest operators.

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 ● High-profit scenario: assumes a network hashrate of 70 EH/s, slightly lower than the last
six-month minimum, and a Bitcoin price slightly below the highest observed value over the last
twelve months. In the high-profit scenario, we reduce electricity charges to US$0.02/kWh and
set pool fees to the lowest observed values among top operators.

Profitability analysis

Using the scenarios above, we have run our model using the specifications of 73 different ASIC
miners from the manufacturers mentioned at the beginning of this section. Below we have
charted the profitability ranges of the top 3 performing miners from each manufacturer:

The analysis shows that, among current generation miners, Bitmain has the lead, and the top
three most profitable miners are made by the company, followed by MicroBT’s Whatsminer
M20S and Innosilicon T3+ Pro. Unsurprisingly, all top 5 models have been released in the
second half of 2019 and account for the latest technology in ASIC manufacturing. Bitfury has
the worst-performing models, with the B8 being the only of the top 3 models by our selected
manufacturers to have negative profitability in our base case. However, Bitfury does have the
oldest miners in our analysis and are not as well equipped with highly efficient technology as its
competitors.

We have also analyzed new generation models by the abovementioned suppliers (announced
since December 2019), specifically Bitmain’s Antminer S19 series, Canaan’s AvalonMiner 11
series, and MicroBT’s Whatsminer M30S and M31S series.

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Again, Bitmain takes the top spot in the profitability ranks with the new Antminer S19 Pro,
followed by MicroBT’s Whatsminer M30S++ and M30S models. The Antminer S19 Pro will have
the best efficiency of any ASIC miner ever released, at 30W/TH, closely followed by the
Whatsminer M30S++, with 31W/TH. Canaan, the only listed ASIC manufacturer, has the least
profitable machines among the new models, although still showing an improvement against the
AvalonMiner 10 series. However, just like the current generation models, the new miners are all
vulnerable to cryptocurrency price slumps and increased competition on the network and reach
negative profitability in our low scenario

That’s why the best option for a mining right now is Antminer S17+. The price for this equipment
varies between $2900-3500

Results from the profitability analysis (​https://bit.ly/3silhHo​) are shown below:

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The State of Bitcoin Mining in Kazakhstan
Abstract
There are several advantages to Bitcoin mining in Kazakhstan. Competitive electricity rates,
VAT exemptions, and legal clarity all foster favorable dynamics for Kazakh Bitcoin miners. A
federal law was passed in June 2020 that legitimized Bitcoin mining as an official economic
activity. The federal law was a significant development for Bitcoin miners in Kazakhstan as they
can now operate with legal clarity and plan long-term. Bitcoin miners that are currently operating
hold an advantage over new entrants to the industry. As the government recently increased the
price cap for electricity rates, new entrants will likely secure higher power prices than those
currently operating. Some mining facilities own their power plants and substations, allowing
them to secure electricity rates of less than $0.03 per kWh. Government estimates put the
energy consumption of the country’s Bitcoin mining industry at 620 MW. The industry is
expected to continue to grow, with a government minister anticipating $715 million in
investments over the next three years. The broader cryptocurrency industry is also expected to
grow, with an exchange launch anticipated in 2021.

ELECTRICITY RATES AND ENERGY MIX

Facility Electricity Rate: $0.020 to $0.043
All-in Hosting Rate: $0.037 to $0.05

For electricity rates, the Kazakh government sets a price cap, which is the maximum that power
plants can charge. Firms predominantly secure power contracts at the price cap. Most facilities
that are currently operating have secured rates in the region of $0.02 to $0.023 per kWh.
However, the price cap for electricity rates has recently increased and new entrants are more
likely to secure rates that equate to roughly $0.028 per kWh. Transmission costs are not
included. Several firms own power plants and/or substations and will save on transmission
costs. The average hosting rate is estimated to be $0.042 per kWh. All-in hosting rates range
from roughly $0.038 to $0.05.

Hardware Logistics

Mining facilities typically import hardware directly from China. There is a 12% VAT obligation on
imported hardware. Domestic entities can secure an exemption on this VAT by committing to
the hardware staying on the company’s balance sheet for five years. The equipment cannot be
sold, moved, or exported for five years. It is also subject to regulatory inspections. At the end of
the five years, the requirements imposed on the hardware are lifted, and it can be subsequently
sold, moved, or exported. Those that wish to exit the VAT exemption agreement amid the
five-year window will be forced to pay significantly higher than the original 12% obligation. The

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restrictions on exiting the VAT exemption agreement increases the importance of purchasing
mining machines hardware at a favorable rate. Those that overpay on the cost per TH may
depend on reselling their hardware in a high-demand low-supply market to recoup their
investment fully. With the VAT exemption, this will not be possible.

Overseas entities who wish to secure VAT exemptions and maintain legal ownership of the
hardware must establish a domestic subsidiary or a domestic entity. The cost of forming such an
entity can vary widely based on the corporation’s specifications. Forming an entity with foreign
shareholders will be subject to higher costs.

It is also possible for foreign entities to import hardware through a purchase agreement with a
Kazakh entity. This is an alternative option for overseas customers who wish to import hardware
without establishing a domestic Kazakh entity. A domestic entity will purchase the foreign
entity’s hardware and record it as an item on their balance sheet. A fee will be charged for such
services, but it will be much less costly than forming an entity. This may be a more attractive
option for smaller-scale miners who wish to import hardware into Kazakhstan. However, it also
involves a degree of trust as the hardware will be legally owned by the domestic entity.

Hardware can be imported via trucks, railway, or air. It takes roughly three to five days for
hardware to be imported by air. This time includes hiring cargo and coordinating delivery. The
actual air travel takes less than one day. Railway and truck will take two to three weeks.
Although air travel is more expensive than railway and truck, the extra time mining can
compensate for the additional cost.

Regulatory Stance

Bitcoin mining in Kazakhstan is a legal activity after a federal law was passed in June 2020.
However, exchanging between cryptocurrency and fiat is illegal and requires that proprietary
Kazakh miners structure their business in a specific way. In 2018, Kazakhstan authorities
considered outlawing any business activity associated with cryptocurrencies. The stance from
the government has since reversed. The legislation passed in June 2020 acknowledges crypto
mining as an official business activity. This was an extremely positive development for the
industry as it legitimized Bitcoin mining as an economic activity that is clearly defined by the
federal law. This allowed mining facilities to establish operations without the risk of mining being
ambiguously defined in the eyes of the law.

The legislation introduced terminology related to digital assets. Mining is defined as “the process
of performing computational operations using computer and energy capacities by the specified
encryption and data processing algorithms, which ensures the integrity of data blocks in
information objects via blockchain”. Digital assets are classified into two categories – secured
and unsecured. Secured digital assets are defined as “a digital means of certifying property
rights to goods and (or) services”. Unsecured digital assets are defined as tokens issued as a
reward for participating in a blockchain’s consensus process. Bitcoin falls under the category of
unsecured digital assets.

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The regulation prohibits exchanging cryptocurrencies between fiat and Bitcoin, making it difficult
for firms who wish to carry out proprietary mining. However, a specific business structure can be
set up to accomplish this which will be discussed in the “business setup” section. In the future, it
may be possible to exchange cryptocurrencies within Kazakhstan in the special economic zone
of Astana. There is a clause in the regulation which will allow bilateral cryptocurrency to fiat
conversions in this zone. However, there is currently no exchange facilitating such conversions.
It is anticipated that an exchange partnered with the International Financial Centre (IFC) in
Astana will launch in 2021.

The Minister of Digital Development – Bagdat Mussin – has also been actively seeking to attract
investment in the country’s cryptocurrency mining sector. In September, Mussin estimated that
$190 million has already been invested in domestic cryptocurrency mining operations and notes
that preliminary agreements have been secured for another $700 million worth of investments.

Local governments are supportive of the Bitcoin mining industry. They also follow instructions
from the national government to seek and spur investment in the crypto mining industry within
their respective regions.

Business Setup

Kazakh Bitcoin mining firms structure their business to provide services in digital mining.
Services like security, electricity, internet connectivity, hardware maintenance, and hardware
procurement are bundled together and sold as a package to domestic or foreign entities. The
hardware in such service packages is owned by the Kazakh mining firm offering the packages.
There are only a few firms that solely carry out proprietary mining.

Although firms are prohibited from exchanging between cryptocurrency and fiat in Kazakhstan,
the conversion can be accomplished by using the combination of a domestic and overseas
entity. Firms typically establish an overseas entity in either Singapore or Hong Kong. They
transfer ownership of the mined assets to the overseas entity where they can convert into USD
or another fiat currency. The fiat currency can then be transferred to the domestic entity.

Firms providing hosting and service packages can operate without an overseas entity.
Customers of hosting providers deal with custodianship and exchanges. Customers are
regularly invoiced by the hosting firm and can pay in fiat currency.

There is no specific tax regime for this type of activity. It is taxed according to the 20% corporate
tax. There is also a special regime for IT companies where they can be taxed on 1% of their
total revenue. Cryptocurrency mining firms can apply for this special regime to reduce their tax.

It is also possible that an overseas hosting customer can own the hardware. In this case, a
customer must establish a Kazakh corporation to import the equipment. Hardware is imported
under the ownership of the Kazakh entity, and the owner can hire the services of a hosting
facility.

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Most Kazakhstan mining facilities are newly constructed and are specifically designed for mining
activities. Many small-to-medium-sized mining firms may congregate in one larger facility. These
small-to-medium-sized firms may either carry out proprietary mining or may sell service
packages at a premium to the larger facilities' hosting rate. Labor costs are estimated to be
roughly $0.002 to $0.0025 per kW, comparable to Russian estimates.

For mining facility management, the wide variance of climate conditions needs to be considered.
In summer, temperatures average more than 30 °C and average -20 °C in winter. Temperatures
of over 40 °C are possible during summer and temperatures below -40 °C are possible during
winter. During summer, careful consideration needs to be given to the mining facilities’ airflow to
lower the risk of mining machines overheating. During winter, raising the inflowing air
temperature becomes important to lower the risk of damage to mining machines.

In 2020, Kazakhstan ranked 25th in the World Bank’s ease of doing business rankings. The
country ranked particularly strongly on the categories of “Protecting Minority Investors” and
“Enforcing Contracts” with a 7th and 4th ranking, respectively. “Trading Across Borders” and
“Getting Electricity” were the poorest categories for Kazakhstan as they ranked 105th and 67th,
respectively. 190 countries were assessed in the rankings.

Key Domestic Firms and Institutional Presence

One of the largest Bitcoin mining facilities in Kazakhstan is Enegix. Based in Ekibastuz, Enegix
facilities have an energy capacity of ~180 MW and the firm owns their substation. Owning a
substation allows Enegix to secure competitive electricity of less than $0.03 per kWh. Enegix is
an example of a larger facility where smaller firms can secure space and market to their
customers at a premium. Powerry is another significant Bitcoin mining facility in Kazakhstan.
The firm considers itself a vertically integrated mining company and owns a power plant and
substation. Powerry can also secure rates of less than $0.03 per kWh. Other significant hosting
facilities and miners known to have a presence in Kazakhstan include Xive, Bitfury, Minebest,
MyRig, and AQ Group. AQ Group is a significant customer of

Several professionals in the Kazakhstan mining industry formed The National Blockchain and
Cryptocurrency Association to advocate for legislation that would clearly define cryptocurrency
mining activity in the country. The association was formed in 2017.

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Conclusion

From September 2019 to April 2020, the Cambridge Center for Alternative Finance estimated
that Kazakhstan’s hashrate share grew from 1.42% to 6.17%. Kazakhstan’s Bitcoin mining
industry has certainly rapidly advanced, with government minister Bagdat Mussin estimating
that $190 million has been invested in the industry. The growth of the industry was driven by
several factors that are favorable to Bitcoin mining in Kazakhstan. Facilities can secure
extremely competitive electricity rates, with many currently operating at a rate between $0.03
and $0.033 per kWh. Previous research has estimated that only 27.5% of the Bitcoin network
has secured electricity rates of $0.04 per kWh or lower. Miners that invest in energy
infrastructure can secure rates as low as $0.02 per kWh. Research suggests such rates are
among the lowest 5%. Securing a VAT exemption on imported hardware will also help miners
save significantly on CapEx costs.

Electricity costs are estimated to account for 79% of a miner's OpEx costs, and CapEx is
estimated to account for between 37% and 52% of a miner's total costs. Kazakhstan offers an
environment that is favorable for miner’s lowering both of these costs. However, the exemption
comes with restrictions, and miners need to be careful not to overpay for hardware. A federal
law was passed in June 2020, which recognizes the industry as an official economic activity.
Legal clarity is extremely positive for the advancement of the Bitcoin mining industry in
Kazakhstan. Government minister Askar Zhumagaliyev anticipates that 300 billion tenges ($715
million) will be invested over the next three years. Advancement in the broader cryptocurrency
industry in Kazakhstan is also expected with a domestic exchange for converting between fiat
and cryptocurrency potentially launching in 2021.

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Proposal

Mining strategy

Before starting the process, one should choose the strategy.

Three common strategies:

1. Moderate​: the miner sells enough coins to cover the daily power bill as well as the daily
depreciation. If the mining revenue of the day is less than the total expense, then only
sell enough to cover the power bill. Everything else remains in BTC position.

2. Long BTC​: the miner sells just enough to cover the daily power bill, leaving all remaining
coins in a long position.

3. Sell Daily​: the miner immediately sells all coins into USD. The only goal is to arbitrage
the difference between the spot price and cost-of-production. Worth noting that this
strategy is not tax-efficient and incurs constant market slippage. For modeling simplicity,
we do not take these factors into consideration.

Deliverables and Timeline

Here we will propose an optional way of moving forward.

As explained above, the best miner to choose from right now is Antminer S17+.
We recommend starting with that miner only and add other bitcoin miners later on.

The GPU market is very crowded right now, maintenance is more expensive and, they are hard
to maintain. That is why it is better to enter that market later when everything settles down.

The best market to buy a mining hardware is China. We do know resellers there and also have
direct access to Bitmain itself. But right now it is almost impossible to buy directly from the
manufacturer.

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Timeline

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Our roles

Below we list possible areas where our team can be helpful. This list is not exhaustive and can
be changed at will.

● Company formation
● Strategic planning
● Hardware Market research
● Buying the Equipment
● Logistics
● Asset Management
● Market guidance
● Advising
● Creating Fiat on and off-ramps.

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