Why the Ethiopian government shouldn't mine Bitcoin

This is more of a draft of talking points or notes rather than a properly written article. So apologies to my regular readers. 

I've been asked to participate in a Twitter spaces discussion on this topic. Here's a very quick post to list my main arguments, in case I'm unable to articulate them clearly enough live. I've said all this in my talk at the Africa Bitcoin Conference 2024  but for those who haven't seen it, here's a summary.

- Mis-allocation of resources 

Government should be investing on infrastructure that has a multiplier effect on the rest of society. For example, water and sewage, which Ethiopia desperately needs, and any number of things that the private sector can't do but are vital. In particular, the return on investment in directly building electrical infrastructure is far greater than almost anything else. Even within the Bitcoin mining sector, it is much better to be upstream selling energy to miners than to be buying energy to mine. In the case of Ethiopia, the marginal profit of EEP from each kWh sold to miners is bigger than the margin of the miner per kWh. This is because as the seller, you have the option of selling to higher value uses at a higher price, and selling the leftover (stranded energy) to miners. 

The misunderstanding here is that casual observers think mining is easy and cheap. But the numbers they throw about are based on silly premises, like assuming the machines and data center infrastructure cost is zero. 

For example, I've estimated that the cost of mining 1GW requires $500M of investment. If you do the math, you can earn much higher returns if you put $500M into more generation and transmission. 

So why am I investing in mining? Well I, like many miners, would happily move upstream into generation if I could! But restaurants exist downstream from farmers. Vertical integration is not always possible so specialization makes sense, if you want to actually accomplish things and have an impact.

- Danger of missing the opportunity cost

Those who push for government mining often say the government has free electricity, so why not? But that would be a tragic mistake. If you take some energy that could be sold for $0.06 and use it for an activity that is worth $0.03, then you are basically losing 50%. But the danger is if you own both sides, you don't see the loss from this opportunity cost, you just think you made $0.03. So while it looks like you are making cash from free energy, what you are actually doing is taking energy from the people. You are generating cash for the government while incurring a hidden loss to the people.

The biggest opportunity cost of course is that, by doing this, you are losing the chance to finance further growth. The net effect is slowing down electrification. Instead if you sell the power to the people who need it most and sell the excess to the miners, you are accelerating electrification. Not understanding the opportunity cost is like the proverbial eating of the seeds instead of planting them.

- This is a bad way to build a strategic Bitcoin reserve.

A confusing argument is that mining allows the government to build up a reserve in Bitcoin. I am actually in favor of the state owning some Bitcoin as I've advocated for many years. It does make sense, just like gold or foreign currencies, except better.  But you don't need to mine to do that. You can just buy it.  The counter argument I've heard on this is: "well they will never get their act together to buy some. They are not competent enough". Besides the fact that insulting the people you are trying to convince is never a good strategy, there is a more basic flaw in this reasoning. Mining is harder in every way than buying. So to say they are too incompetent to buy but they should mine, is ridiculous. 

Some may say I am making a self serving argument because I want to protect my own investment in mining. But anyone who has studied the dynamics of Bitcoin mining understands that it is a global competition and location doesn't matter. Whether someone mines right next door to you or on another continent they are all equal competitors. In fact the closer ones are positive because they create a cluster that can help each other. No, my reason is that I think it risks derailing what could be a very positive trajectory of accelerating electrification.

If you want to dig deeper, here are my previous posts on this topic which explore it more fundamentally.

P.S. My opponent in the "debate" I suppose will be someone from Project Mano. First let me get the main issue I have with their post that started the debate. They used a grossly incorrect fact as the basis for the entire thing. That it costs less than $2000 of energy for a miner to produce one Bitcoin. The real number is close to $40,000. With the real number, and then adding on capital expenses and other operating expenses, their entire argument falls apart. When I asked them, they privately admitted they knew it was wrong but persisted in spreading this dangerous lie. When a discussion is *knowingly * based on falsehood, nothing else matters. No logic or reason can work. Just politics in it's ugliest basest form. So I don't expect to convince them, but I do want to help give a realistic perspective to well meaning but less informed people who can be misled.

 

On the real costs of Bitcoin mining

Someone is wrong on the Internet! A recent article on a website called NFT Evening has been circulating, claiming that it costs $1,986.20 to mine 1 Bitcoin in Ethiopia. This information is outrageously wrong,  by more than 2000%.  Normally I would just ignore such nonsense.  But unfortunately, it is spreading, and many people are getting misled. The misinformation is potentially harmful, so I feel compelled to respond. 

Disclosure:  My company QRB Labs is the first Bitcoin mining company in Ethiopia, and to date the only Ethiopian company. I believe this business is very good for the country, as explained before here and here. 

First misconception: price of energy

So here are the facts (see the footnote at the end of this post for details on the units).

• The global hashrate, i.e. total computing power of all Bitcoin miners in the world, is currently around 800EH/s. 
• All together miners earn about 3.2 BTC total every ten minutes. This is the sum of the block subsidy and transaction fees.
• Thus to get 1BTC , it takes about 800x10^18*600/3.2 = 1.48 x 10^23 Hashes. 
• Mining is done by ASIC computers which use from about 17 J/TH for the most efficient machines to 35 J/TH for the less efficient ones.  Let's take the mid-point of 26 J/TH.
• Therefore to get 1BTC it takes about 1.48 x 10^23  x 26 / 10^12 Joules of energy. Converting to kWh,  1.48 x 10^23  x 26/10^12/ 3,600,000 = 1.07 Million kWh. 
• The price of energy from Ethiopian Electric Power for Bitcoin miners is US$0.0314 per kWh. With Value Added Tax, the total cost of energy is a bit over $0.036 per kWh
• Multiplying the last two, the answer is $38,480 dollars of electric energy per BTC.

Note that the global hashrate and the transaction fees change continuously but this snapshot gives you an idea of the situation for the last few months. For a more in-depth explanation of how it evolves, see the paper entitled "Dynamics of Bitcoin Mining". 

Hopefully now you understand just how ridiculously incorrect $1,986.20 is. The real number is around $38,000 -- about 2000% more.

Second: energy is not the only cost

A lot of people who have never mined  think energy is the whole cost. This is very incorrect. The price of electric energy is indeed a big variable for miners,  but it's only half of the total cost. You need to add infrastructure and the machines and the operating costs. To take some nice round numbers, let's assume we have 1GW of mining.  

• First you need to put in transformers, electrical distribution switchboards, breakers, cables, routers, switches, shelves, containers or buildings, air or water cooling systems, etc. This will be about $200M to $300M in capital expense.  Depending on your power supply and demand in your area, and the overall environment, this investment may last 5 years, so as an amortized  expense it would be about $5M per month.
• Second you have to buy the ASIC computers. At today's price, for 1GW that will be about  $400M to $500M of capex on the computers. These machines will typically have a lifespan of about 4 years. So, amortized, an expense of about  $10M/month
• Third you have to actually run the facility, including internet access, employees salaries etc. For 1GW, you can assume about $1M-$2M/month.

Put it all together, throw in taxes, repairs, spare parts, logistics costs etc, and you get that 1GW of mining incurs costs about $26M per month in energy and $20M per month in other expenses. With revenues of about $50M to $55M per month. That makes the profit margin 10% to 20%. 

Of course, if the price of Bitcoin drops by 20%, as it just did in the last week,  the mining margin can quickly turn  negative. Conversely, if the price shoots up, then profits go up, but eventually the global competition increases and profits shrink right back. For a more technical explanation, I refer you again to "Dynamics of Bitcoin Mining". Bottom line: mining is a ruthlessly competitive, risky, low margin global commodity business.

These numbers give you a range of what might be the total of the industry in Ethiopia. Bitcoin mining in the country involves a couple of dozen companies, and it reached ~600MW in October 2024, just 9 months after it started. So 1GW gives a rough order of magnitude for the near future. It may sound like easy money. But what it really is: invest $600M-$800M of capital into a country which is risky and difficult to work in, even by African standards. And then pray that you can survive risks. If you do, after a couple of years, you will recoup  your initial investment, and then for another 2-3 years you will maybe achieve a low double digits return on investment per year. It's a pretty tough proposition. The average tech startup is low risk by comparison. Most Western investors can generate that rate of return at much lower risk in traditional areas. To go for it you have to have a very strong dedication to a mission, or an extraordinary level of risk tolerance. 

For comparison, Core Scientific, a publicly traded American miner put out their earnings report just a few days ago. Their electricity cost is $0.024 per kWh and operating costs are $0.009 per kWh. So Ethiopia is actually more expensive than the best places in the US. Considering all the other handicaps of Ethiopia (like extreme import difficulties and high taxes as discussed here), mining in Ethiopia is no walk in the park.

So it's a bit annoying to have ill-informed people with no skin in the game calling for bans, confiscations, price increases or whatnot. If they succeed, not only will our investment be burned, setting a very negative precedent for future investment, but also the country would lose its fastest growing major source of foreign currency. Most importantly, the opportunity to accelerate the electrification of the country could be squandered. This is why it's important to fight this bad information, as stupid as it seems.

Enshittificafion

As Bitcoin miners, turning waste into useful things is kind of our ethos.  So besides correcting the facts as we have just done, it's worth taking a moment to examine how we got here. This is a good case study of enshittification, the gradual degradation of quality in online content.

Consider the timeline

• On February 3, 2025, a website called NFT Evening posted a typical content-farm article. Full of incorrect data, nonsensical comparisons and flashy tasteless infographics. Some red flags that should alert the reader immediately. Half way down the article it says the current price of Bitcoin is $57,909.16. First of all, that week, the price of Bitcoin was in the mid ninety thousands range, briefly spiking above $100k. The price hasn't been anywhere near $57k in months. Second, why use 7 digits of precision on the price when it changes continuously? Unless you are talking about the real time price at a specific moment in time, like citing a transaction, that makes no sense.  One reason could be that the author is, or thinks the reader is, impressed by the false precision of more meaningless digits. Another explanation is that the article was generated by an AI language model which accidentally regurgitated six month old data. Even the electricity prices are pretty random. They cite a petroleum website as the source. But for all we know, they were harvested from local prices published long ago, multiplied by exchange rates from a different time frame; confusing rates which vary by quantity and industry; or maybe just made up. Another red flag is the author's bio: full of the most cliché keywords like crypto, NFT, DeFi, Web3, AI... Ugh.  That string is not a sign of high quality to put it mildly.
• On February 20, 2025, BitCluster (a foreign company mining in Ethiopia) posted the story highlighting the number $1,986.20 for Ethiopia. Why? This is a mystery. First of all, again going down to the cent is ridiculous as the precise number would be changing continuously. Second, more importantly, anyone even remotely connected to the real business operations would know the number is ridiculously wrong. Third, to the extent that this number is believed, it could lead to calls for massive increases in electricity price, suspicion from the tax authorities looking for hidden profits, and outright ban. Fourth, if this was true, it would mean BitCluster is gouging their own hosting customers. All things that presumably BitCluster doesn't want. I have reached out to the CEO of BitCluster for an explanation but haven't heard yet. For now, I'm going to assume a drunk marketing intern is in charge of the BitCluster X/Twitter account.
• On February 24, 2025, the X/Twitter account called Project Mano reposted the BitCluster tweet and went on an unhinged rant about how foreigners are bad for Ethiopia, how this is a national humiliation etc. When we QRB Labs corrected their number publicly, they reached out privately with long justifications for their attack. I asked the person simply if they believe the number $1,986.20. They said of course not. Literally the only data point which underpins the entire rant is false, and they know it!  This was actually a shock.  Honest disagreement is no problem.  Ignorance and innocent mistakes are forgivable. Holding strong opinions without having skin in the game is not great but understandable. But deliberate falsehood, I did not expect. Of course it's normal in politics people lie and convince themselves the ends justify unethical means. But in this context, it may sound naive or strange to outsiders who only hear about "cryptocurrency" and "blockchain" nonsense, but there's a certain idealistic ethos among Bitcoiners. Things like honest money, proof of work, low time preference etc. are taken seriously.  So to see Project Mano engage in pure falsehood and propaganda was a deep disappointment. 
• On February 27, 2025, the website Addis Insight posted the same article. They literally copy-pasted the entire article from NFT Evening without attribution.  I guess there's no honor among content farms. No research, no credit, no attribution,  just a mindless relentless race to the bottom. It's almost a perfect case study of enshittification. The only thing missing is 2010-style "listicles" about "Ten easy steps for you to profit from this today!" 
• Shortly after that it started circulating on Whatsapp. The blast radius is expanding. More and more innocent people are being fooled.
  

It's an amazing example of how bad information can start on one website trying to make money in a quick and lazy way, and then quickly flow downhill from there. As the saying goes, a lie can travel halfway around the world before the truth puts on its shoes.

Notes

1. Units used in calculation:

• H stands for hash, the calculation miners do.
• E stands for Exa, which means a quintillion, 1 followed by 18 zeros.  
• T stands for Tera, a trillion, 1 followed by 12 zeros. 
•  J is a Joule, the standard unit of energy. Power is in Watts. 1W = 1J/s. And 1kWh = 3,600,000J.
•  Power is energy divided by time.

2. A quick note on the related topic of asking the Ethiopian government to mine Bitcoin itself. I think it's a bad idea. My reasons are explained in this talk https://youtu.be/sHiN0yTz4BE?si=zMBa7-fL4JteiNYp&t=998 starting at the 16:30 mark. But that is a longer topic which I will maybe cover separately.

3. EEP pricing is not quite optimal in my opinion. To fully align the incentives of the industry and the energy provider with the benefit to the country, it should be dynamic, with strong differentiation based on supply and demand at different locations and times. But that's another larger  topic to address separately.

4. Shout out to Gridless for the Bitcoin dung beetle metaphor and image.

5. In case they get deleted, here are the achive links for

Addis Insight article: https://archive.is/1dLTW

Project Mano tweet: https://archive.is/bMROv

NFT Evening article: https://archive.is/2HDMC

Datacenter potential in Ethiopia

Where is Africa in this picture?  It's a fraction of the "rest of world" slice.  

A bit of history:  Until the late 2000s, data centers tended to be where the telecom cables were i.e. near big population centers with lots of Internet users. The important internet data center locations were NYC, Northern Virginia, SF bay area, Amsterdam, London, Hong Kong, etc. But as we approached the second decade of this century, energy gradually became a bigger cost than bandwidth so they started developing near power sources. Nowadays, Google and Facebook's datacenters are in places like Iowa and Oregon, far from cities and near abundant supplies of energy. 

This is an opportunity for Ethiopia.  (And it's what my company QRB Labs is focused on).

But two caveats: 

a) latency still matters so they can't be too far from the consumer for some applications like communications and live media. So in the short term, for content hosting, the focus will likely be regional rather than international.

b) for some applications, privacy, data security and intellectual property considerations are complicated, so the data centers need predictable and favorable legal environments. So Ethiopia has some catching up to do before it can really compete in hosting AI and other cloud computing services. But it remains an interesting potential area, especially for the model training portion of AI which is not latency sensitive.

There is one immediate application which is energy intensive, not very latency sensitive and completely location agnostic: Bitcoin mining.  I've written about it at length here, but let's put it in the context of data centers in general. The legal requirements are pretty simple as all the data involved is public and the algorithms are open source. And contrary to common misconceptions,  mining is purely infrastructure serving global users, it doesn't depend on local adoption of Bitcoin or the local financial regulations. So it can be anywhere in the world. The catch is, because it is location agnostic, miners are constantly seeking the cheapest power worldwide. Mining is globally hyper-competitive,  any miner that pays more than the other miners on average will immediately go out of business. So to attract miners power prices have to be very low. In the US, while AI data centers can pay up to $0.10/kWh, and households average around $0.15/kWh, and other industries such as manufacturing tend to be somewhere in between those two, big Bitcoin miners pay $0.02/kWh or less (total cost around $0.04 with half being energy). Of course, power providers will prioritize customers who can pay the higher prices. Thus, the natural equilibrium is that Bitcoin miners tend to buy power that no one else can use, also known as stranded power, and thus average lower price than any other users.

So with the right strategy, Ethiopia has a chance to benefit from the data center boom, selling stranded power to Bitcoin miners while working to develop the higher paying demand.  The highest priority should be for the power company to make electricity pricing be supply and demand-based, with aggressive location-based differentiation.

The second priority should be for the government  to radically reform the equipment import process. Currently this is a huge handicap. Importing data center equipment is a 9 step bureaucratic process. It takes on average more than 6 weeks to process each shipment, not including transportation time. 

• Security clearance. Each piece of equipment goes through lengthy "pre-import" approval and post-arrival "import release" approval processes. But everyone involved knows that computer hardware doesn't pose any cyber-security threat. Cyber threats are generally software and network based. In fact it's difficult to think of a single example in the world of a national security problem which can be solved by controlling which computers are allowed into the country. To be blunt, it is a gigantic waste of time. The national security interest should be focused on the energy security of the country.  Is the power company planning  the supply and demand correctly? The current approach makes no more sense that limiting the number of light bulbs that enter the country. 
• Import duty and investment incentives. Capital investments are charged lower import duties. This is an understandable objective. However, the process of qualifying is extremely onerous and often arbitrary. It requires an investment license which creates enormous complexity as I've written about before. Once you start operations you have to switch from an investment license to an expansion license, which has a new set of requirements like minimum payroll etc. Each shipment has to be gruelingly reviewed and approved by the investment commission, by the ministry of finance, as well as customs commission. Besides the inefficiency, the uncertainty is huge. Imagine importing equipment not knowing if the import duty will be 3% or 40% until after it arrives. Any misstep carries the risk of huge penalties, and at worst, the equipment can in theory be confiscated. For a data center, capex efficiency is a life or death matter, so the import risks are high enough to scare away most rational investors. It makes it very hard for a company to grow investment progressively. It would be much better to simply have a constant low import duty, say 5%,  for all equipment and get rid of the investment license. The businesses would be happier, and the government would likely make more revenue from the boom.
• Customs. Besides security and investment approvals, you have to go through customs. These offices are notoriously inefficient and unfair. To make matters worse, the more they delay, the more revenue they generate. Conversely, if they clear stuff too fast and at a low price, the individual customs agent can be suspected of corruption. This creates a cruel incentive for them to become ever more inefficient. A crucial reform would be to a) introduce the following key performance indicator: total customs revenue divided by average time to clear shipments. Tie it to salaries and promotions of the customs officers and their managers. Those who get the most revenue in the least time would be rewarded. And b) create a public database of assessed value and duties paid for all shipments. (The public database shouldn't have the name of the importer, just the numbers). This combination would help eliminate unreasonable delays and  corruption, as both the importer and the customs agent would be incentivized to quickly agree on the correct value. 

For once, Ethiopia has something that the whole world really needs. It can be the Saudi Arabia of electricity.  (Ok the second time, if you count coffee. But as I've written about before a long time ago, it's tough for a producer to capture its fair share of the coffee value chain). Let's not mess it up! We need the best possible energy pricing and the best import process.