Gulf region flips bullish on crypto mining, but can it be green? 

To:

Al-Monitor Pro Members

From:

Sebastian Castelier

Freelance journalist covering Gulf economies

Date:

Aug. 18, 2022

Bottom Line: 

Crypto mining is an electricity-intensive process that requires running computer servers to solve a complex set of algorithms. In other words, mining crypto converts electricity into digital coins then sold at market value. For that reason, access to cheap power is a ​​trump card. The energy-rich Gulf region is a suitable candidate. It is home to some of the world’s largest fossil fuel resources and boasts the world's lowest solar tariffs.

After a decade of hesitation, Gulf states have started to warm up to cryptocurrencies. The United Arab Emirates (UAE) and Bahrain, in particular, are looking to attract centralized crypto exchanges — they processed more than $14 trillion worth of crypto assets in 2021 — and their interest in mining crypto is rising. “There is a push from the UAE government to make greater use of power generation capacities,” said Abdulla Al Ameri, an Emirati crypto mining entrepreneur who has been mining for about five years, including in Kazakhstan and Russia. “I expect the UAE crypto mining market to take off in the next two years,” he told Al-Monitor. The question is, how green will this be?

Simultaneously, Gulf states have warmed up to renewables, solar in particular, opening the doors for solar-powered crypto mining. “We are working on a hybrid crypto farm in Abu Dhabi powered by solar at day, grid at night,” CryptoMiners’ CEO Nasser El Agha told Al-Monitor. The Dubai-headquartered crypto mining service provider cooperates with an undisclosed British company to launch the Gulf’s “first company-scale solar-crypto farm” by December 2022. It is a proof of concept intended to be ultimately taken to the market, specifically to agricultural farms wishing to generate extra income through crypto mining.

Background Facts:
  • Existing power grids are a source of opportunities. “In the UAE in the summertime, they generate 4 gigawatts of power to run their air conditioners, the other nine months of the year they only use 1 gigawatt and 3 gigawatts sit idle,” miner Marathon Digital Holdings’ CEO Fred Thiel said in April at the Bitcoin Conference.

  • Crypto mining can also push up oil and gas drilling operations’ profitability. In 2021, Saudi Aramco denied it would engage in bitcoin mining, but times have changed. In April 2022, Mubadala and Oman Investment Authority invested in Crusoe Energy. The US-based company pioneered crypto mining powered by flared natural gas and claims flare mitigation is the “low hanging fruit” for reducing oil and gas greenhouse gas emissions. The firm’s planned offices in Muscat and Abu Dhabi will be a “launching point for continued expansion” throughout the region, Crusoe's CEO said.

  • Asked whether Gulf countries mining crypto through state-owned companies would be “immensely profitable” given the fact that the UAE is home to some of the world's largest solar plants, Agha replied: “Of course, yes!” Last year, UAE-based Phoenix Technologies placed one of the largest purchases of crypto mining rigs on record$650 million — to set up the world’s largest crypto mining site in the UAE. Industry sources told Al-Monitor that the $2 billion project had not been launched yet.

  • Even Qatar’s tough stance on crypto mining softened on the back of greater regional acceptance, Agha said. “Qatar’s Ministry of Commerce finally gave us the green light to operate there. Six months ago, the same people told us that if we opened up a crypto mining store in Qatar, we would go to jail the next day,” he said. According to him, crypto mining machines can now be legally imported into all six GCC countries.

  • However, Gulf states turning bullish on crypto mining unveil a yearslong missed opportunity. During the 2014-2021 period of relatively low oil prices, Gulf states clamped down on long-term capital expenditures to contain soaring fiscal deficits. At the same time, bitcoin prices skyrocketed, and the cost of renewable energy fell drastically. Crypto mining was a powerful tool to kill two birds with one stone.

    • First, it could have been a forward-looking venture to fund solar infrastructures, which are now being funded by hard-earned petrodollars as oil prices jumped back around $100. “People do not understand that even renewables right now cost a lot of money to invest in,” Omani economist Adham Al Said told Al-Monitor in February.

    • Second, powering Gulf cities with crypto-funded solar unlocks additional revenues by freeing up a greater share of fossil fuel production for export. Saudi Arabia, one of the last countries to run oil-fired power plants, burned 420,000 barrels per day for power generation in 2020. The country now aims for 50% renewable energy by 2030.

  • Claims that intermittency kills the profitability of solar-powered crypto mining are certainly valid for profit-driven private miners. They need to run mining rigs without interruption to get a reasonable return on their investments, while batteries required for night shifts when the sun is down are viewed as expensive and largely inefficient in the Gulf’s hot climates. Crypto mining 100% powered by solar is unlikely to run 24/7 at full capacity and would not provide an attractive return on investment, miners said.

    But that’s a different story for governments whose responsibilities include investing in projects benefiting local communities — for example, deploying renewables to reduce oil extraction activities, which cause local air pollution and impact public health. Solar intermittency hit crypto mining's short-term bottom lines, but governments’ time horizon allows policymakers to value nonfinancial gains, such as reducing air pollution.
Alternative Scenarios:

Scenario 1: Cooling servers is too costly to turn mining profitable in the Gulf.

Data centers are fond of the Arctic climate where abundant brutally cold air and icy water cool units that heat up easily. The Gulf region, by contrast, is scorching hot about half of the year — temperatures climb above 50°C (122°F) during summer. At first glance, running data centers in the Gulf region seems counterintuitive; the financial and environmental cost of running an army of air conditioners to cool down servers makes it an unattractive prospect.

  • Big Tech does not believe the idea is foolish. Amazon Web Services opened its first Middle East data center in Bahrain in 2019 and plans to open three more in the UAE in 2022. Google Cloud is hiring for its Dammam data center. The Gulf's climate requires 24/7 air conditioning, but power ranks among the most competitive globally.
  • Hot climates never warded off miners. Iran’s government-authorized crypto miners turned cheap electricity — produced by burning sanctioned Iranian crude oil and gas — into hundreds of millions of dollars worth of crypto, allowing Tehran to circumvent sanctions. In 2021, 4.5% of all bitcoin mining globally reportedly took place in Iran.
  • Also, liquid cooling solutions that submerge or immerse mining rigs into a liquid substance to dissipate heat help ease the burden of high cooling expenditures. “Liquid cooling helps to overclock — boost mining machines performance — and sustain equipment for much longer than traditional air cooling,” said miner Ameri.

Scenario 2: The cryptocurrencies mining bull run is behind us

Nineteen million out of the 21 million existing bitcoins have already been mined, and the average time of US household-equivalent electricity required to mine one coin soared from a few seconds to nine years as the difficulty rate to mine one jumped from 1 in 2009 to 30 trillion in 2022. Meanwhile, the bitcoin price dropped sharply this year, by about 65% from a November 2021 all-time high of $69,000, pressuring the profitability of mining crypto.

  • Mining is not over — the 21 millionth bitcoin is expected to be mined around 2140. Furthermore, the crypto industry will always need miners whose primary role is to verify each new transaction and record them on the decentralized blockchain ledger. Mining will no longer be rewarded with newly minted coins but transaction fees, which means latecomer Gulf states can still gain a strong foothold in crypto mining.

That being said, Gulf states’ bet on crypto mining is exposed to two long-term risks:

  1. The "crypto crash" is not over. The risk cannot be excluded, but deflating leverage has already happened to a great degree. After spiking above $3 trillion in November 2021, crypto’s total market capitalization hovered around $1.1 trillion at the time of writing.
  2. The proof of work mechanism — miners racing against each other to solve complex algorithms to record transactions — gives way to proof of stake. In the latter, participants referred to as “validators” are chosen to handle the task, reducing the amount of computational power required, which is where Gulf states’ key competitive advantage stands. Proof of stake could slash blockchains’ energy use by 99%.
Conclusion - most likely scenario:

Crypto mining, although a highly volatile bet, is increasingly understood by Gulf decision-makers and businesses as a vehicle to cash in on the region’s massive energy resources, be it through the world's lowest solar tariffs, gigawatts sitting idle in winter or flared natural gas.

Contributor Background:  

Sebastian Castelier has been reporting on GCC countries since 2016, with a focus on how the oil-rich region navigates the long-term energy transition economically, socially and politically. He has been a contributor to Al-Monitor since 2019 and writes for various publications, including Haaretz, Al Jazeera, The Independent and Le Temps, among others. 

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