Bitcoin and Geopolitics in 2022

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Coinmonks

11 min readJan 21, 2022

Geopolitics is probably not the first thing you think of when you hear Bitcoin, but the decentralized asset and the ecosystem are becoming increasingly geopolitical now. Let’s quickly rewind before we look ahead.

One of the most notable events was China banning Bitcoin mining early in 2021. China is no stranger to banning Bitcoin-related activities, but this crackdown was more impactful for the network and price than others. After declaring a crackdown on Bitcoin mining activities throughout the country the price tumbled to a low of $30.000 over the summer, together with a sharp decrease in hash rate, resulting in a less secure network overall.

Notably, the hash rate is now at an all-time high making the network more secure than ever. Meanwhile, the Bitcoin price continues to drop now with the Fed is threatening to raise rates and stop quantitative easing.

Over the summer several people and media channels came out in full force to declare the death of Bitcoin once again, but this miner migration was a positive thing for the network overall.

In 2019, China controlled approximately 75% of the global hash rate, that number was gradually falling but remained above 50% at the start of 2021. Now at the start of 2022, this number has fallen to 0%. The mass exodus from Chinese Bitcoin miners resulted in a greater distribution of the global hash rate and a more decentralized network. The graph below portrays how China’s share of the hash rate dispersed to other countries.

Source: Cambridge Bitcoin Electricity Consumption Index

This is massive. One of the most prominent and legitimate anti-Bitcoin argument in my mind was that China had too much control of the global Bitcoin network, making a coordinated attack easier.

Well, this coordinated attack was not successful considering the rapid recovery of the hash rate. The big winners of this great rotation are mainly Russia, Kazakhstan, and the United States.

This is a net positive but it also entails new challenges. One of them is Kazakhstan increasing its hash rate to an estimated 18% of the total network and becoming the second-largest bitcoin mining country. The country recently plunged into violent protests led by anti-corruption movements because of the high gas prices and extreme wealth inequality.

More than 160 people were killed and 6.000 arrested during the rampages around the country. The hash-rate immediately dropped 15% together with the Bitcoin price that shortly fell below $40.000 before moving back up temporarily.

What looked like a perfect place to set up Bitcoin mining operations because of the cold climate, dozens of abandoned factories and dirt-cheap energy now turned into an uncertain disaster.

During the protests former president Nursultan Nazarbayev was removed as head of the security council and the internet was shut down nationwide. Russian-led troops under the Collective Security Treaty Organization (CSTO), a military-alliance of post-Soviet states, were also roaming the country.

This has made the environment for the Bitcoin miners incredibly unstable. They were being confronted with freezing machines, popular unrest, and Russian troops surveilling the country, meaning leaving is not an option. This is another unfortunate set of events for the local miners that were already seeing complications for months.

Those that relocated to Kazakhstan because of the low energy prices discovered that its aging power grid was not capable of handling the sudden spike in the consumption of energy. Suddenly the mining accounted for 8% of the country’s capacity, causing blackouts and power cuts that resulted in the government rationing power supply to the registered miners, and unplugging them if the grid was overstressed.

The biggest problem was the limited internet access. Local miners are hopeful the situation improves and the internet comes back online now the situation has calmed down somewhat. However, this situation underscores why miners are increasingly interested in locating themselves in politically stable jurisdictions.

Russia is seeing similar unrest around the crypto and mining space. Russia’s central bank has proposed banning the use and mining of cryptocurrencies on Russian territory, citing threats to citizens’ wellbeing, financial stability, and to their monetary policy sovereignty. It’s not a surprise authoritarian countries like Russia and China are not keen on losing monopoly control of the money.

Interestingly enough, the instability in Kazakhstan prompted immediate reactions that confirm the Game Theory around Bitcoin mining. A Spanish deputy for the Ciudadanos party proposed a bill to make Spain an attractive destination for Bitcoin miners, citing the instability in Kazakhstan. Her party wants to position Spain as a prominent player in the European Union to attract investments from the cryptocurrency space. Being accommodative to Bitcoin miners could be the catalyst for this.

Another challenge to the distribution of the global hash rate is the danger of American domination. The United States quickly tripled its hash-rate, and while the United States definitely is a more accommodative location for Bitcoin miners than China, there are plenty of challenges.

The United States is working on sustainability regulation in line with the ESG movement. The result of this could be “green bitcoin” being sold and priced at a premium price, because they were mined “sustainably”.

This could add doubt to the fungibility of Bitcoin and it is counter to the free-market ethos that is a fundamental part of Bitcoin. Politicians like Elizabeth Warren are continuously blaming Bitcoin miners for worsening the “climate change” crisis and trying to crack down on it.

On top of this, regulatory capture of Bitcoin miners is a concern. The state can take total control over the Bitcoin miners instead of implementing a ban. El Salvador announced state-run geothermal energy mining, and even though that is an incredibly interesting development, too much state control over Bitcoin miners could be a worrying trend.

Nation-state adoption

Talking about El Salvador, 2021 was a memorable year for Bitcoin adoption. El Salvador was the first country that made Bitcoin legal tender and recognizes it as an official currency. El Salvador is a dollarized country that largely depends on foreign remittances and Bitcoin enables them to receive money from abroad over the Bitcoin network almost instantly and costless. Given that they cannot print their own currency, having an alternative to the dollar is a welcome addition. It’s also an attempt to move away from IMF influence and moving towards more financial sovereignty.

The Game Theory of Bitcoin adoption by countries has long been discussed. Usually, no country wants to be the first to make a bold move like this, but if it is a successful move then no country wants to be the one left behind. This move can cause a chain reaction among other countries to adopt Bitcoin, help citizens receive remittances, bank the unbanked and offer a monetary asset outside of the traditional financial system.

After this announcement a wave of Latin-American politicians signaled that they were also inspired to follow El Salvador’s lead and propose pro-bitcoin legislation. Many of them equipped laser eyes on their Twitter profile pictures. It’s unclear if these were serious comments or simply a way to ride the hype train, but Bitcoin tends to move “gradually, then suddenly.”

This game theoretic aspect of nation-state Bitcoin adoption was also mentioned in a financial report by Fidelity Investments, confirming the high stakes and potential for other sovereign nations to acquire Bitcoin and make it legal tender.

One small country that is not being left behind is Tonga. Lord Fusitu’a, a former member of parliament of the small Pacific Island nation stated that they will make Bitcoin legal tender and copy El Salvador’s playbook.

The move could onboard more than 100,000 Tongans onto the Bitcoin network. As motivation he shared the remittance case and he said adoption would provoke:

“A disposable income increase by 30%. With that extra 30%, some (people) are going to be saving it rather than putting it into the economy and stacking sats.”

General adoption

Bitcoin adoption in general has exploded over the years and there are an estimated 106 million Bitcoin owners today, from refugees to government officials and large institutional investors. Rough estimates state that 4% to 5% of the global population owns some Bitcoin globally today. This is comparable to the internet in 1999. In fact, according to current annual adoption rates of 80% Bitcoin is estimated to reach 1 billion users by 2025. This is an even faster growth than the internet.

Even more bullish is the growth of the Lightning Network. This relatively new technology enables near-instant and almost-free microtransactions. This is the way to onboard billions of people around the world. The Lightning Network capacity has seen massive growth last year, with the capacity and open channels almost tripling since the Summer of 2021.

You might think that Bitcoin adoption is mostly driven by countries that have a friendly regulatory framework, but this is not necessarily the case. Various countries like Nigeria, Pakistan, India, China and Turkey have been hostile towards Bitcoin, yet their per-capita Bitcoin usage is very high.

The Nigerian government banned cryptocurrencies in February 2021 and later they announced their own CBDC to limit incentives to use private cryptocurrencies. Despite the ban daily transactions kept growing, with people trying to find alternative payment methods in an environment of political repression, currency controls and rampant inflation.

Erdogan declared war on crypto in September 2021, stating that Turkey would fight cryptocurrencies to make sure their own digital currency flourishes. Meanwhile the Turkish Lira has plunged to further depths evaporating the purchasing power of the Turkish people. Despite the “war on crypto”, the Turkish people have piled their money into Bitcoin and Tether to escape the lira.

Bukele is in Turkey right now to talk to Erdogan, while Erdogan recently sent a new crypto bill to the parliament. Earlier the Turkish government clearly stated that Turkey “has absolutely no intention of embracing cryptocurrencies”, but we have seen sudden shifts before. This is something to keep an eye on given the inflationary environment Turkey is in.

Modi banned cryptocurrencies in November 2021 and announced their own CBDC. He stated that cryptocurrencies could “spoil our youth”. Unsurprisingly, usage barely dropped off and now the first Bitcoin and Ethereum futures-based ETF’s outside of the U.S. are announced to hit the Indian market.

It’s almost like governments around the world are desperately trying to keep people from fleeing their devaluing fiat currencies, with varying degrees of success. In my mind, banning something only makes it more interesting to investigate.

For most people in the West Bitcoin is still considered a high-risk speculative asset, but for some that live under less fortunate circumstances Bitcoin is considered a lifeboat outside of their local fiat currencies. One example is Navalny, that has used Bitcoin for years to circumvent the fact that Putin’s authorities shut down their bank accounts and censor their transactions.

Stablecoin politics and regulation

When it comes to regulation 2022 will pan out to be an interesting year for Bitcoin and crypto in general. Many nations are looking at regulating stablecoins, which are deemed a financial risk by governments and central banks around the world.

They are right to some degree, stablecoins form an essential part of the crypto economy. If a stablecoin begins to lose financial stability or value, that would cause considerable damage to the entire ecosystem. A sudden lack of faith in the issuers of stablecoins could cause a catastrophic liquidity shock, comparable to how a traditional bank run would look like.

There is plenty of fear, uncertainty, and doubt around the most popular stablecoin Tether. Tether has been blamed for keeping the price of Bitcoin artificially high and not having sufficient backing for their minted coins. The company has even been called the biggest fraud since the Madoff Ponzi Scheme.

Despite all the mystique and accusations around Tether, their market capitalization keeps growing, with a staggering total of $78 billion today. There are other emerging stablecoins, with USDC slowly eating away some of Tether’s market capitalization. USDC almost counts for 30% of the total stablecoin supply now, perhaps because of the uncertainties around Tether.

Governments are increasingly looking to regulate stablecoins, stating that they entail risks like money laundering and terrorist financing, on top of the liquidity risks around them. The Federal Reserve has proposed two different ways to deal with stablecoins.

The first is to convert them into the equivalent of public money by either issuing them by FDIC-insured U.S. banks or backing them 1:1 with U.S. Treasury Bonds, which is a similar framework as the oversight around U.S. bank deposits. The second solution is to introduce CBDCs instead and simply tax stablecoins out of existence, basically completely replacing this private money with public money. Stablecoins in the crypto space like Tether and USDC could be replaced with U.S. CBDCs instead.

This would inevitably result in the retaliation of other large nations. The EU, China, Russia, and many other large players are keen to get out of the dollar-dominant financial system, so if a US$ CBDCs gets introduced all these countries are likely to issue similar stablecoins backed by their own domestic currencies.

This scenario would intensify the geopolitical currency wars and extend it to the cryptocurrency ecosystem. In either scenario, stablecoins will face large challenges and will be subject to increased regulation. This year it will undoubtedly become more clear which countries choose to follow the path of China and decide to ban Bitcoin, and which countries will see opportunities to embrace Bitcoin with a friendly regulatory framework.

Meanwhile, we are still relatively early in the S-Curve adoption phase. The winners and losers will likely only be clear a decade from now.

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Written by Troy | The Macro Sphere