Welcome To Latam Insights Encore, a deep view of Latin America’s most relevant economic and cryptocurrency-based news last week. In this edition, we examine the possible outcomes of the war that Paraguay is waging on illegal (and now legal) bitcoin mining operators, and how this might make the country lose millions of dollars as miners seek alternatives in neighboring nations.
Paraguay Stands to Lose More Than What It Hopes to Win With Its Current Bitcoin Strategy
Paraguay started to be considered an attractive destination for establishing bitcoin mining operations in 2018 with its cheap electricity that mainly comes from hydroelectric sources, such as the Itaipu dam, the third largest dam in the world. This drive to explore Paraguay as a mining haven intensified in 2021 with the so-called bitcoin mining ban in China, which caused a global exodus from the Asian country to other destinies.
Paraguay, while hosting several bitcoin miners with large compounds in the country, has carried out a series of actions against illegal mining operations that have promoted a negative narrative surrounding the industry. And while over 70 illegal mining operations have been disconnected and thousands of miners seized, industry insiders believe that other situations threatening the business, like the “vulture contracts,” which allocate energy to undeveloped projects that can be used for more profitable alternatives.
In addition to this behavior, the National Power Administration of Paraguay (ANDE) has recently raised the electricity fees associated with providing electricity for bitcoin mining activities by 14%, disrupting the industry ecosystem and causing widespread rejection. According to reports, this has already caused a capital flight of over $400 million from companies that had already signed contracts but canceled them due to this fee increase.
This increase comes after creating a special power tariff group that increased bills by 50% last year, making Paraguay less attractive for miners seeking to profit with the current slim margins in an industry that depends heavily on market conditions.
The Paraguayan government has acknowledged that it cannot substitute the bitcoin mining industry in the near term. So the moves in this direction are strange, considering that the strategy described by the Ministry of Industry and Commerce was to leverage bitcoin mining as a bridge to attract labor-intensive activities in the long term.
This is why the stance of the Paraguayan government towards bitcoin is considered a net negative for the country, positioning it to lose millions of dollars in capital flight and gain nothing in return as there is no alternative consumer for the energy this is taking advantage of.
