TBILISI, Georgia — For three years, a windowless warehouse on the edge of town has been whirring with enough energy to power nearly 50,000 homes. Day and night, the warehouse, and dozens of cargo containers in a windswept valley, are generating Bitcoin, the cryptocurrency that has created a virtual gold rush in the former Soviet republic of Georgia.
Bitfury, an American technology company, is churning out millions of dollars’ worth of the digital money using ultracheap hydropower harvested from waters rushing down the volcanic peaks of the Caucasus. Even as the currency has tumbled in value, thousands of Georgians have jumped into the game and sold cars — even cows — to buy high-powered computers to mine Bitcoin and join what has become a state-supported dash toward data supremacy.
A former prime minister encouraged Bitfury with a $10 million loan in 2015. The governing Georgian Dream party sold 45 acres for $1 for Bitfury to set up shop. The government has been selling energy at half the rates charged in the United States or Europe, and it has created tax-free zones to draw in tech-savvy entrepreneurs.
The efforts have given Georgia, with 3.7 million people, a dubious distinction. It is now an energy guzzler, with nearly 10 percent of its energy output gone into the currency endeavor. The country consumed so much power in recent years that the World Bank ranked it one of the most active cryptocurrency sites in the world.
The whole experiment is likely to face immediate challenges as the price of Bitcoin declines, after a spectacular rise tempted investors around the world to bet on cryptocurrencies.
Most companies tend to lose money when the price of Bitcoin falls below energy costs, and mining operators worldwide have recently been scaling back. The largest mining company, the Chinese company Bitmain, has been closing offices and laying off workers. Last week, Bitfury announced layoffs at a facility in Canada.
Georgia, however, has been betting its economy on luring blockchain technology, the encrypted storage capability behind all crypto transactions.
Bitfury has helped migrate most of Georgia’s land registry to blockchain, making the government one of the first to rely on the secure digital ledger. Its tax system may soon follow. Georgia aims to beat Malta, Bermuda and other countries known for light-touch regulation of cryptocurrencies to dominate blockchain development.
“The economy’s digital transformation is our highest priority,” said George Kobulia, the economy minister. “We’re supporting this any way we can.”
A Low-Tax Frontier
In downtown Tbilisi, a neon-lit Marriott welcomes tourists. A nearby shopping mall installed a special A.T.M. for Bitcoin withdrawals. A cryptocurrency exchange flashes the prices of Bitcoin, Ether and other digital money on a ticker.
When street protests ousted the last Soviet-era leader in 2003, the government, struggling with poverty, corruption and grinding bureaucracy, began selling itself as a business-friendly low-tax outpost for investment. Big financial institutions came in. So did casinos. A private company willing to take a risk was Bitfury, founded in 2011 by a tech savant from Latvia who was proselytizing about a strange virtual industry.
Remi Urumashvili, a well-connected lawyer and now Bitfury’s main representative in Georgia, said that when Valery Vavilov, the co-founder and chief executive, approached him to seek advice on building a cryptocurrency operation, he was baffled.
“They told me they wanted to mine Bitcoins, and I’m asking them, ‘Hey, guys, what’s a Bitcoin?’” Mr. Urumashvili recalled.
Mr. Vavilov told him that the currency had introduced a new technology, blockchain, that had the potential for widespread use in business. Mr. Urumashvili said he had seen a potential tax advantage.
“They explained that it’s money that exists on the internet,” he said. “So I said, ‘If a thing doesn’t exist in reality, maybe the tax will be zero.’”
Mr. Urumashvili worked hard to lobby lawmakers to keep Georgia an open market for cryptocurrency. “I don’t like regulations,” he said, arching an eyebrow. “And there are very few regulations here for anything.”
As soon as Bitfury opened its doors, Georgia created “free economic zones” where mining activities and electricity weren’t taxed. When Bitcoin and other cryptocurrencies were exchanged for dollars or pounds, Georgia treated the exchange as an export exempt from value added taxes, so Bitfury could keep every penny of earnings.
Rumors have swirled that Bidzina Ivanishvili, a former prime minister from the Georgian Dream party and the country’s richest oligarch, has been a secret beneficiary of the digital experiment. He gave Bitfury a $10 million loan through his investment fund when Bitfury’s vice president, George Kikvadze, sat on his investment board.
Mr. Ivanishvili declined an interview. Mr. Urumashvili of Bitfury said that no laws had been violated to encourage Bitfury, and that the former prime minister’s loan had been paid off. He had no other ties to Bitfury, Mr. Urumashvili added.
The government even expanded an entire power station next to the Bitfury facility to pump in electricity at no extra cost. With energy prices at 5 to 6 cents an hour, Bitfury and its supporters could envision prosperity, if not around the corner then somewhere just beyond the fog of Georgia’s storied mountains.
Mining With Friends
When Bitfury came to Georgia, one Bitcoin was worth around $350. It spiked to nearly $20,000 before tumbling. Big players like Bitfury have bandwidth to keep operating. But smaller investors have been far more vulnerable.
In villages across Georgia, an estimated 200,000 people secured mining computers to set up in basements and garages. For young people especially who struggled in a tough economy, Bitcoin seemed an alluring alternative to just making ends meet.
Joining the rush was George Kirvalidze, 35, the former owner of a small internet company in the town of Kvareli, three hours from Tbilisi in Georgian wine country.
About half the town’s 6,000 households have some kind of a mining rig, he said.
“Most people who bought in thought high prices would last forever,” said Mr. Kirvalidze, who has managed to mine 20 Bitcoins.
Even farmers got involved. “At one point it was more profitable than owning a cow,” he said. “Now it’s not so sure.”
Cryptocurrency lives off a blizzard of mathematical calculations. Computers, or miners, around the world compete to solve complex formulas on the blockchain. When a mining computer gets the right answer, it is given a bundle of new Bitcoins as a reward.
The constant calculating superheats computers, and the energy demand — to power the computers and to cool them — has spiraled in places where such currencies are pursued.
To save energy, Mr. Kirvalidze created a mining pool with nine friends, who grouped their machines in a friend’s garage. One November afternoon, 15 of the 60 miners were turned off because Bitcoin prices had fallen too low to justify the energy use. More would shut down if prices continued to slump, he added.
“Bitfury is one step ahead of us,” Mr. Kirvalidze observed, citing the company’s cutting-edge technology and quasi-state backing in Georgia.
“If we could get cheaper energy prices, too, we could make more,” he said. “That would increase money circulating in the economy and eventually improve growth.”
‘Onto the World Map’
Forty-five minutes from the center of Tbilisi, trucks rumble over two-lane roads and past faded pink and yellow high-rises. A prison, in matching pink and yellow paint, blights a cow pasture. In the middle of the valley rises the gray confines of Bitfury, plunked on a 40-acre concrete strip protected by guards and a high wire fence.
In a warehouse as big as a Walmart, Ilia Koranashvili, a muscular engineer with a snake tattoo, walked around 160 hermetically sealed stainless steel tanks filled with power-efficient chips and a special cooling liquid. The tanks are Bitfury’s experiment to keep energy costs down and make the mining cost effective almost anywhere, said Mr. Koranashvili, who heads Bitfury’s monitoring team.
Industry estimates suggest the company mines just over 5 percent of all Bitcoins, although no one would say how much was being mined here.
But competitors in Georgia reckon it was a fortune. Vakhtang Gogokhia, the chief executive of Golden Fleece, a small cryptomining start-up, said he was pulling in around 10 Bitcoins a month using one megawatt of energy, enough to light 1,000 homes. Bitfury says it constantly consumes at least 45 megawatts of energy, though Mr. Gogokhia suspected it was more.
Critics say the government, by subsidizing operations like Bitfury, is ripping off taxpayers by forcing them to foot the bill for well-connected companies.
Zurab Tchiaberashvili, a lawmaker from European Georgia, the largest opposition party in Parliament, said the government’s generosity toward Bitfury had deprived Georgians of millions in tax revenue.
“It’s a huge conflict of interest,” he said.
Mr. Urumashvili brushed off such concerns. “Bitfury has given our country many things, including a path to the future,” he said. “When you have a ticket to get onto the world map,” he added, “you should use it.”
Still, as Bitcoin prices highlight the uncertain nature of cryptocurrencies, the government isn’t putting all of its eggs in one basket.
“Georgia is interesting for cryptocurrency miners,” said Mr. Kobulia, the economy minister. “But would it be a major source of our economic growth? Maybe not.”