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Cryptocurrency mining is exploding in the United States, but how this growing industry fits into the traditional data center landscape is still an open question.
Bisnow/Kimberly Reeves
Cryptocurrency mining is now one of the most profitable businesses on the planet, with almost $3B in growth expected in the coming year, according to some projections.
While this seemingly insatiable need for computing power would seem to be manna from heaven for data center operators, the industry’s approach to crypto has been cautious at best. Data centers operators have been skeptical of crypto miners, seeing them as credit risks that bring potentially problematic power demands and new engineering challenges.
Yet there are signs these attitudes may be changing. Industry insiders say a growing familiarity with the mining business model has led to better tenant vetting and to agreements designed to mitigate the risks inherent to cryptocurrency. Meanwhile, colocation facilities outside traditional data center hubs are starting to see crypto as a key piece of their future business model.
“I think for most data center operators, this is really foreign to them, in terms of how mining operations work, and they’re initially just scared about it,” said Russel Bruno, CEO of AceHost.com, a Tampa-based data center provider that operates both colocation and dedicated cryptocurrency mining facilities. “This marriage is going to take some time, and our industry is going to have to take the time to explain how we work and help people think outside their current box, because right now there’s an opportunity and people are leaving money on the table.”
What’s standing in the way of data center operators embracing crypto? At the top of the list, industry insiders tell Bisnow, is the perception of digital currency miners as a massive credit risk compared to regular enterprise tenants. This fear is not unfounded. Mining revenue hinges on the often volatile day-to-day performance of digital currencies that can fluctuate in value by 20% overnight. In 2013, a crash in the value of Bitcoin led to a wave of defaults by miners, who abandoned racks of mining equipment at data centers across the country.
There are also practical challenges. So-called mining rigs — essentially racks of stripped-down servers optimized for blockchain transactions — often have different space requirements and heat profiles than standard server racks. This makes it difficult and often inefficient to house mining rigs and conventional enterprise servers in the same facility. Perhaps most significantly, mining equipment uses far more power per server rack than enterprise servers and is almost always operating at full capacity. For data centers operating near the limits of their power supply, this can make crypto tenants less than desirable.
“They’ve worn out their welcome in a lot of the low-cost power markets — they’ve been driven out of these areas,” said Kevin Imboden, senior research manager for Data Center Insights at Cushman & Wakefield. “There’s a consistent backlash … unless it’s a crypto mining-specific data center where that’s what it’s built for and there’s not any other tenants who are going to be struggling for power because of the crypto miners.”
While skepticism about mining digital currency may be prevalent throughout the data center industry, there are also signs this perception may be evolving and that operators are starting to see crypto as something other than a risky distraction.
As providers have gained a better understanding of the crypto mining business model, they have begun structuring deals tailored to the credit risk inherent in mining. These include revenue sharing agreements, where a portion of the profit a machine mines every day is siphoned into a separate wallet for the data center owner. In a worst-case scenario, owners won’t be left with only an unpaid bill and racks full of abandoned machines.
Other operators are implementing vetting processes for crypto miners, requiring a proposal from prospective tenants providing transparency into their financials.
Some of the largest colocation providers are trying to find ways to make crypto work.
“We love that part of the industry, and we’re looking to create some incentive plans to have some assurance that these guys are going to pay us,” said Bhu Virdi, director of Solutions Architecture at Flexential. “It’s a good business model for us because we like a ton of power concentrated in a single server rack instead of spread over five or six racks. But the problem is that they basically make their money day by day, so their ability to pay you is not that great. We’ve lost out on some dollars on some of these companies where they come in and deploy a high amount of computing power into our facilities, and then you don’t get that ROI back from them and you’re really just kicking them out.“
Large data center operators may be looking for ways to make digital currency fit into their business model, but experts say more immediate opportunities exist for smaller players outside of major data center markets. While the data center industry has been booming, many operators in smaller markets used to relying on enterprise colocation tenants have been struggling. A number of those tenants have switched to cloud-based solutions, leaving colocation data centers with unused space and extra power.
Cryptocurrency mining can help fill the gap, AceHost’s Bruno said.
“Why not make money on the power and on the raw space if it’s just sitting there and it’s an extra revenue stream,” Bruno said.
In addition to operating its own data centers, AceHost operates as a sort of middleman between data center owners and crypto mining tenants. Bruno said there has been a torrent of interest from data center operators looking to miners to fill excess space, as companies with space and power to spare and in dire need of short-term revenue don’t care about credit risk.
“Just in the last six weeks, we’ve had almost 500 inquiries for crypto mining,” Bruno said. “There’s guys who have 30K SF sitting there and they’re wanting to utilize their utilities. They’re paying rent already and they have power.”
Whether digital currency miners will be interested in many of these colocation facilities remains to be seen. Mining does not require what’s known as a mission-critical facility; the redundancies and backup power systems needed for a regular data center are unnecessary overhead for miners. Cost of power is the primary — and often the only — consideration. As such, mining rigs are often located in old warehouses and even in shipping containers.
But according to Bruno, colocation data centers can compete on speed to market, allowing miners to get their machines online right away with few upfront costs.
“If someone wants to send us a machine right now, they’ll be live right away,” he said. “We had a customer who said he ordered 50 machines, and then couldn’t find a place to put them up after spending a couple of hundred grand. You have to think about how long does it takes to get things up and running, to get permits and things like that to get set up yourself.”
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