The money-making potential of cryptocurrency mining is an opportunity that has caught the attention of huge numbers of users, ranging from the hobbyist to the enterprise.
Participants are, essentially, responsible for processing cryptocurrency transactions using specially designed hardware rigs that ensure each of these transactions is recorded in a linear, time-stamped fashion within a public ledger known as a blockchain.
It is a compute and energy-intensive process, and participants are rewarded for their efforts with whatever cryptocurrency they have chosen to mine. The more time they spend mining, the more money they stand to make, and downtime must be avoided at all costs.
“Users might be running mining units in a warehouse or garage at the moment,” Greg McCulloch, CEO of Godalming-based colocation provider Aegis Data, tells Computer Weekly, “but if the lights go out and they lose power, they’re not making money.”
To achieve maximum profitability, miners leave their rigs running all day and night, meaning round-the-clock access to reliable power sources and resilient, high-speed network connections are a must.
These requirements make cryptocurrency mining sound like a dream use case for colocation datacentres, but this is a realisation that some participants have been relatively slow to reach.
The great British bitcoin rush
While bitcoin, the most well-known and high-profile example of a cryptocurrency, has been around since 2009, user interest in using colocation facilities for mining purposes – particularly UK-based ones – began picking up a year or so ago, operators claim.
“It probably started for us about July/August 2017, which is when the price [bitcoin values] crossed over to about $5,000, prompting a fairly regular run of enquiries about colocating miners to start filtering through,” says David Barker, founder and technical director of West Byfleet-based colocation provider 4D Data Centres.
Anecdotally, this interest is coming from hobbyist miners, looking to scale up and improve the resiliency of their operations, while – perhaps – looking to secure a secondary income, whereas others could be classified as investor-backed micro-businesses.
“They range from a couple of IT guys, with maybe a backer funding the acquisition of miners, through to hobbyists with a couple of mining rigs they can no longer run in their house for noise or power consumption reasons,” adds Barker.
As miners have progressed from using home PCs on to specially designed, power-hungry mining rigs to process the complex calculations needed to create their favoured cryptocurrency, it stands to reason that they’ve started to look beyond their own four walls for locations that would be a better fit to run them in.
“These guys are running these units to the absolute limit, and – while they might be paying a bit more to use a datacentre – they get security, and can sleep at night knowing they have power, cooling and resiliency,” says McCulloch.
Flexible colocation contract terms
All of the colocation providers Computer Weekly has spoken to are at great pains to point out their cryptocurrency mining customers benefit from the same uptime, availability and levels of support as their more traditional enterprise clients.
One notable difference, though, is the relatively short length of leases the colocation providers are willing to offer miners, which is partly down to operator concerns about the volatility of the cryptocurrency market.
As such, Computer Weekly understands there are clauses in some colocation contracts that allow cryptocurrency miners to have their rigs switched off whenever cryptocurrency values drop below a pre-defined point.
“I would never sign a bitcoin miner on a three-year term because it would not be a good business model for either of us,” says McCulloch. “We don’t want to be tied into a traditional two- to three-year datacentre contract if the bottom falls out of the cryptocurrency market.”
So instead of signing them up to multi-year contracts, providers are opting for rolling, monthly renewals instead, it seems.
“That gives flexibility to the datacentres to move users out if something isn’t going right, and for the users to pull out their equipment at short notice, should they need to,” says McCulloch.
From boom to bust?
Based on Barker’s own calculations, running a bitcoin mining operation out of a datacentre remains profitable until the exchange rate reaches the $4,000 mark.
“That profitability curve drops as you approach that figure,” says Barker. “At current values, you will get about 18 months’ worth of profitability out of it.”
The performance of a mining rig is measured using the hash rate metric, which tracks the number of computations that take place per second to help participants contribute to the supply of new cryptocurrencies. The higher the hash rate, the better.
Therefore, performance improvements to the hardware used to mine cryptocurrencies are a big influence on how much money miners can make, but power costs are the biggest determinant of profitability.
“In terms of efficiency gains, three years ago you could buy a mining rig with a [hash rate] of 15 terrahashes per second and it consumed around 8kW of power,” says Barker. “Now you can buy one that runs at 15 terrahashes a second and consumes around 1.5kW.”
To remain competitive, efficient and – ultimately – profitable, there may come a point for miners where they need to decide if it is worth upgrading their hardware or exiting the market altogether. A lot of this comes down to how quickly miners believe they can recoup the cost of such a hardware investment.
“Only people who can do [mining] at scale will have the funds to continue on that treadmill [of hardware investment], so I suspect we will continue to see mining consolidate into a few major players,” says Barker.
Beijing-based bitcoin mining hardware manufacturer Bitmain is one to watch, in this regard. Not only does it make the kit powering many of the third-party mining operations that exist today, but the company also runs cryptocurrency server farms of its own.
According to the estimates of US analyst house Bernstein, Bitmain is thought to have made between $3bn and $4bn in operating profit in 2017, putting it on a financial performance par with chipmaking giant Nvidia.
“[Bitmain] is effectively using the money that comes in from people buying the miners to fund its own mining operations and operating in a part of the world where electricity is extremely cheap,” adds Barker.
Governments across the world are still grappling with how to regulate cryptocurrencies, meaning countries where it is advantageous to operate today may become less accommodating hosts in the years to come.
This is a worry, says Steve Wallage, managing director of datacentre-focused analyst house Broadgroup Consulting, as miners are lot more upwardly mobile than more traditional colocation clients, and will vote with their feet if they have to.
“These guys have their maps of the world and if the place they are at the moment becomes unfriendly, from a regulation or power cost perspective, there are lots of other places they can go and lots of places queuing up to host them,” says Wallage.
“It could be argued they would like to be somewhere where there is low government involvement and assessment of their affairs, but also cheap energy and taxes, with Iceland, Scandinavia and Canada all targeting the market.”
Swedish colocation provider Hydro66 is an example of an overseas operator that is supplementing the revenue generated by its more traditional enterprise clients by throwing over some of the space in its renewably powered facility to cryptocurrency miners.
In terms of customer base, Hydro66 claims its client mix is broadly the same as what the other colocation providers are seeing, but the firm is also picking up business from some of the Bitmain-like players which are starting to dominate the cryptocurrency landscape.
“We are seeing this type of activity coming from Japan and China, mainly due to geo-diversification needs for risk balancing and also for [the Nordics] access to low-cost green power,” says Paul Morrison, the firm’s business development manager.
“UK power costs and the stability and capacity of the grid will be significant headwinds for cryptomining in the UK, while other regions, such as the Nordics, offer low-cost green power at industrial strength and scale.”
Home versus away
While freedom of movement is a concept cryptocurrency miners have at their disposal to take advantage of, there are a number of reasons why some prefer to keep their rigs running closer to home in the UK, rather than ship their kit overseas where they could potentially make more profit.
“If you place your kit in Norway, for example, there is the cost involved with getting everything over there for a trend that might fall over in a year or two, so they don’t mind paying a little bit more to keep it local,” says McCulloch.
There is also an element of “server hugging” involved, he adds, as people still like to have the option to come and visit their kit, with relative ease, should they want to.
This is a view Barker shares, before going on to share anecdotal tales of users who have paid to have their hardware shipped over to the continent, so they can take advantage of cheaper power prices, only to find it never arrives.
“If you’ve spent hundreds of thousands of pounds on mining equipment, do you really want to trust that investment to somewhere you have never seen?” says Barker.
“That tends to be the main driver for people looking to retain their miners in the UK: they’re willing to accept a slightly higher price point on power for that security of knowing where their equipment is.”
There are a good number of reputable colocation providers dotted across Europe, with a track record in catering to the needs of cryptocurrency miners, but it does pays to be wary, adds Barker.
“There are people out there who have seen the strong demand for this and have just bought office space or warehouses and are advertising it as cryptocurrency colocation, but they haven’t got the experience of running the facilities or enough staff to deal with enquiries from customers,” he continues.
The decision to host locally or overseas is not necessarily an either/or conversation, adds McCulloch, as some of miners on Aegis Data’s books are running rigs in the UK and the Nordics to keep a lid on costs.
“It is not a dissimilar arrangement to the one some of our enterprise clients have where they are running workloads in traditional datacentres, in the cloud or a colocation facility, and getting a bit of a mix,” he says.
The blockchain opportunity
All things considered, 4D Data Centres’ Barker says UK cryptocurrency miners probably have around a year to 18 months to maximise their profitability, before market consolidation, high power prices and hardware refresh costs really start to take their toll.
“Mining cryptocurrencies is probably a good thing to do for the next 12 to 18 months, but beyond that – and where bitcoin, litecoin, dash and the other currencies people are mining in the datacentre are concerned – it is going to become too centralised. Long term, I don’t think the market for mining is in the UK,” he adds.
For this reason, Wallage predicts blockchain, rather than cryptocurrency mining, is where the long-term opportunity in all this lies for the datacentre community as a whole.
Steve Wallage, Broadgroup Consulting
The open source community, in particular, has expanded the functionality of the blockchain code used to underpin cryptocurrency transactions to extend the usefulness of this distributed ledger technology to a much larger pool of users and industries, including retail, financial services and legal.
“Cryptocurrency mining to secure the transactions on the network is only one blockchain application, the same as email is only one application on the internet,” says Hydro66’s Morrison.
“The blockchain is simply a decentralised ledger where cryptography replaces the need for trusted intermediaries. So any situation or process which depends on middlemen can potentially be improved by implementing a blockchain system.”
Indeed, according to research from benchmarking firm McLagan, the world’s eight biggest investment banks could cut the costs of their IT infrastructure by up to $12bn a year by replacing their fragmented ecosystem of database systems with a single blockchain-based digital ledger.
IBM is one of a number of tech giants focused on building out its blockchain proposition at present, having brought to market its software-as-a-service (SaaS) IBM Blockchain Platform offering in August 2017, which is geared towards making the technology accessible to a much wider range of industries.
Oracle also has a cloud-based blockchain offering that forms part of its wider platform-as-a-service (PaaS) portfolio, while Microsoft is courting developers of blockchain-based applications to run them on its Azure public cloud platform.
Cloud giant Amazon Web Services (AWS) has also made an investment commitment to help members of its partner community create blockchain-based services for members of the healthcare, life sciences, supply chain management, security and compliance industries too.
If the work the hyperscale cloud provider community is doing around blockchain starts to take off, the colocation community could benefit indirectly, as the suppliers may need additional datacentre capacity to keep up with demand.
4D Data Centres is going one step further, and is currently in the throes of building a hyper-ledger fabric platform of its own, in anticipation of enterprise demand for blockchain-based services increasing in future.
“We’re testing the water because, longer term, I think that holds more value for us. The underlying blockchain technology is going to be disruptive, and it could take five, 10 or 15 years for its full potential to become known,” says Barker.
“It is not going to be an overnight thing, but I think blockchain will have a much wider impact and presents more of an opportunity to our business than mining cryptocurrencies in the long term.”
Read more about cryptocurrency and colocation
- Canadian investment firm Arctic Blockchain acquires renewably powered colocation specialist Hydro66 to cash in on demand for datacentre capacity from cryptocurrency miners.
- Sweden attracts more datacentre investment with a blockchain company selecting the country for its next datacentre.