Service Providers and Bitcoin: Huge Opportunity, But Tough Economics

This is the second feature in our three-part series on Bitcoin mining infrastructure. Read the first one here.

Is Bitcoin mining a huge opportunity for data center service providers? Or will the bulk of infrastructure for the virtual currency be built out by Bitcoin entrepreneurs?

There's plenty of activity on both fronts as the Bitcoin network experiences explosive growth. As large mining operations build out low-cost hashing centers, some data center providers are leasing significant amounts of space and power to Bitcoin specialists, while others remain wary of the density requirements and economics of the deals.

Bitcoin customers are seeking to acquire lots of capacity. But they want high-density space, prefer their contracts short and cheap and specialize in a speculative and rapidly changing business.

"There's about 150 megawatts of Bitcoin capacity being shopped around right now," said Mark MacAuley, a Bitcoin enthusiast and managing director at RampRate, which helps enterprise clients find data center space. "There's this massive demand. It's a huge opportunity, but this is a different animal.

"Most of the data center facilities out there are Tier III and designed for mission-critical loads," said MacAuley, who has done consulting work for cryptocurrency specialists. "Bitcoin is not mission-critical. Street power is fine. Cost is the biggest driver for them, and most traditional providers can't meet their price point. None of these guys want long-term contracts. The service providers want to get into this business, but their product isn't suited to this demand."

N+1 or N+2 don't cut it, but 'N-0.5' makes sense

Some providers have managed to build thriving Bitcoin businesses by adapting their offerings for the sector's specialized needs. One company that has embraced the opportunity is C7 Data Centers in Utah. Bitcoin customers represent 17 percent of C7's business, according to CEO Wes Swenson, who said his firm houses 4.9 megawatts of Bitcoin capacity, with another 5 megawatts scheduled to come online this fall.

"It’s an interesting challenge," said Swenson. "Most of the data centers that I know are not taking this business. Many of these Bitcoin miners can’t find data centers that meet their requirements for cost and concentration."

To accommodate Bitcoin customers, C7 has rolled out a new data center design that Swenson describes as “N-0.5.″ It offers high-density space with lower reliability and no service-level agreement. The room is cooled using ambient air and cold-aisle containment, with no UPS or generator backup for the mining rigs. The design requires less infrastructure and up-front investment, which makes these deals work for the provider.

"I’m making the margin I need to reinvest in the business and still have great pricing," said Swenson. "But I don’t know how you can run an N+1 or N+2 data center and still make money on Bitcoin."

Space at $1.5 million per megawatt

A recent deal illustrates how service providers are adjusting their offerings. CyrusOne recently signed a lease for 41,000 square feet of space in its Phoenix data center for a customer housing high-density equipment in immersion cooling tanks. CyrusOne delivered the space at a cost of $1.5 million per megawatt, significantly below the $7 million per megawatt the company typically spends on enterprise data center space with "five nines" of uptime.

CyrusOne didn't identify the tenant or its business, but industry observers note that the deal aligns closely with the requirements of Bitcoin miners. CyrusOne CEO Gary Wojtaszek says only that the Phoenix customer "does not require the same resiliency as traditional deployments."

"One of the key engineering challenges we were presented with was how to achieve the lowest operating expense possible for the customer," Wojtaszek said in CyrusOne's recent earnings call. "Our engineering teams work closely with the customer and we were able to deliver the environment for less than $1.5 million per megawatt."

There are some cloud mining companies that still require Tier III-level reliability, according to Bryan Ballard, CTO for Netsolus.

“There is a small subset of the Bitcoin community that is offering (hosted mining) contracts,” said Ballard, whose company has built several custom facilities for cryptocurrency clients. “We’re seeing a high uptick in the contract miners, but we expect that to subside over the next year. They need uptime, so they need the equivalent of enterprise-style requirements. The rest of the miners don’t need that.”

The cooling challenge

One of the primary challenges of Bitcoin mining is the desire for both advanced cooling and a low price point.

"It’s challenging for most data centers to manage the high density and handle the heat," said Swenson. "These are very hot, computationally-intensive servers."

One solution to the heat problem is immersion cooling, which has been used in several large Bitcoin installations. Cooling specialist Allied Control has developed immersion tanks for Bitcoin customers, including one in a Hong Kong high-rise.

"Allied Control has a lot of interest from the data center industry, but at this point of time less than a handful are seriously interested," said Alex Kampl, vice president of engineering at Allied Control. "I have seen a trend that some data centers are initially extremely interested in our solution, but then go the air cooling route and make Bitcoiners essentially pay for an infrastructure upgrade, in hope when the Bitcoiners depart that they leave them with millions worth of infrastructure that they can then use for the 'normal' market."

Investors wary of Bitcoin

Recouping development costs is where the math gets tough. C7's Swenson says Bitcoin customers don’t want to sign contracts longer than 18 to 36 months.

"If they want 1 megawatt or more, that’s a problem," said Swenson. "It’s a bet on my side. I have to sign three-year to 10-year power contracts with my power companies. How much of my business am I willing to bet on Bitcoin? It can be a big intellectual conversation with your investors. We embrace it fully."

Not all data center investors have the same comfort level, MacAuley said.

"Some investors don't want to touch the Bitcoin industry," he said. "The risk is outside the profile that's palatable to some investors. Your management team has to be ready to defend why they did a 5 megawatt or 10 megawatt Bitcoin deal and explain it to their investors. That's the biggest step for service providers."

That could change as the Bitcoin ecosystem attracts more large investors from Wall Street and Silicon Valley. A new report from CoinDesk projects that venture capitalists will pump $285 million into Bitcoin companies in 2014. Meanwhile, investment firms are expected to roll out several ETFs (exchange-traded funds) that will broaden Wall Street's participation in Bitcoin.

New models on the horizon?

MacAuley predicts that this influx of capital will lead to new models for Bitcoin mining centers.

"I think it's going to have to change," MacAuley said. "Wall Street is unimpressed by cowboys running around trying to do this on the cheap. To put equipment worth $25 million in a warehouse in central Washington is less interesting to Wall Street than putting it inside a Digital Realty pod in Ashburn. There's a credibility problem. The Federal Reserve isn't operating in someone's garage."

"I believe that there will be a new industry within a year," said Kampl. "This industry will serve Bitcoin miners with shelves in warehouses, containers with big fans, or DataTanks with immersion-cooled blades. There are different ways to solve the same problem, and it will be completely different in Russia, Europe, Asia or America. All these facilities that we already have now will go though several iterations but the plan is to keep them in place and make them more efficient."

Swenson sees the market continuing along two tracks, with some Bitcoin miners building their own hashing centers while others work with service providers.

"Many of the data centers that are taking this business are barely breaking even," he said. "I think (miners) are being forced to build these powered shells because data centers like mine can only take so much of this capacity.

"I believe Bitcoin is going to take off. The amount of infrastructure to handle transactions is moving faster than anything I’ve seen in 25 years in the business. I think this adoption can be a boom for data centers if they figure out how to build a lower-margin facility. If you design the right data center, it can work. For us, it’s been awesome."

See part one of our series. You can follow Rich Miller on Twitter.