What the Bitcoin Shakeout Means for Data Center Providers

There’s a major shakeout underway in bitcoin cloud mining, with some firms shutting down or halting payouts to customers, while others are shifting their business models.

The fallout is being felt by data center operators who leased space to large mining operations, prompting one provider to sue a bitcoin customer for millions of dollars in unpaid hosting costs.

The turmoil is driven by an extended slump in the value of bitcoin and other virtual currencies. After soaring as high as $1,100 in late 2013, the price of bitcoin has plunged, hitting a low of about $225 on Tuesday.

This decline has wreaked havoc with cloud mining operations, who lease processing power to users. Many of these companies operate their own warehouse-style computing facilities, but some providers lease data center space from wholesale providers.

On Monday, C7 Data Centers filed suit against mining company CoinTerra, which has missed $1.4 million in payments. The suit seeks up to $5.4 million in damages, citing C7’s costs for provisioning power and the balance of CoinTerra’s contract. CoinTerra disputes the charges and says it has filed a counterclaim.

CoinTerra CEO Ravi Iyengar told us the company has defaulted on its debt as a result of C7 shutting down CoinTerra’s infrastructure at its data centers. As a result, the bitcoing miner has halted operations and stopped payouts to its customers.

CoinTerra is also a major customer of CenturyLink, which has leased more than 10 megawatts of data center capacity to the mining firm. Its servers at CenturyLink data centers have also been shut down.

The Downside of Speculative Mining

Bitcoin mining has always been a speculative business, offering a way to mint digital money with high-powered hardware by processing transactions, with financial rewards paid out in virtual currency (hence the “mining” nomenclature). The network is based on a public ledger known as the blockchain, with each transaction verified using cryptography.

The returns on mining fluctuate with the price of bitcoin and network activity. As the price of bitcoin has plunged, even industrial-scale mining operations are unable to cover their costs. On Monday, the second-largest bitcoin mining pool said it was temporarily suspending operations, saying mining had become unprofitable.

Another mining company that has leased significant data center space is CloudHashing, now owned by Peernova. Customers have complained that the company is mining fewer coins and that payouts have become erratic.

“CloudHashing is very much operational,” said Emmanuel Abiodun, president of Peernova. “We have simply pointed our mining machines to a larger mining pool to increase the block discovery frequency which is a good thing for all customers. The growth of the bitcoin network made that decision absolutely necessary. Customers will now be paid on a weekly schedule.”

Shifting Focus Amid Mining Challenges

Peernova, like other companies in the ecosystem, has been changing its strategy. In December the company said it had raised $8.6 million in new funding and would use the money to accelerate its development of blockchain-based software products for enterprises. “A large amount of our efforts this year will be delivery of these applications,” Abiodun said.

Another firm that has shifted its business focus is GAW Miners, which made a major push into cloud mining last summer. The company recently launched its own virtual currency called Paycoin, and some customers who continue to mine using GAW’s cloud-based “hashlets” say their maintenance fees can exceed the returns from mining.

The turmoil has been felt most acutely among smaller players in cloud mining. Over the past month, a growing list of companies have either halted their cloud mining operations or curtailed payments to customers, including ZeusHash and PB Mining. In perhaps the most bizarre development, cloud mining service Hashie suspended operations and temporarily replaced its web site with an “alternate reality game.”

For Data Centers, Credit Risk Comes Into Focus

The chaos makes the risks of the bitcoin sector stark. As we noted in July, the sector presents a challenge for the data center industry. As demand for bitcoin mining capacity soared in early 2014, some providers leased significant amounts of space and power to bitcoin specialists, while others skipped these deals, wary of the density requirements, economics and potential credit risk.

“Some investors don’t want to touch the Bitcoin industry,” data center industry veteran Mark MacAuley, a managing director at RampRate, said at the time. “The risk is outside the profile that’s palatable to some investors.”

Credit risk is not a new issue for the data center industry, which was hard-hit by the dot-com bust and the collapse of speculative startups. The wave of dot-com bankruptcies rippled through the colocation sector, leading to the collapse of major players like Exodus Communications, AboveNet, and MCI WorldCom.

As the industry recovered, data center providers tightened their credit standards and limited the scope of their construction projects, seeking to keep the supply of space in line with customer demand. After a lengthy period with few customer default problems, the industry’s appetite for risk has been tested by the bitcoin sector.

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