Bitcoin crash could take toll on data center providers

Here’s a story I didn’t see coming. Big data center providers may be feeling the reflected pain of the struggling bitcoin cryptocurrency, as Data Center Knowledge reported.

Exhibit A:  a lawsuit lodged by C7 Data Centers against bitcoin miner Cointerra for non-payment of co-location costs.  Data Center Knowledge reports that [company]Cointerra[/company] is countersuing, but in the meantime its operations at C7 are off.  The story lists several other bitcoin miners and which data center providers they use.

The process of bitcoin mining — a way to value the currency — once could be done on a single machine, but got a lot more complex as the market grew. That meant lots of computers using special chips to crunch the numbers. All that heavy lifting requires data center space.  Now, as the value of bitcoin has swooned — today’s price is $197 versus more than $1,000 two years ago — bitcoin miners are struggling.

In fact, given the amount of compute power it takes to perform the mathematical calculations required to mine a bitcoin means that it may no longer be economical to do it in the first place. And as Coindesk reports, this could result in a vicious cycle in which miners operate at a loss and then feel compelled to immediately sell the bitcoins they produce, triggering further downward pressure on the cryptocurrency.

For data center providers, this is just a confirmation that they need to know their big customers. “This is another highly speculative market evolving so companies jumped on an opportunity to make some money — it’s sort of like the tulip phase of the 1600s all over — if there’s a bubble, bubbles can break,”said Toby Owen, VP of products for [company]Peer1 Hosting[/company].

He doesn’t think there’s a big impact on data center providers writ large, but “if you lease a significant chunk of your floor space to one company, you’d better understand the credit worthiness of that customer. As always.”

Cointerra had no comment for this story. Wes Swenson, CEO of C7 Data Centers, said this suit is an anomaly for his company.

Cointerra, he noted via email, contracted for about 4 megawatts of power — “a massive amount for a single customer … [and] C7 incurs the cost of this power directly. Cointerra was starting to run behind in payments through the fall, and then no payments were made for 60 days while still mining,” he said.

He added that his company has several other mining customers as companies. “Many of them have been able to weather the storm, the storm being higher hash-rate difficulty to create a bitcoin, and a lower US dollar exchange rate to bitcoin. Bitcoin mining generally requires specific hardware, and these types of intensive computational algorithms draw an immense amount of power, along with a system that can cool the equipment to allow it to operate efficiently.”

But, if the bitcoin slide continues we can probably expect more of these disputes.

This story was updated at 8:24 a.m. PST with Toby Owen’s comment and again at 2:30 p.m. with C7 Data Centers comment.