Colocation Datacenters Caught in Cryptocurrency Bubble

Colocation Datacenters Caught in Cryptocurrency Bubble

Bitcoin prices are soaring, and so is the demand for datacenters from the cryptocurrency miners. Yet the speculative nature of the cryptocurrency business means that leased datacenter operators should have a diversified business model and clientele to hedge against volatility, according to 451 Research analyst Jonathan Schroth, and Kelly Morgan, Research Director of Datacenter Infrastructure & Managed Services.

Bitcoin, the original and most ubiquitous cryptocurrency, came into prominence and gained value through being mined and then validated on the distributed ledger. In other words, cryptocurrency mining requires both computer processing and mathematical algorithms to verify the transactions. Successful miners will be rewarded with bitcoin.

Colocation datacenters fill in the gap in the cryptocurrency frenzy by offering space and electricity to store and power mining servers. Cryptocurrency miners typically operate on the bare minimums with less stringent needs for security and cooling, and virtually zero equipment redundancy. Colocation spaces give miners the agility to scale up swiftly without incurring construction costs – a win-win for both operators and miners when bitcoin prices rally.

Valuation risk

However, that is not always the case, as shown by the bitcoin price crashes in late 2013, early 2014 and late 2017. Cryptocurrency miners driven into bankruptcy pulled out, leaving mine hosting operators in the lurch. Utah-based colocation provider C7 Data Centers and Cyxtera were among the providers hit by unpaid bills from cryptocurrency miners.

Bitcoin remains a highly volatile asset class, with returns of its annual standard deviation of daily price being on average five percentage points greater than the broad S&P 500 equity index over 10-plus years. Rising competition, and the ‘halving’ of bitcoin reward over the past three cycles have further undermined the income of cryptocurrency miners. Colocation providers risk being undercut by cryptocurrency miners who seek low cost, and will downsize their operations should bitcoin prices fall.

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Variety rules

A diversified strategy will help multi-tenant datacenter operators make the most of their less-than-reliable partnership with cryptocurrency miners.

Datacenter suppliers such as Verne Global and Advania, as well as key colocation players including Equinix and Digital Realty, have focused on building a diverse customer base to reduce their exposure to cryptocurrency risk. Banking and automotive, both sectors that require high-density options similar to cryptocurrency mining, are typically the more stable clientele.

Pivot to services

As customer needs shift, a few colocation operators are expanding into managed services. This strategic approach offers new revenue streams, especially for providers that are purely catering to the cryptocurrency niche. Kansas City, Missouri-based colocation firm Netsolus, which reported a 75% exposure to crypto miners, has rolled out managed services and IaaS.

CloudHashing, a provider of cloud-based mining services from its facility in Iceland, merged with mining hardware manufacturer HighBitCoin to launch PeerNova in 2014. The entity raised $31m, and has since ventured beyond bitcoin-specific businesses to offer services around general enterprise blockchain applications and data analysis.

Whether pivoting into IaaS or diversifying their customer base, datacenters are learning (sometimes the hard way) not to put all their eggs in the bitcoin basket.

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