Bitcoin mining boards packed with ASIC chips fill the Wenatchee, Washington, hashing center for MegaBigPower. (Photo: Ashley Casey for MegaBigPower)

As Bitcoin Grows Mainstream, Data Center Provider Opportunity Widens

As sharp price declines wreak havoc with the economics of Bitcoin mining, some entrepreneurs see a shift to transaction fees as the future of the virtual currency. This evolution came into focus this week, as the lead developer proposed revising Bitcoin’s core code to increase the volume of transactions on the network.

A shift from mining rewards to transaction fees has implications for the data center industry, which could gain more business from industrial Bitcoin miners if the facilities supporting the network need to be enterprise-friendly. That would mark a shift from the current practice, in which the Bitcoin network infrastructure is split between data centers and no-frills hashing centers featuring high-density hardware and low-reliability power infrastructure, often housed in former warehouses.

As marquee brands like PayPal and Dell embrace the virtual currency, the global Bitcoin miner network has plenty of data-crunching capacity. But are America’s largest merchants and payment processors comfortable trusting their customer experience to mining rigs sitting in warehouses halfway around the world?

“My belief is that if you’re Michael Dell and your revenues from bitcoin become meaningful, you may want to know where your transactions are being processed,” said Dave Carlson, the CEO of MegaBigPower, one of North America’s largest mining operations. “You may not want to rely upon a mine in China. I believe there will be premium processing contracts, so merchants will know exactly where their transactions are processed.”

Carlson believes e-commerce will create a major opportunity for dedicated Bitcoin mining operations. He expects to deploy at least 20 megawatts of capacity in central Washington state in coming months — and perhaps much more — as MegaBigPower introduces new hardware optimized for industrial-scale mining and energy efficiency.

Shakeout for the mining sector?

Carlson is a pioneer in industrial-scale mining, operating one of the sector’s largest Bitcoin mining facilities in a warehouse in central Washington. He’s seen the network’s processing power (hashrate) soar from 2 gigahashes per second last October to more than 300 gighashes per second, with much of that power controlled by multi-megawatt mines in areas like China, Sweden and the Ukraine. The emergence of these large, well-financed Bitcoin miners has squeezed out many enthusiasts that once mined the cryptocurrency in bedrooms and garages.

That shakeout will continue. In the last month, the price of Bitcoin has sunk more than 20 percent to about $325.

coinprices

An overview of the recent decline in the price of bitcoin. (Chart via CoinPrices.io)

That decline has pressured the profit margins for mining operations and mining pools, which aggregate processing power from individuals and small groups. Carlson’s not alone in seeing the mining sector under pressure.

“The current price drop has put a tight squeeze on miners big and small,” writes Scott Fargo, who tracks the mining industry for CryptoCoinNews. “It is most noticeable to smaller and medium sized mining operations that don’t have the reserves to keep running miners that could, in some cases, cost more to run in power than they now generate in income. Smaller miners have been getting out, and new miners are less likely to invest and start mining.”

Carlson takes a long view of the Bitcoin opportunity. He cites the recent adoption of Bitcoin by Paypal for its merchant network as a sign of changes to come.

“The real long-term opportunity is transaction fees and the processes and products around that,” said Carlson. “Transaction fees will rise with the criticality of the transaction requirements of the largest businesses.”

The developers managing the Bitcoin protocol are also contemplating a future surge in transaction volume. Noting that the Bitcoin network can support only about seven transactions per second, Bitcoin Foundation Chief Scientist Gavin Andresen this week proposed a hard fork of the open source code to make the network more scalable.

Shifting incentives

The Bitcoin network provides a method to effectively mint digital money, using high-powered hardware to process transactions and earn 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. Incentives are offered for Internet users who dedicate processing power to the network, in the form of a “block reward” of 25 new bitcoins every 10 minutes or so.

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About the Author

Rich Miller is the founder and editor at large of Data Center Knowledge, and has been reporting on the data center sector since 2000. He has tracked the growing impact of high-density computing on the power and cooling of data centers, and the resulting push for improved energy efficiency in these facilities.

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