Bitcoin Is Back, But Crypto Data Centers Still Face A Bumpy Road

Bitcoin mining data centers are drawing attention again as the cryptocurrency's price has shot up to record highs, but crypto’s real estate gold rush may be a thing of the past. 

The U.S. experienced a crypto mining building boom between 2020 and mid-2022, a period that saw miners snap up hundreds of acres of land and thousands of megawatts of energy rights in low-power-cost states like Georgia, Tennessee, Kentucky and Texas. Not only were new bitcoin mining development projects being announced at a record pace, but the facilities were massive — some slated to use more than twice the energy of even the largest cloud data centers operated at that time by tech giants like Microsoft, Google and Amazon. 

But this wave of bitcoin mining build-out came to a screeching halt in 2022. The value of bitcoin and other digital currencies plummeted more than 64% between April and November of that year, pushing many miners into the red. With some of the most prominent mining firms heavily leveraged to fund aggressive development plans, the “crypto winter” crash kicked off a distress cycle that saw a wave of bankruptcies and consolidation across the industry. 

Now, bitcoin has bounced back. The currency’s value has climbed to record highs since the start of the year, and mining companies have announced a handful of new large-scale mining projects. 

But crypto mining experts told Bisnow they are skeptical the industry is on the edge of the next development wave. 

Despite the recovery of bitcoin’s value, miners face headwinds making it harder than ever to operate at a profit. And even when economic conditions become more conducive to growth, miners must contend with a digital infrastructure development landscape that has changed radically over the past two years.

“It's going to look very different than it did going into 2022 over the next decade,” said Austin Storms, co-head of mining at Galaxy, a mining and crypto-oriented financial services firm that operates a 180-megawatt bitcoin mining facility in Dickens County, Texas.

“I think the era of these super big mining facilities is largely coming to an end.”

Few miners are in a position to pursue new development at all. Many are struggling to stay afloat in the wake of a fundamental shift in the economics of bitcoin mining that occurred on April 19, known in the industry as “the halving.”

The halving refers to an adjustment made every four years to the bitcoin blockchain that reduces by 50% the bitcoin reward that miners receive. This scheduled change is hardwired into bitcoin’s underlying algorithm and is fundamental to the design of the currency — a mechanism to ensure there is a finite supply of new bitcoin that is gradually brought into circulation. 

For miners, though, the quadrennial event simply means their revenues are cut in half in an instant. It is an existential event for many, forcing miners with higher power costs or less energy-efficient equipment to mine at a loss. Barring a sudden increase in the currency’s value, miners with older equipment or unfavorable power pricing are expected to shut their machines down in the coming months. 

“Many of the machines that were making money are no longer making money,” said Barry Kupferberg, managing partner at Barkers Point Capital Advisors. “We’re in the phase where there’s a lot of equipment that needs to get shut down and dismantled, and I think that’s going to happen.” 

The halving added to what was already a challenging period for miners due to other variables written into bitcoin’s algorithm. Even prior to April 19, many firms were producing fewer bitcoins per kilowatt of computing power than ever. Publicly traded mining giant Riot Platforms reported last week it produced 36% fewer bitcoins in the first quarter than the same period last year. 

These narrowing margins, combined with the high cost of capital, have made underwriting hundreds of millions of dollars in new development and power acquisition a tough sell to lenders who would see little return on investment in today's climate.

Additionally, mining firms with enough liquidity on their balance sheets to fund major capital projects are first deploying capital not toward expansion but toward reducing their operating costs by acquiring new, more energy-efficient mining equipment. 

“The new equipment being ordered and delivered now is twice as efficient as the old equipment,” Kupferberg said. “There's not a lot of growth at the moment, so you’re seeing a focus on optimizing earnings by focusing on efficiency.”

While some of the largest crypto mining firms are looking to scale up their operations despite economic headwinds, industry experts predict the bulk of that growth capital will go toward mergers and acquisitions instead of development.

The halving and other headwinds have miners with older equipment or less sophisticated energy strategies scrambling for a potential exit ramp, creating the conditions for a new round of consolidation that may already be underway.

The mining sector has seen a growing number of asset transactions since the start of the year, led by some of the industry’s largest players.

In January, Marathon Digital acquired a pair of mining data centers in Nebraska and Texas, then purchased another existing facility in Texas in March. CleanSpark acquired four separate mining data centers in Mississippi and Georgia in a single deal in February. 

On the company's quarterly earnings call Wednesday, Riot Platforms Head of Corporate Development and Strategy Jason Chung said the mining giant is actively looking for M&A opportunities, and he expects the volume of bitcoin data center transactions to pick up steam in the weeks ahead. 

“We've seen very healthy deal flow pre-halving, and we think that deal flow will further increase post-halving,” Chung said. “I think there's a really interesting window of opportunity approaching for deals to be done in the sector.”

There are still some bitcoin mining firms building new data centers and expanding existing facilities.

Core Scientific announced last month it is planning a 72 MW expansion of its data center in Denton, Texas, while Polaris Technology is constructing a 200 MW facility on 42 acres near Tulsa, Oklahoma. In March, Riot began operations at its new 400 MW facility in Corsicana, Texas, that could scale up to a gigawatt starting in 2025. 

But few, if any, of the recently launched build-outs are truly new projects. Rather, companies are finally executing on land and power purchased during the pre-crash building boom — more representing an infill of the mining sector’s footprint than an expansion. 

The bitcoin mining sector will likely eventually enter a new expansion cycle as the price of bitcoin rises and other economic conditions improve. But industry experts say the next burst of development will look different than the frenzied gold rush climate that saw miners and speculators easily snap up thousands of acres and dozens of gigawatts of commitments from energy providers across the country.

Miners will have to contend with a much more challenging development landscape likely to yield fewer opportunities and none of the gigawatt-scale mining megaprojects that defined the last wave of development.

When skyrocketing crypto values drove a wave of investment into bitcoin mining in late 2020 and 2021, miners were the only entities requesting the delivery of massive blocks of power in 500 MW chunks from transmission organizations in places like Texas, Georgia and Tennessee, Galaxy's Storms said.

Developers and speculators could easily buy land in low-power-cost markets with access to transmission infrastructure, and energy providers were seemingly happy to provide interconnections and allocate gigawatts of capacity. 

While markets like Texas and Georgia had a significant inventory of large data centers for enterprises and Big Tech cloud providers like Amazon Web Services, Google and Microsoft, the extensive site selection criteria for mainstream data centers relative to crypto mining facilities meant there was little competition over land or power. Miners could build on sites with power but poor fiber connections far from major population centers — sites traditional data center providers wouldn't consider. At the time, the largest hyperscale cloud data center used a fraction of the power miners regularly sought. 

But today, Big Tech’s artificial intelligence arms race has flipped this dynamic on its head.

The world’s largest tech companies are scrambling to build out the data center infrastructure for generative AI and other high-performance computing, driving record leasing and development pipelines that are on pace to double global data center power consumption within four years. Hyperscale data centers are also getting bigger, with some projects reportedly approaching a gigawatt of capacity. As the data center industry’s power demand has increased, transmission systems in the industry’s traditional markets have been pushed to the brink.

These power constraints, along with the less stringent siting requirements for some AI computing compared to traditional cloud data centers, have pushed hyperscalers to sites that two years ago would only have been of interest to the crypto mining sector.

Instead of having easy access to gigawatts of cheap power, miners now often compete for land and power with the world’s largest tech companies, which are willing to pay huge premiums to get access to the sites they want. 

“Before, it was the Wild West era of large-scale power capacity with interconnection requests given for 800 MW to a gigawatt campus, because miners were requesting large bulk transmission delivery of power before any other industrial users were doing it … but that era is over,” Storms said. “Now it’s very difficult to find a site that can get firm capacity for what I would consider to be a true hyperscale campus.”