'The Wheels On The Bus Really Started Screeching': Crypto Crash Slows Growth Of Mining Facilities

Cryptocurrency values have plummeted this month, a crash that is pumping the brakes on the building boom for data centers that mine and process the digital currencies. Experts say it’s a slowdown, not a crisis — not yet, anyway. 

The bottom fell out for crypto in early May, with major currencies like bitcoin and ethereum losing around a third of their value almost overnight, down more than 50% from the market’s height in late 2021. Cryptocurrency miners and the operators of the data centers who host them are feeling the pinch.

The sector had been in the midst of an accelerating development boom, with some predicting 10,000 megawatts of new mining facilities in the U.S. within five years. But the tanking crypto markets, combined with skyrocketing energy costs and more expensive lending, is slowing that projected build-out. Experts still predict mining development will continue unless the crypto correction becomes a crypto collapse, but even the biggest industry boosters expect scaled-back development pipelines and delays on projects big and small.

“I don’t see how there can’t be [a development slowdown], to be honest with you,” said Russ Bruno, CEO of AceHost.com, a Tampa-based data center provider that operates both colocation and dedicated cryptocurrency mining facilities. “The amount of money that some of these guys have put into building these things out with investor money, it’s definitely scary. I’m wondering myself how that's all going to shake out for them.”

Cryptocurrency mining in the U.S. exploded in 2021. The sector’s growth was driven not only by the skyrocketing value of bitcoin and other digital currencies but also by a ban on mining in China and competitive power rates in many U.S. markets compared to Europe. Chris Brendler, a senior equity analyst at DA Davidson who covers the crypto mining space, said it was a perfect storm for the industry in the U.S. 

"Bitcoin went to $60K, China shut down, a lot of the Chinese miners tried to move here, and timely entrepreneurs tried to raise capital and start mining here as well," Brendler said. “So there was a lot more demand for mining space.”

Public officials in cheap power states like Texas and Oklahoma have successfully marketed themselves to crypto miners, who have gladly taken advantage of targeted tax breaks and other inducements. Publicly traded mining operators like Marathon Digital Holdings, RIOT Blockchain and Core Science — which mine for bitcoin and ethereum themselves in addition to leasing space to miners, much like a traditional colocation data center — have built out hundreds of megawatts of capacity. One planned data center campus announced last month by RIOT Blockchain, once built to capacity, would use enough electricity to power a city. Texas utility regulator ERCOT said in February that it expects 6,000 MW of new demand just from crypto by 2023.

The crypto downturn is already slowing this frantic pace of development. On recent earning calls, a number of publicly traded mining operators announced significant reductions in expected build-out. Core Scientific, generally viewed as an industry leader, cut its expected deployments by 30%. 

While the stock prices of public miners like Core Scientific have been hammered over the past two weeks, industry insiders say private operators large and small are also paring back growth expectations and reconsidering deals already in the works. 

“A lot of deals that I’ve seen are underfunded, and they put things on hold. We're slowing things down on some of the deals that we have,” AceHost.com’s Bruno said. “Our Crypto division that was rapidly growing, and outpacing everything else we've done, but the wheels on the bus really started screeching two weeks ago.”

The development slowdown is due in part to slowed demand growth for hosting services from miners, experts say. Tenants generally pay for both the computing equipment for mining and the power they use, and the tanking value of bitcoin and ethereum means that math no longer pencils for some operators or the investors financing the new equipment. Tenants are getting squeezed on both ends, as power costs continue to rise in many markets. Core Scientific reported its energy costs increasing by between 15% and 20%. 

Because of these pressures, investors who spoke with Bisnow all said they had backed out of financing these so-called mining rigs in recent weeks. Bruno said he has had cancelations from tenants and expects more to come. 

Industry insiders also cite access to capital — as well as the increased cost of lending — for both tenants and hosts as a driver of the development slowdown. Large institutional lenders who would generally fund large real estate projects have generally steered clear of crypto projects, a skittishness that has only increased with the collapse of currency values and stock prices for the major miners.   

“Market conditions are slowing the flow and limiting the availability of outside capital required to fund our industry. … I think it's very fair to say there's certainly an added layer of conservatism,” said Mike Levitt, CEO of Core Scientific, speaking on the company’s first-quarter earnings call. “Others with whom we do business also need to form capital and bring in capital. If they don't, then we don't need them as customers.” 

Despite the slowdown, there was a consensus among those who spoke with Bisnow that the reduced development pipeline for crypto data centers isn't a death knell for the industry. Demand growth has slowed, but there is little evidence that miners are abandoning rigs en masse. DA Davidson’s Brendler says that publicly traded miners are reducing expected build-out largely to avoid the risk that missing projections or additional debt would further damage their stock price. 

"As bad as the markets have been to bitcoin mining stocks and bitcoin, in some ways, it really hasn't yet reduced demand,” he said. “If it continues to go lower from here, obviously that could be a different story, but there’s still more miners looking for space.”

Brendler and others point to a number of forces that are stabilizing demand for mining data center space in the short term. While energy costs are rising in the U.S., the situation has been much worse in Europe — pricing and instability in the region have led many miners to look to the U.S. Bruno said he has seen this trend firsthand, with an increase in calls from European miners in recent weeks. 

Perhaps most significantly, the industry was already facing a tenant backlog. Providers across the industry couldn’t get enough power online to meet the needs of miners who had already purchased equipment. These miners are still scouring for available power anywhere they can find it, meaning demand will likely remain robust until this backlog is diminished.  

“The issue is we’re still power-constrained — that’s been the bottleneck,” Brendler said. “Take Core Scientific, one of the biggest hosts. They’ve said for four months that they’re filled up, that if you wanted to pay them to host your machines this year, they just couldn‘t do it.”