Is Colocation the Right Choice for Bitcoin Mining?

The decision about using a colocation center for Bitcoin mining has some unique considerations that are worth exploring to make Bitcoin mining efforts as profitable as possible. Many of the needs for Bitcoin mining are counter-intuitive. Bitcoin mining needs are not what is desirable for the colocation of computers performing other types of critical-path functions for an organization. The main concerns for Bitcoin mining are the cost/type of electrical power, the cost of rental rack space, the climate-controlled conditions, the data security, and the redundancy level.

Power Requirements

Bitcoin mining requires complex mathematical calculations that use significant processing capacity. Bitcoin mining uses specially-configured computers that consume a lot of electrical power. The cost of the electricity used in a colocation center is a significant portion of the Bitcoin mining expense. The charge for the cost of electricity is a rate per kilowatt-hour. The calculation of the monthly electrical expense comes from using the rate and the power usage requirements of the Bitcoin mining equipment.

The source of electrical power is also a concern for those who want to have an environmentally-friendly operation. It is harmful to the environment to use non-renewable sources of electrical power, such as electricity derived from burning coal. It is better to choose a colocation facility that gets its power from a renewable resource such as hydroelectric power.

Using cheap electrical power that causes carbon air pollution is an undesirable solution, in light of the risk to humankind due to climate change from global warming. The better solution is to find a colocation center that uses cheap power from a renewable resource, which is close to the facility.

Cost of Rental Rack Space

Some colocation centers also charge for the rack space used. To understand all the costs involved in using a specific colocation center, consider the rental cost for physical space in an equipment rack as well as the cost of electricity.

Climate-Control

All colocation centers have climate control. Bitcoin mining equipment may benefit from extra cooling that applies directly to the Bitcoin mining computers to keep the chips from overheating. It may be prudent to invest in additional cooling equipment to improve the performance efficiency of the Bitcoin mining operation.

Data Security

Most colocation facilities have a highly-secure design. Security includes 24/7 network monitoring, round-the-clock on-site security personnel, video surveillance, archived backups, alarm systems, and sophisticated physical-entry controls such as biometric scanners.

Bitcoin mining equipment needs modest security but not the extraordinary efforts employed by many colocation facilities. The Bitcoin mining equipment can be in a colocation center that has a locked room but does not need extreme security measures and the associated expenses. The only significant risks are equipment damage or theft. There is little risk of data breaches. To mine Bitcoins, there needs to be a confirmed proof of completed work, which means the work in progress is not vulnerable during the calculation processing.

Redundancy

Another feature that most colocation facilities offer is redundancy to reduce the downtime and to offer an annual service guarantee, such as 99.99% availability. There are four tiers of redundancy. These tiers are ranked from level one with no redundancy to level four with full redundancy. For Bitcoin mining, redundancy is not necessary. Bitcoin mining is not a critical-path function that would cause severe damage or significant financial loss to an organization if it paused for a short period.

To build a tier-four colocation facility may cost up to $650 per square foot more than a tier-one facility. A tier-one colocation center is just fine for Bitcoin mining because it would normally only have the risks of being offline for up to 36 hours annually. This offline risk is not damaging to Bitcoin mining. The cost reduction of renting space in a tier-one colocation facility, when compared to a tier-four center may be significant. A tier four facility will likely cost much more than the value lost for pausing Bitcoin mining for up to 36 hours each year.

Budgeting for Bitcoin Mining

A budget for Bitcoin mining includes the cost of purchasing or leasing the equipment, having it delivered and set up in a colocation facility, the rent for the rack space at the facility plus an estimate of the charges for electricity usage. It may be possible to buy used equipment; however, since the electrical power is the highest cost element in Bitcoin mining, choose the best equipment possible that is more efficient in terms of data processing speed.

For best results, look for a colocation facility located near a renewable energy source, such as a hydroelectric power plant, a solar power installation, or a wind farm. Look for the lowest-cost electricity as possible. Try to find a colocation facility designed for Bitcoin mining. Such a facility will not need heavy security, just modest protection from equipment theft.

If there is an option to choose a tier-one facility with no redundancy and that strongly reduces the colocation rental price, then it is a good idea to choose such a center over a more expensive tier-four facility.

Summary

After identifying and estimating all the costs, add them all up to calculate a break-even point. The break-even point is the amount of value that must come from the created Bitcoins, which exceeds the cost of creating them. It is possible to lose money mining Bitcoins if the creation cost is more than their value. Doing the due diligence necessary to collect the correct figures and then carefully calculating the expenses, helps to avoid this problem.

The mining of Bitcoins will cease when there are 21 million Bitcoins. After mining all the Bitcoins ends, the miners will have to rely only on transaction fees as their revenues from Bitcoin processing activities.

There is still plenty of time left to mine Bitcoins; however, for the greatest chance of profitability for a longer period, it is important to get started right away.