The strategy behind miner colocation

With the emergence of blockchain technology and cryptocurrency, mining has become a serious opportunity to make a profit. From amateur hobbyists to professional miners, there is room for every to make money, given they do it correctly and have some luck going their way. Any business venture requires a feasibility assessment of what profitability can be expected and what methods can be used to increase profitability. The competition in cryptocurrency mining is intense and it gets tougher with more players in the market. Miners are looking for any advantage that can give them a competitive edge over the rest. In the industry of crypto mining, mining colocation provides some strategic advantages in terms of profitability, risk management, and efficiency.

What are the requirements for a “mining rig”?

When crypto-mining was a new concept, miners could use a few GPU (Graphics Processing Units) in their home to set up a “Mining Rig”, which essentially was their computer that was used to perform mining activities. This resulted in a decent profit for most people. As more players have jumped into the cryptocurrency market, the competition has increased. This increase in supply has resulted in the demand for more advanced mining rigs, equipment, and infrastructure. Not only is there a requirement for better performance but also reduced costs. Similar to any business venture, the ultimate goal is to achieve better profitability. GPUs have been replaced with powerful ASIC (Application Specific Integrated Circuit) devices that can perform mining calculations at a larger and more efficient scale. Each ASIC machine is designed to mine a specific cryptocurrency such as Bitcoin.

What is mining colocation?

Along with more efficient machines, miners have looked for other ways to increase profitability. One such way is to use colocation as a resource for crypto mining. Apart from buying expensive hardware, miners have to bear high costs of energy and maintenance of these high-end machines. Colocation allows you to outsource the infrastructure requirements of the mining hardware to a third-party facility. Just as miners took advantage of other shared resources such as cloud mining, VPNs, web hosting, and more, they also took advantage of remote infrastructure facilities for their ASIC mining equipment.  The customer ships their hardware to the colocation facility who has specially designed racks to install the hardware. There are different services offered depending on the level of management required.

Colocation facilities offer to house the ASIC mining equipment including energy costs, cooling, and maintenance. Some colocation facilities also offer ASIC machines for sale or rent. Miners are paying colocation facilities per unit of electricity. A lot of colocation facilities offer renewable energy as the power source. The increasing demand for performance has made colocation facilities very popular. These colocation services can handle the power requirements which might not be possible at home. In cryptocurrency mining, the internet is crucial. It is not the speed of the internet but the reliability of the internet that is most important. There is an added layer of security to keep the equipment safe. This includes CCTV surveillance, biometric scanners, and other security features to keep the mining equipment safe. There are also layers of redundancy added in case certain infrastructure malfunctions, a replacement kicks in without any interruption to services.

The economics of profitable mining  through colocation

The cost of hardware is a one-time cost at the time of purchase. The cost of hardware will depend on the components of the hardware. A high-end ASIC machine can cost a few thousand dollars whereas a basic machine might be a few hundred dollars. As expected, the high-end ASIC machine will perform better. The performance of an ASIC machine is determined by the hash rate, which is the speed of processing transactions.

Apart from the hardware costs, a colocation set up requires hosting fees. These fees are dependent on several different factors such as the location of the colocation facility, type of management required, the amount of wattage required, and other services selected. The best rates are often offered by colocation facilities with cheaper electricity. These locations are generally near major energy sources such as hydropower plants. The strategy to increase profitability from colocation mining should include reduced the colocation hosting fees to a minimum.

Most colocation facilities offer a buy or host rate on a monthly basis although different packages are offered. A term of the contract is typically 12 months but that too can vary from a few days to multi-year terms. Certain data centers do not offer crypto mining-related services due to high fluctuations of or power requirement and cooling infrastructure requirements. Therefore specialized mining data centers are increasing that are designed according to crypto mining requirements.

After securing a space for your hardware at a cost-efficient colocation facility, the next step is to look at ways to maximizing your profits form crypto mining. There are several online calculators that can use information such as your hardware model or specifications to give you an estimate of what profitability to expect.

The hash rate, usually measured in terahashes per second, determines the processing speed of hashes. Machines that are high end will require more upfront investment but will reap greater performance. The power consumption, measured in wattage, will determine the electricity cost. The goal of a miner is to have a machine that delivers crypto-mining revenue while keeping the energy costs to a minimum.

The cost per kilowatt-hour is the rate at which electricity consumption is charged. Colocation facilities are going to provide rates for electricity consumption. As part of the strategy to maximize revenue, check what features are offered by the colocation facilities. For example, if your machine is a high performance, it will require more advanced cooling. The colocation facility needs to provide these advanced cooling features to keep your machine running at optimum levels.

A typical data center designed for mining use up massive amounts of energy. Cooling is the most expensive non-IT consumption at the mining data center, it can account for 30% of the energy consumption of a mining data center. The cabinets are positioned in a design that enables ideal ventilation and quick access to the mining machines. Mining data centers cam use indirection evaporation techniques to cool the machines.

The strategy for maximizing mining profitability is to determine the optimum level of colocation facilities required for your machine hardware. If you are paying for a facility that is an overkill, then you will suffer from increased costs and therefore reduced profit. On the other hand, if you try to save money in colocation facilities, your hardware might not perform to its ability or gets damaged, this will reduce your revenue. Trying to find and maintain a balance is the key to colocation mining profitability.

If you are a solo miner, consider using mining pools. In a mining pool, a group of miners group their processing power over the same network. This can be done at a colocation facility. Keep in mind that there will pool fees which are the percentage of your revenue distributed amongst the rest of the pool. For solo miners, the return on investment might be extremely good. You have will to do your calculations to determine the feasibility of the strategy. However, one of the major advantages of the mining pool is that you might be able to achieve rewards as a group that would not be possible to do individually. The shared revenue might be acceptable compared to making no revenue at all. Colocation combined with the mining pool might be a game-changer for your overall mining strategy. Those miners that can put into a high level of processing power through the mining pool while reducing costs through a colocation facility might have the ideal balance between cost and revenue generation.