This is the first of a two-part series on the boom in Bitcoin computing infrastructure, and what it means for the data center industry.

Emmanuel Abiodun once mined for Bitcoins on a desktop computer in his home. He's now running 160 powerful computers in server space in Iceland, where the machines are cheap to power and cool. Later this year, Abiodun expects to have an empire of 4,000 bitcoin mining rigs spread across two continents, eventually filling nearly 5 megawatts of data center space.

"To be able to scale, you're going to have to look at a data center," said Abiodun, the founder and CEO of London-based CloudHashing, which leases server capacity to customers hoping to generate bitcoins. "We're definitely seeing that trend."

The journey of Abiodun and CloudHashing reflects the larger story of the Bitcoin network. After getting started in garages and server closets, bitcoin mining is moving into data centers and the cloud. Some traditional data center providers will benefit, but this transition also has the potential to enrich a new generation of entrepreneurs emerging from within the bitcoin community.

Over the past year, the computing power supporting the bitcoin network has soared, creating a powerful global network backed by 150,000 petaflops per second of computing power, roughly 600 times the combined power of the all the supercomputers in the Top500 list. Practitioners of Bitcoin mining - the term for using data-crunching computers to earn newly-issued virtually currency - are adopting more powerful hardware, pooling their efforts and seeking to slash their power bills.

An Opportunity for the Data Center Industry?

As this trend continues, "production capacity and operating efficiency will drive profit margins," writes Jeff Schvey, a bitcoin analyst at The Genesis Block. "The natural evolution of this will be large data centers that can take advantage of economies of scale."

The increasing industrialization of bitcoin infrastructure presents an opportunity for the data center industry. Large mining operations are beginning to follow the example of their forerunners in hyperscale computing, shifting compute capacity to remote areas with cheap power, including Iceland and central Washington.

But the bitcoin network may develop along several tracks, and not all of them involve traditional data centers. Some entrepreneurs in the bitcoin community are developing custom facilities to house high-density hardware, ranging from makeshift server farms in warehouses in the Pacific Northwest to futuristic racks of sleek, liquid-cooled immersion rigs in Hong Kong.

One thing is certain: Bitcoin infrastructure will need to become more energy efficiency. Recent estimates from Blockchain.info suggest that the global bitcoin network has been using between $12 million and $15 million of electricity each day, while generating $5 million to $6 million in new Bitcoins.

"Bitcoin mining is very energy intensive," said Abiodun. "Power is key, because it affects your profitability."

Bitcoin is sometime referred to as the "Internet of money" - a platform using cryptography and software to offer an alternative currency and payment-tracking system. At its heart is a huge distributed computing network that verifies each transaction. Participants in this online ledger – which includes individuals, corporations and mining collectives – are rewarded with new bitcoins, which are issued about every eight minutes. This ability to discover new coins has prompted the "mining" analogies, which some say are misleading.

"I hate the term," said Josh Zerlan, Chief Operating Officer for Butterfly Labs, a Bitcoin hardware specialist. "We're not mining. This is transaction processing.”

Cloud Hashing: Building Big

CloudHashing has been the first major bitcoin specialist to go public with its use of data centers. The UK-based company has set up shop near Reykjavik, Iceland in a data center operated by Verne Global. The company's presence in Iceland was profiled in The New York Times, and is about to get a lot bigger.

"Our mission is to bring Bitcoin mining to everyone in an easy and affordable way," said Abiodun, who said the service has grown from 800 customers in September to 5,000 in early January. To meet that surge in demand, he has ordered 1,500 custom mining rigs using ASICs (Application Specific Integrated Circuits) to crunch data for creating and tracking bitcoins, which he says will boost CloudHashing's Iceland operation to 2.5 megawatts of power capacity.

Expansion in Dallas

That's not all. As soon as next month, CloudHashing plans to open a new data center in Dallas where it will launch an armada of water-cooled mining rigs from CoinTerra featuring cutting edge 28nm ASIC chips. He says the Dallas facility will operate at "an unprecedented scale," and could eventually house 2,500 machines and use 2.3 megawatts of wholesale space.

That's not on the immediate horizon, as it was only last week that CoinTerra unveiled the first working prototype of its new TerraMiner IV system. CloudHashing is partnering closely with CoinTerra, a Silicon Valley bitcoin hardware startup headed by Ravi Iyengar, former lead CPU architect for Samsung.

"We always ensure that we're using the very latest hardware," said Abiodun. "We're major hardware buyers, so it's essential that our approach is as efficient as possible."

In addition to buying CoinTerra rigs for its own customers, CloudHashing is also supporting Terramine Hosting, which will house hardware for CoinTerra customers. For $1,899 to $2,999 per year, customers who buy CoinTerra's 4U systems can house them in Terramine racks in CloudHashing's data center.

IceDrill: Powered by Bitcoin IPO

CloudHashing isn't the only Bitcoin mining outfit teaming with hardware vendors and data center providers. IceDrill plans to build a powerful mining facility in a data center in Canada, which will be populated with 28nm ASIC machines from HashFast, another Silicon Valley hardware startup. Like its rival CoinTerra, HashFast has seen delays in shipping its mining computers, but recently delivered the first units to IceDrill for testing.

IceDrill is backed by a unit of PetaMex, which raised capital through a public offering on a platform for Bitcoin investors. Photos of the company's data center, posted by IceDrill co-founder Willem van Rooyen, depict a commercial data center featuring Trane chillers and Cummins generators. The company isn;t disclosing the location or provider of its facility. "We're glad to be working with a data center which is not only willing (and able) to cater to our 'special needs,' but also excited by the future prospects of the Bitcoin mining space," van Rooyen shared on Bitcoin Talk.

HashPlex: Walking With the Cloud-Builders

A startup called HashPlex is hosting bitcoin hardware in sites in Seattle, and is preparing to open a new data center in central Washington state, where its neighbors will include Microsoft and Yahoo cloud server farms that are among the world's most efficient facilities. The company says it is backed by venture capitalists and angel investors and will launch with the ability to support customers with "megawatt-plus" power requirements. The HashPlex team includes veterans of Microsoft, Google and the Open Compute Project.

"We think there is a need for hardware hosting as mining moves from being a hobbyist activity to something bigger," the company said in a post on Reddit. "Traditional datacenters are way too expensive and offer more redundancy in all respects than we really need. None of the options are what we'd call miner-friendly. So we started building HashPlex. We're building out a data center in central Washington where power is clean and cheap."

HashPlex will host customers' mining hardware for $99 per kw-month (1000 watts used constantly over a one-month period).

Custom Facilities: Homebrew at Scale

While some bitcoin mining operations will seek out established data centers, others are creating their own facilities. Among these is MegaBigPower, which also operates a facility in Washington state. Seattle entrepreneur Dave Carlson has created a bitcoin mine from a former warehouse filled with more than 1,300 custom rigs running nearly 300,000 ASIC hashing chips, according to a post at BitcoinTalk.

Bloomberg BusinessWeek recently had a look inside Carlson's operation: "Inside the facility ... row after row of Bitcoin computers sit on cheap metal racks he bought at Home Depot. Industrial fans on the floor keep the machines cool."

At the other end of the spectrum is a Hong Kong facility operated by ASIC Miner, in which rows of rack-mounted tanks are filled with Novec, a liquid cooling solution created by 3M. Inside each tank, densely-packed boards of ASICs run constantly as they crunch data. As the chips generate heat, the Novec boils off, removing the heat as it changes from liquid to gas.

"Unheard of" Development Path to Custom Hardware

Data center development is an expensive business, which historically has created a high barrier to entry. It would seem unlikely that bitcoin entrepreneurs could create their own custom facilities.

But there's an interesting precedent in the bitcoin hardware industry, according to professor Michael Bedford Taylor, who heads the Center for Dark Silicon at the University of California at San Diego (UCSD). Taylor notes that the evolution of bitcoin ASIC hardware followed an unusual template.

The pursuit of more powerful mining machines "led to the development of customized silicon ASICs without the support of any major company," Taylor writes in a paper profiling these grass-roots efforts. "The users self-organized and self-financed the hardware and software development, bore the risks and fiduciary issues, evaluated business plans, and braved the task of developing expensive chips on extremely low budgets."

Bedford, who was among the developers of the TILERA many-core computing architecture, says this path was "unheard of in modern times, where last-generation chip efforts are said to cost $100 million or more and the number of ASIC starts drop yearly."

A number of these hardware startups have funded operations through pre-orders for hardware, which has led to customer complaints when development is delayed, as has happened with several providers.

Bankruptcy Illustrate Risks of Fast-Moving Business

There are risks in the bitcoin infrastructure business, as seen in the case of Alydian, a company formed by VC-backed Bitcoin incubator CoinLab to provide "enterprise-scale mining." Alydian filed for bankruptcy in November, just three months after coming out of stealth mode, saying rapid advances in hardware had undermined its business plan. CoinLab told the Wall Street Journal that the dramatic increase in mining speed in the Bitcoin network has lowered returns for all Bitcoin miners, leaving Alydian unable to deliver on contracts to mine bitcoins for its investors and customers.

It's a fast-moving and sometimes tricky landscape, and it's hard to say how regulations might affect the future adoption of bitcoin. But data center operators are beginning to pay attention.

"It's too early to tell, but the bitcoin industry does require a lot of power and cooling to support mining," said Lisa Rhodes, VP of Sales and Marketing at Verne Global, which hosts CloudHashing. "We view the bitcoin industry’s potential as a new customer segment no differently than any other industry that has the same type of high computing and power requirements."

One challenge is that many bitcoin businesses currently have difficulty finding banks to work with them. About 60 hosting providers allow customers to use Bitcoin to pay for hosting services, including NameCheap, UK Host, Wordpress.com, SugarHosts, InterNOC 24 and Woo Servers, among others.

Accepting Bitcoins: Early Movers Emerge, But Risks Remain

“Not a lot of hosts use it so you’re opening yourself into a new market,” CubicWebs CEO Michael Dance recently told The WHIR. “I liked the idea of it and anyone can use it just by using the Internet.”

One advantage of bitcoin is that it eliminates chargeback risk, as payment takes place directly and immediately. The downside is the fluctuation in the value of Bitcoins, which have bounced between $500 and $1,100 in value over the past three months.

Obiodun says Bitcoin's rise in value is attracting larger investors to the space, which translates into more substantial backing for bitcoin enterprises, including mining operations. That could include some of the world's leading technology investors. An example: a secretive company named 21e6 has raised $5 million. Business Week reports that 21e6 includes wealthy members of the Silicon Valley elite who are developing specialized hardware to "build the world’s largest Bitcoin mine - a virtual money printing machine."

For his part, Obiodun expects that the success of CloudHashing will allow him to examine more efficient data center designs, including immersion systems similar to the one created by ASIC Miner in Hong Kong.

"We're making substantial investments in hardware," he said. "We've had a remarkable amount of growth. We firmly believe we're at the early stages of the expansion of the bitcoin network."

In part two, we look at the future path of bitcoin's infrastructure, including the opportunities and challenges in centralization, and the potential role of fees in the bitcoin network.