Bitcoin Mining Facilities - What Property Insurers Should Know
Bitcoin mining facilities are not your traditional data processing centers. Over the past decade I've had the opportunity to review the property specifications of dozens of data centers, including many cryptocurrency mining facilities. In my experience, crypto-mining facilities often have risk features that make them more hazardous than underwriters typically envision when they think about a “data processing center.” Before insuring these facilities, Property underwriters should consider a few things.
Digital “mining” is the process of generating new units of cryptocurrency (usually Bitcoin) by solving complex mathematical problems that have become more challenging over the years by virtue of how Bitcoins were originally encoded. As the price of Bitcoin increases, so do the number of data processing facilities dedicated to mining it.
Here are some red flags for risks unique to a cryptocurrency mining facility’s Property hazards:
Crypto-mining requires vast amounts of computer processing power and is therefore extremely energy intensive, often resulting in facilities that are located in more remote areas where land or buildings are less expensive to lease, but adjacent to a power supply able to meet its requirements. [Learn more from web article: “Bitcoin consumes more electricity than Argentina”]
The downside to remote locations is that they typically receive a delayed fire-fighting response. Due to the sense of urgency involved in digital mining, the equipment is usually pushed to its operating limit and I encountered one risk with a temporary, sub-standard cooling arrangement.
It’s not uncommon to repurpose a large factory, such as a retired metals smelter or other heavy manufacturer, into a crypto-mining operation because of its excellent connection to the power grid. [Learn more from web article: “Inside the Massive Crypto-Mining Plant in Massena, N.Y.”]
This is an ingenious way to use a site that might have otherwise remained idle. It does, however, result in some non-traditional construction types and unusual building configurations that also lack the automatic fire suppression systems common in other data centers. I've also reviewed a few submissions that included an electrical substation and power generating unit as covered property.
Lack of Clarity
It’s not always apparent that a risk is a crypto-miner. To be clear, many submissions provide plenty of detail, including a site survey. However, at the other end of the spectrum, you might just receive a narrative copied from the insured’s website, and a statement of values that raises more questions than it answers. We recently received a submission that simply indicated “Electronic Data Processing Center.” We researched the company online and discovered it was a Bitcoin miner owned by a foreign company. When we informed our client, they declined to quote.
Yet another insurance submission I reviewed failed to disclose a significant investigation and ongoing legal action against the insured’s management team. Fortunately, a simple Internet search can often reveal critical details.
Submitted Values vs. Replacement Cost
The computing equipment used to mine cryptocurrency is unique. Traditional data centers might route information across the Internet with a collection of routers or servers, but the mining of digital currency requires powerful graphics cards or, more recently, ASICs (application specific integrated circuits, designed specifically for mining) to unlock the code and subsequent reward. This equipment is very sensitive to supply and demand, and it’s quite likely that it may be more costly to replace after a loss, especially if the currency value continues to rise. [Learn more from web article: “Bitcoin Mining Machine Shortage Worsens as Bitmain Sells Out Through August”]
It is important to consider the values you are using as a rating basis and ask yourself if those values accurately represent the way policy terms and conditions will respond after a loss.
In a final note of caution, cryptocurrency mining is under acute pressure to produce results as fast as possible, but that pressure doesn’t need to lead to careless underwriting decisions. As described above, the spectrum of Individual Risk features found in cryptocurrency miners is much broader than that of traditional data processing facilities - and therefore requires additional underwriting considerations. Property insurers should make sure they are contemplating the actual risk characteristics they are insuring, with terms and conditions tailored to their level of risk tolerance.
As always, please reach out to me or your local Gen Re representative for insight into underwriting cryptocurrency miners and to discuss reinsurance solutions.