Cryptocurrency mining equipment breakdown risks
© Getty Images

Cryptocurrency mining equipment breakdown risks

Q&A with Leila Ameri,
Director Underwriting

    alt txt



    What is a cryptocurrency?

    • Cryptocurrency is a form of currency that exists digitally, as an encrypted data string. Since it only exists in digital form, a network of servers and other specialized hardware are required to create and distribute the currencies.
    • Cryptocurrencies operate independently, meaning they do not rely on governments, central banks or other central authorities for backing.
    • Cryptocurrency is decentralized and operates on a distributed ledger called the blockchain, which records and keeps a history of all transactions.
    What is cryptocurrency mining?
    • Cryptocurrency mining is the process by which transactions are verified and added to the distributed ledger (blockchain) of a cryptocurrency.
    • The individuals or organizations who perform cryptocurrency mining are called ‘miners’.
    • Units of cryptocurrencies are created through a process called mining, which involves using a network of computers and specialized hardware to solve complex mathematical algorithms. The first miner to solve the algorithm is rewarded with newly created cryptocurrency as well as transaction fees.
    What are the main risk factors of crypto mining that we need to be aware of?

    1.    Mining requires high speed

    • The first miner to complete the work gets paid and all others do not. Therefore, crypto mining requires high speed to handle complex, cryptographic algorithms. This speed comes with a price: mining servers require significantly more electrical power than commercial servers and thus generate significantly more heat.
    • High speed requirements mean capacity can be added quickly, but equipment is treated as a commodity and discarded when it fails, rather than repaired.

    2.   Power source adds risk

    • The source of incoming power can introduce additional risk.
    • Mining operations often locate alongside either their own power source, such as hydro, solar, coal generation or inexpensive fuel such as natural gas, where they can generate their own electrical power.

    3.   Power delivery and distribution infrastructure

    • A typical cryptocurrency mining data centre may be housed in shipping containers.
    • Because of the large amount of power consumed by mining operations, attention should be directed to how the electrical power is delivered to each container, including the backup power system infrastructure.
    • Generally a crypto mining data centre cannot justify the cost of back-up power, such as dual electrical power systems or back-up generators, so they are at high risk of business interruption.

    4.   Facility building structure

    • Modular data centres, where container-type structures are connected to power, internet and heat removal, are more susceptible to damage and environmental factors, such as weather, earthquake and flood.
    • Many mining operations will fabricate their own containers to save costs and may introduce risks to the structure, as well as to the equipment contained, such as power distribution, HVAC, network distribution and switching.

    5.   Inadequate cooling will bring down the entire data centre and damage equipment 

    • Mining servers generate vast amounts of heat and operate at much higher temperatures than standard commercial servers.
    • As mining operations strive to reduce costs, they would be more inclined to rely on ambient cooling such as fans, rather than chillers, which are more effective.

    6.   Who owns the assets?

    • Often the mining operation is a subsidiary of a larger organization, a venture capital funded initiative, or a joint venture, where only some of the assets are owned or controlled.
    • If the miner has no control over anything but the servers, it can be difficult to determine things like power feeds, equipment maintenance and equipment operations.

    To really understand the risks associated with cryptocurrency mining operations, each component of the mining operation’s configuration must be evaluated. Even though each of those components are not considered new technology, how they are used together influences the risk.

    In addition, as with any developing new business, lenders and insurers continue to increase their understanding of crypto mining and have yet to establish a good level of comfort with the array of risks.

    Connect with Leila Ameri on LinkedIn

    This article is for informational purposes only and is not intended to convey or constitute legal advice. HSB makes no warranties or representations as to the accuracy or completeness of the content herein. Under no circumstances shall HSB or any party involved in creating or delivering this article be liable to you for any loss or damage that results from the use of the information contained herein. Except as otherwise expressly permitted by HSB in writing, no portion of this article may be reproduced, copied, or distributed in any way. This article does not modify or invalidate any of the provisions, exclusions, terms or conditions of the applicable policy and endorsements. For specific terms and conditions, please refer to the applicable insurance form. Posted on June, 2023

    Subscribe to our newsletter 

    We want to provide you with insurance, engineering and technology information you need to stay ahead of the game.