Risk, Insurance, and the Age of Digital Mining

As Bitcoin and other cryptocurrencies gain in popularity, insurers must better understand their exposures

October 07, 2021 Photo

Since the introduction of Bitcoin and cryptocurrencies in 2009, the use of digital currencies has continued to grow. Early adopters utilized personal computers to complete the necessary steps that would result in new digital “coins.” Commercial deployment of specialized mining servers and the introduction of mining farms soon followed.

 The Y2K crisis in the late 1990s was likely the insurance industry’s first large scale introduction to the risks of insuring technology. The insurance industry normally relies on historical actuarial data that details frequency and severity of loss. The rapidly changing nature of crypto mining technology makes actuarial data unreliable. Therefore, while Bitcoin and cryptocurrencies have been mined for over 10 years, a large portion of the insurance industry is still not comfortable underwriting this type of risk.

 The words “crypto mining equipment general liability coverage” or “Bitcoin mining equipment insurance” yield few search results, indicating that there is no widespread specialized coverage for crypto or Bitcoin equipment. However, crypto mining equipment would readily fall under the description of computer hardware or data center server equipment, terms that insurance carriers have experience with. This article will provide color on underwriting and post-loss considerations for an industry that is growing far quicker than most expected.

What Is Cryptocurrency?

Endorsements by high-profile tech entrepreneurs, sports figures, and investment bankers have made Bitcoin a household name. Cryptocurrencies are digital currencies that use a cryptographic approach to regulate the generation of currency and verify the transfer of funds. Unlike the U.S. dollar or other government regulated money, Bitcoin is decentralized, and trusted third parties do not verify transactions. Instead, the currencies rely on blockchain technology, a secure public ledger that is programmed to record all of the transactions. This method of public recording prevents people from making copies, undoing transactions, or spending coins they do not own. While there are more than 6,000 cryptocurrencies in existence, we will focus on Bitcoin simply because of name recognition.

Regardless of how cryptocurrencies are or will be utilized, hardware manufacturers are currently experiencing a surge in demand for mining servers that can efficiently verify transactions and mine new digital coins. This is because the value of Bitcoin is high enough to make investment in equipment worthwhile. If the value of Bitcoin drops, the demand for the equipment will also drop. This makes equipment valuation highly volatile.

Mining Bitcoin

The original developer of Bitcoin designed the system with a supply limit of 21 million coins, while the blockchain can continue to record an unlimited number of transactions. Bitcoin is housed on a network of computers, connected through the internet, called nodes. The Bitcoin ecosystem is subject to a set of rules that applies equally to everyone. Since it is based on cryptography, these rules involve solving complex mathematical problems. Miners and nodes keep the system going.

The cost of mining boils down to the cost of leasing a facility, the cost of equipment, and power consumption. The more computing power that is employed to solve the mathematical problems, the bigger the share of the monetary reward. The surge in Bitcoin price, and in public interest in cryptocurrencies in general, has incentivized hardware manufacturers to build efficient computer servers that are designed specifically for mining. Because mining involves an understandable sense of urgency, equipment is expected to operate continuously at its functional limits.

When considering a computer data center, the infrastructure setup is traditional. The data center is a specialized, protected, climate-controlled area within a building that, in many cases, incorporates filtration solutions to maintain the flow of clean air. Data centers are designed to optimize the reliability of the equipment housed within and protect the data on those pieces of equipment. This is done at considerable expense, which is not always cost effective for crypto mining operations.

According to Peter Hakenen, property/casualty senior consulting underwriter at Gen Re, Bitcoin mining facilities are not traditional data processing centers. They often have risk features that can make them more hazardous. Crypto mining requires vast amounts of computer processing power, which makes it extremely energy intensive. This is why it’s common to repurpose a large factory, with excellent connection to the power grid, as a crypto mining operation. However, this may result in unusual construction types and building configurations that also lack the automatic fire suppression systems common in other data centers.

Hardware Failures

Like other connected electronic devices, crypto mining servers experience software related issues, improper set up challenges, network connectivity difficulties, and other problems that are easily solvable. Unlike traditional data centers with proper environmental controls, crypto mining hardware is placed in unique locations with cost of electricity and equipment-cooling needs as the primary drivers. Dust, temperature fluctuations, elevated humidity, and salinity are rarely controlled in these types of environments. The lack of controls contributes to failures related to improper heat dissipation and electrical bridging:

•     Heat dissipation—Heat can adversely affect crypto mining hardware and may impair safety, performance, and reliability. Excessive heat caused by poor dissipation will degrade performance in the form of slowing operating speed. It could also damage circuit board assemblies and could result in a fire.

•     Electrical bridging—When electricity strays outside the established pathway of an electrical circuit, it can result in hardware damage, electrical shock, or even a fire.

•     Power surge—When a power surge occurs, it searches for the easiest path to ground. In many cases, this path is directly through sensitive electrical and electronic components that are not designed to be protected from the high currents. This over-voltage condition is only momentary, but it can cause severe damage to the components in the ground path. It manifests as overheating, breakdown, or fire.

•     Power quality—If the supplied voltage and current is within a set of parameters, the electrical power is of good quality. If the voltage or current—or both—are outside of those parameters, the power quality is likely poor. The majority of power quality problems are related to issues within a facility as opposed to the utility. Typical problems include grounding and bonding problems, wiring issues, code violations, and internally generated power disturbances.

Example of a Loss

A loss recently observed involved a fire in one of two adjacent shipping containers that housed Bitcoin mining servers. The containers were stored outdoors in front of large transformers that energize the servers inside. The fire consumed the majority of the container contents. The origin appeared to be the power distribution panel within the container. A closer look at the 480V cable that entered the panel revealed chafing damage to the insulation and shielding of a wire. This is typically caused by wires rubbing against each other or a rough surface.

The cable had been inserted through a hole on the back of the container. A protective sleeve was not installed in either of the observed holes, and the wiring insulation was touching the bare steel. The claimed electrical arc explosion and resulting fire were likely a result of a combination of inadequate protection around the hole in the cabinet and large, side-mounted fans that caused the container to vibrate such that, over time, the cable insulation chafed, eventually exposing the electrical wiring. The wiring came in contact with the container, which is grounded, and caused a short circuit. This is an example of improper installation that would not meet code in a regular structure.

Post-Loss Considerations

While replacement with like, kind, and quality (LKQ) is typically straightforward, the current volatility and non-standard supply chain make valuation very difficult. Recovery of hardware that exhibits contamination is not as clearly understood.

The second adjacent container discussed in the loss example did not sustain physical damage. However, corrosive contaminants settled on sensitive electronic circuitry. Along with construction/environmental debris, corrosive and conductive contaminants cause circuitry to overheat and bridge between electronic components. This scenario also happens daily in data centers and office buildings that house computer equipment. A fire erupts, materials in and around that limited area are consumed, and equipment in other parts of the facility are coated with soot and claimed as damaged.

While environmental debris is normally removed when preventive maintenance is performed, many equipment owners elect not to power down equipment that is utilized around the clock. Following a fire, unexpected equipment failures, which directly translate to business income loss, present an unacceptable risk. Bitcoin mining servers currently have a five-month lead time and demand is not expected to slow as Bitcoin’s value increases. Therefore, replacement may not be the best option.

Professional decontamination is a sought-after option. It restores the Bitcoin servers to the same cleanliness levels they had when first manufactured and allows owners to resume production with minimal downtime. The post-decontamination cleanliness is almost always better than what existed in those servers just before the loss.

The advent of cryptocurrencies ushered in the modern-day thrill of a digital gold rush. While gold nuggets were physically mined in the Sacramento Valley, cryptocurrencies can be mined from anywhere electronically. By design, the inventor of Bitcoin made it harder to mine new coins as circulation increased. Solving complex mathematic problems and updating the blockchain now requires a great deal of computing power, hence the global increase in electricity consumption in an industry that surpassed $1 trillion in value.

The hardware infrastructure behind the cryptocurrency network is not regulated. Some equipment owners stage mining servers in proper installations, such as data centers that meet building and electrical code; while others opt to save on the cost of infrastructure in an effort to deploy more capital on mining hardware.

Many insurance companies view lax risk management practices as a reason to resist coverage. However, if a site survey is performed, allowing the insurance underwriter to properly assess risk and recommend a policy premium based on observed loss prevention practices—and in consideration of post-loss restoration techniques that have been employed successfully for decades in far more sensitive industries—the overall risk of underwriting a crypto farm can be successfully managed.

No different than other losses involving time-sensitive equipment, replacement hardware with a five-month lead time presents a challenging dilemma when business income loss is measured in minutes. Every 10 minutes, a new Bitcoin block is added to the blockchain. While the hardware infrastructure is not regulated, there are industry standards for the electronic circuitry within the Bitcoin servers. Restoring equipment back to those industry standards is the foundation of a successful recovery. Meeting published cleanliness and functional requirements instills confidence that a loss can be settled, and the equipment owner made whole. 

About The Authors
Amir Rubin

Amir Rubin is executive director at AREPA and a senior technical consultant at Envista Forensics.  amir.rubin@arepa.com

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