(Corrects second paragraph of story published Oct. 22 to show hardware sales have stopped; clarifies that quote in eighth paragraph refers to whole industry.)
A Swedish company that estimates its equipment is behind about 25 percent of the bitcoins being generated is looking beyond servicing unhappy clients.
KnCMiner is expanding its own data center where thousands of its machines mine bitcoin and similar software by solving complex algorithms. The shift in focus comes after industry sales of hardware “have stopped,” according to KnC co-founder Sam Cole.
After bitcoin’s price collapsed from a high of more than $1,000 to lows of around $300 earlier this month, customers once eager to mine the digital currency have started to ask for their money back, Cole said. Yet the pullback by individuals who had hoped to grow rich in their garages belies the potential for companies that have built up the scale to stick the course, he said.
“There’s still going to be $2 billion, at today’s price, mined in the next few years,” Cole said in a phone interview. “That’s a lot of cash that’s up for grabs and we’re going to do our best to take a decent chunk of it.”
After raising $14 million in venture capital, KnC is looking at more locations in Iceland andSweden as it aims to control as much as 20 percent of the bitcoin mining market, compared with the 5 percent it mines itself today.
Seeking Capital
KnC is now trying to secure a second cash injection, targeting $50 million to build more data centers and develop new mining equipment.
Cole says the biggest miners will end up profiting most as scale becomes increasingly important. KnC generates bitcoin at a cost Cole says is “significantly below $400” per unit. The company does its mining in a helicopter hangar in Boden, a Swedish town near the Arctic circle, where it’s in the process of tripling capacity.
“When we don’t have these customers buy our hardware it becomes a different business model. It becomes much easier, much more open, much more honest,” Cole said, referring to the whole industry.
One bitcoin currently trades at about $388, representing a 47 percent decline year-to-date. There are 21 million possible bitcoin units that can be mined, with about 13.4 million already in circulation, according to blockchain.info.
Bitcoin Scandals
Since its inception in 2008, bitcoin has been linked to a series of corruption scandals spanningmoney laundering to payment to view child pornography sites. Yet proponents of the software are attracted by an absence of banking fees and the prospect of a decentralized alternative to fiat currencies. And despite regulatory challenges and other glitches, bitcoin has managed to attract sufficient venture capital to continue growing.
The virtual currency is generated by miners who are rewarded in bitcoin for processing transactions by making complex calculations. Though it takes less heavy lifting than traditional mining, the massive amounts of computing power, electricity and cooling have driven a rapid industrialization of the business.
Since KnC started in June last year, it has sold bitcoin mining computers worth $75 million. When it entered the market, one bitcoin unit was trading at about $120.
“If we were an IPOed public company, which we may be some day, our share price would of course fluctuate with the bitcoin price,” Cole said. “It would be a wild ride.”
KnC says its shift in focus reflects an industry-wide trend.
“We’re seeing a complete change in the industry,” Cole said. “It’s accelerated out of the garage and the homes, to the small businesses, to the large data centers, and now you’ve got to have a megadata center for it to be profitable.”
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