“Virtual currencies, perhaps most notably Bitcoin, have captured the imagination of some, struck fear among others, and confused the heck out of the rest of us.” – Thomas Carper, U.S. Senator (D-DE)
Whether it is Bitcoin, Ethereum, Ripple, Litecoin or one of the almost thousand other cryptocurrencies on the market today, virtual currencies are certainly now all the rage, both in the technological world and in financial circles. Building is not going to wade into the sea of literature already out on cryptocurrencies. What we will discuss, however, is the peculiar relationship between cryptocurrency and real estate, particularly older, aging industrial infrastructure. Like many things we perceive as “virtual,” even cryptocurrencies have a bricks-and-mortar underpinning. To understand the leap from bitcoin to bricks-and-mortar, one first has to understand basically how cryptocurrency transactions are validated online.
Bitcoin. Image by casino via Open Clipart.
Most of the literature will describe the process in far more sophisticated technical terms, but for Building purposes, a broadband connection brings a cryptocurrency transaction to a computer. The computer then tries to solve a mathematical puzzle associated with that cryptocurrency transaction. If the computer successfully solves the puzzle, it transmits the solution back through the broadband connection, and the transaction is validated and confirmed as authentic. Most importantly for our purposes, the computer that solved the puzzle gets a commission, expressed as a miniscule percentage of the value of the cryptocurrency transaction that it just validated. This process is called “cryptocurrency mining” and the computers that solve the puzzles are called “mining rigs.”
Mining rigs can be anywhere and almost any type of computer. One of the touted benefits of cryptocurrencies is that it does not need a centralized government or bank computer to verify each transaction. Indeed, at least in the early days of bitcoin, much of the cryptocurrency mining was done by individual tech geeks in their basements and the mining rigs they used were Pentium laptop computers from Best Buy.
Alas, that was then, and this is four years later (a veritable lifetime in technology years). Today’s cryptocurrency mining rigs are specialized computers (smaller than a bread box, with no monitors and no keyboards) with names like “Bitmain Antminer S9,” “Whatsminer M3,” and “Ebit 10.” Furthermore, while there are still some “ma and pa” cryptocurrency miners out there, the days of the small cryptocurrency miner seem gone, with modern cryptocurrency mining done in giant “cryptocurrency mining farms” — data centre-like warehouses with thousands upon thousands of these mining rigs lined-up in racks from floor to ceiling. Like almost all other industries in the world, cryptocurrency mining has gone big in order to realize economies of scale.
Now for the bricks-and-mortar nexus and why these cryptocurrency mining farms translate into demand for Canadian real estate. Thousands of mining rigs lined-up in racks from floor to ceiling require a lot of electricity — both to power the mining rigs and to cool the tremendous amount of heat that each mining rig generates. Furthermore, cryptocurrency mining farms need reliable broadband with large bandwidth capacity. Finally, as an adjunct to the cooling issue, most of these mining farms are better situated in colder climates where cooling is naturally that much more affordable.
Currently, almost all large-scale cryptocurrency mining farms are in China. There are probably historical reasons for this: cheap, state-subsidized electricity, cold climates in the north and western parts of the country, and the relatively cheap supply of leading-edge mining rigs (almost the entire world’s supply of specialized cryptocurrency mining rigs are made in China by a handful of specialty manufacturers, and the number of these mining rigs that are distributed outside of China is miniscule compared to those bought-up by the Chinese domestic market).
It has been widely reported in the mainstream press, however, that the Chinese government is clamping down on the expansion of domestic cryptocurrency mining farms. This has set the stage for almost all of the expansion of cryptocurrency mining farms to take place outside of China, and Canada fits the bill surprisingly well: relatively available broadband; relatively affordable hydro; and relatively cold climate (especially this winter!).
Most of the cryptocurrency mining farm clients that have already come over from China have gone to hosting and co-location facilities in Québec, both because of that province’s relatively economical electricity prices and because of Québec’s public openness to doing business with these Chinese entrepreneurs. To a lesser degree, Chinese mining farms have also been seen conducting diligence in Manitoba (cheap electricity) and British Columbia (just because the Chinese always seem to investigate British Columbia).
The problem for the Canadian landlords and power suppliers (both government and private) will be to separate the wheat from the chaff, and to determine which of the pending flood of Chinese cryptocurrency miners are going to have the wherewithal and capital to actually be viable in this country, in a business which itself is wildly volatile.
That said, the facilities that make ideal cryptocurrency mining farms are surprisingly low-tech and capital un-intensive. Some have described them as nothing more than old warehouses with lots of computer racking, lots of fans, and a lunchroom! Therein lies the greatest opportunity for Canada — older industrial and commercial facilities that are in need of retrofitting and renovation, can be easily re-tasked to capitalize on this new industry. The very buildings that Canada currently has little current use for (including derelict or underutilized power plants and industrial facilities) can be re-tasked to cryptocurrency mining with almost no capital outlay whatsoever. Alas, opportunities in the tech industry come and go in a blink of an eye, and only time will tell which parts of the country can seize this opportunity before it too goes the way of the VCR, CD ROM, and snail mail.
Megan J. Lem is a corporate lawyer in the Toronto Office of Oslers LLP. This article reflects the personal views of the authors alone.
Jeffrey W. Lem is Editor-in-Chief of the Real Property Reports and the Director of Titles for the Province of Ontario. The opinions expressed in this article are personal to the author and not attributable or referable to the government of the Province of Ontario.