Why Bitcoin Mining Is Booming in Iceland

At the southwestern tip of Iceland is a barren volcanic peninsula called Reykjanesskagi. It is home to the towns of Keflavik and Njardvik, with a population of about 19,000, and the country's main airport.

At the edge of the settlement is a cluster of metal-clad buildings belonging to the IT company Advania, each roughly the size of an Olympic swimming pool. Less than three years ago, there were only three. By April 2018, there were eight. Today there are 11.

While Iceland thrives in this regard, there is one thing that Icelanders generally don’t enjoy: the weather.

Life on the North Atlantic island is often cold, foggy and windy, though hard frosts are uncommon. The capital, Reykjanesskagi, averages about 41 degrees Fahrenheit (5 degrees Celsius) annually, and even when summer warmth arrives, the mercury rarely rises above 68 degrees Fahrenheit. Iceland has realized that even if this climate isn't ideal for sunning on the beach, it's great for one particular industry: data.

Each of the ADVANIA buildings in Reykjanesskagi is a large data center, housing thousands of computers. They are constantly processing information, processing instructions, transferring data, and mining Bitcoins. Data centers like these generate a lot of heat and require 24/7 cooling, which usually requires considerable energy. In Iceland, however, data centers don't need to constantly run powerful cooling systems to regulate the heat. Instead, they can let the brisk subarctic air in. Such natural cooling reduces ongoing costs.

VerneGlobal says Iceland is the only data center in the world with 100% sustainable green energy

Data demand is growing rapidly

As a result, Iceland's data center industry has expanded rapidly over the past few years, led by three companies that dominate the local market. Advania rents space primarily to bitcoin miners. Verne Global, founded in 2012, focuses on the supercomputing needs of corporate clients such as BMW, which has used Icelandic processing power for complex calculations such as crash simulations. A third company, Etix Everywhere Borealis, says it uses blockchain technology to serve clients as well as supercomputing clients.

So how do you measure the growth of this industry? Rapid construction rates are one way, but there are other metrics, such as energy consumption. Data centers are hungry for electricity, and electricity consumption by large data centers in Iceland more than doubled last year. It is expected to rise again by nearly 50% in 2019.

Energy use in large data centers in Iceland

Source: Data created by the Icelandic National Energy Agency via a data wrapper

Another way to measure it: The industry is already a significant part of Iceland’s economy. A KPMG report states that in 2016, before the current explosion really took hold, the data center sector already contributed nearly 1% of the country’s GDP. While there’s no clear data available yet, the recent expansion will increase its role in the local economy.

A combination of factors has led to this lightning-fast growth, including a favourable climate, competitive electricity prices and access to renewable energy, says Einar Hansen Tómasson, project manager for Invest Iceland, a public-private partnership that promotes Iceland abroad.

The country is working to keep up the momentum: a promotional slogan used when investing in Iceland is that it is “the coolest place for data centers.”

However, natural cooling of data centers is not an Icelandic invention, and there is competition from other northern countries. For example, Facebook built a naturally cooled data center in northern Sweden in 2013. Other tech giants, including Google and Apple, have also decided to build their own data centers elsewhere in the Nordic countries. The Danish Energy Agency predicts that new data centers will account for 85% of the growth in electricity consumption in the Danish business sector between 2017 and 2030.

Data is growing rapidly in the Nordic countries: Denmark expects data centers to account for 85% of the country’s growth in electricity use by 2030.

More money, more problems

Iceland’s data center companies promote themselves as clean: after all, virtually all of the country’s electricity is generated by renewable energy sources like geothermal and hydroelectric power.

But Iceland’s image as a place for green energy has become more complicated in recent years. Under an EU system similar to the carbon offset scheme, Iceland’s energy producers have been selling green energy certificates to energy customers elsewhere in Europe. This allows foreign customers to call their electricity renewable even when it’s not, because they are offsetting Iceland’s production.

However, a 2016 report commissioned by the Icelandic government warned that improper monitoring of the sale of energy certificates could end up leading to double counting, with foreign offsets and local companies both claiming the same renewable energy. This could mean problems for Icelandic companies advertising their products and services as 100% clean.

Advocates in the data center industry see it differently. Einar Hansent Česká Masson of Invest Iceland stressed that despite exporting green certificates, the electricity produced in Iceland is still renewable. He said Iceland's energy grid is not connected to any other country, so when certificates are exported, the energy "doesn't go anywhere."

It’s not just certification that’s causing problems, though. Lately, the industry has faced criticism from conservationists who see cryptocurrency mining as a waste of Iceland’s resources.

“Iceland does not have unlimited energy,” said Andri Snar Magnusson, a local writer and environmentalist who has spoken out against the country’s bitcoin industry. Existing energy is needed to power electric vehicles, he said.

But energy is used “very responsibly” in Iceland, said Gósli Królkatrónarson, chief commercial officer at Advanya Data Centers.

Even if Iceland’s data centers can resolve these issues, another factor could hinder their long-term success: connectivity.

Data center connectivity has long been an issue in Iceland, with a major pipeline to Greenland and Canada having broken several times in recent years.

Located about 500 miles from major European economies, Iceland has three undersea data connections to the rest of the world. That may not be enough if it wants to become a big player in the market. In fact, one of those cables, Greenland Connect, broke down in December, leaving Iceland with only two cable connections for the time being. Ways to make Iceland more competitive could include more connections, more competition, and lower prices, according to a 2018 government report. (Preparations for a fourth cable, which could connect to Ireland or the U.K., are currently underway.) Until then, companies that rely not just on sheer computing power but also on quickly transmitted information may choose to keep investing elsewhere.

Still, data scientists and cryptocurrency miners are desperate for more capacity, which means companies in Iceland are building more and more.

This year, Etix Everywhere Borealis completed its first large data center outside of southwestern Iceland. In the North Coast village of Blundus, which has a population of less than 1,000, the company opened a roughly 40,000-square-foot center less than a year after breaking ground.

Blonduos Mayor Valdimar O. Hermannsson said the positive impact of such investment in this small community, which has historically relied on agriculture and fishing, is "almost indescribable." The influx of money means jobs are created and housing is built. There are even plans to build a larger campus, many times the size of the current facility. But to achieve that, the town will need the same things that Iceland's data center industry has: more demand, more customers, and more energy.