Bitcoin mining insurance can be a challenge to place because bitcoin mining operations are unfamiliar to, or misunderstood by, most commercial insurers.
Bitcoin mining operations are hosts that vary in size, methodology and exposures1. Bitcoin mining insurance typically starts with commercial general liability, umbrella (or excess) and property coverage.
Depending on your operations you should also consider cyber liability, errors and omissions (E&O), builder’s risk, directors and officers (D&O) and other important insurance coverages, such as workers’ compensation and auto, to reduce risk of financial loss.
In this article we cover:
- Introduction to bitcoin mining insurance
- Why was bitcoin invented?
- What is bitcoin?
- What does a bitcoin mine do?
- Is bitcoin mining bad for the environment?
- Types of insurance for bitcoin miners
- Bitcoin mining insurance summary
However, until bitcoin is widely understood2 and accepted3, which may take 5-10 years4, those with “diamond hands” should expect a Bitcoin mining insurance market with limited appetite in terms of coverage and capacity.
Introduction To Bitcoin Mining Insurance
However, for publicly traded and/or privately held bitcoin mining facilities to protect their investments, bitcoin mining insurance is a cost of doing business.
Bitcoin mining insurance transfers risk, and minimizes the financial impacts of property loss and/or potential downtime from a covered cause of loss.
Combined with other insurance coverage, your investment and that of your shareholders and limited partners will be better prepared in the event of liability or property claims.
Claims may arise due to on-site 3rd party bodily injury and/or property damage, as well as 1st party property losses, cyber risks, executive risks, E&O risks and loss of income.
Insuring Bitcoin Mining Facilities
Bitcoin mining facilities are often unique when compared to traditional brick and mortar businesses.
They may be constructed from the ground up like a conventional data center, or repurposed from an abandoned factory, steel mill, aluminum manufacturer or other fallow facility.
Mining operations are located adjacent to dedicated, low-cost energy and/or electricity supplies or a sub-station fed directly by the grid.
Buildings cool ASICs using fresh air, refrigeration and immersion cooling methods to maintain indoor environmental quality.
Air cooling requirements for mining equipment are often addressed with large, structurally integrated wall fans. Such designs may be in conflict with fire suppression systems and leave buildings lacking conventional fire protection that insurers are familiar with. Insurers may be hesitant to provide coverage if operations are unusual enough that they are pushed outside underwriters’ appetites.
Day to day risk management, visitor tracking and detailed documentation are important to maintain profitability and avoid a massive insurance bill.
A dedicated risk manager provides support for bitcoin mining operators to maintain a safe facility, document on-site bitcoin mining equipment for continuous operation, and secure reliable, low-cost energy or electricity.
My cartoonish diagram above illustrates some of the complexities and interrelationships between a bitcoin mining operation and insurance coverage.
In evaluating the risks associated with insurance for bitcoin, it helps to first understand what bitcoin is, the intricacies of mining operations and why bitcoin mining is important.
Why Was Bitcoin Invented?
Bitcoin was invented by a person, or persons, named Satoshi Nakamoto,6 amid the banking bailouts of the global financial crisis of 2007-2009.
Satoshi believed it was a problem that the fate of the global monetary system depended on the public’s trust in large financial institutions to tell the truth about the system’s integrity.
Bitcoin is a voluntary, peer-to-peer digital cash system with a transparent, public digital ledger (the Bitcoin network) and a finite, native digital currency (bitcoin or “BTC”) that may be audited and used by anyone.
Many people believe bitcoin is the future of money, or digital gold.
The Path To Digital Gold
From the earliest coins around 700 BC, gold served as the standard for money because of its scarcity, malleability, natural beauty and other uses.7
As money evolved, nation states developed layered monetary structures with gold as the backstop for their national currencies and debts. Promissory notes, such as the greenback, were redeemable on demand for gold coins…
Indeed, up until only 50 years ago, the U.S. Dollar, British Pound Sterling, French Franc, German Deutsche Mark and other leading sovereign currencies were linked to gold…
By declaring a new “fiat” standard, Nixon gave the U.S. government greater monetary flexibility and the Fed could now instruct the Treasury to print dollars as needed with no underlying hard asset backing.
Today, every major government currency is a fiat currency.
What Is Fiat Money?
A “fiat” money is one created by a governmental authority that is not redeemable for a hard asset, such as gold or silver.
Fiat money, whether under the control of well-meaning politicians, or malicious, authoritarian dictators, is an act of faith between the issuing government and the people who live on it.
Inflation is a hidden tax that erodes the purchasing power of a currency over time…
People who are (rightly) nervous about inflation seek safety in scarce, tangible assets, such as precious metals and real estate.
Bitcoin Is Hard Money For The Digital Age
The microprocessor and the Internet transformed data from analog to digital, broke down entrenched information silos and reduced the cost of global, peer-to-peer communication to near zero.
Wall Street embraced computing power and leveraged fractional reserve banking, developing new, sophisticated investment strategies including high-frequency trading and complex financial derivatives.
Yet, even as global banks’ debt and insurance instruments became more opaque, the financial relationship between the U.S. and other countries became more interdependent.
The 2007-2009 global financial crash caused outrage when top executives at giant mortgage lenders, Wall Street investment banks and insurance companies got rich on hundreds of billions of dollars of government bailouts after being deemed “too big to fail”.
Amid the wreckage, on October 31st, 2008, the link to an 8 page white paper titled “Bitcoin: A Peer-to-Peer Electronic Cash System” was posted on a small, online cryptography mailing list.
The author proposed an alternative, digital financial system of the people by the people (aka the “plebs”) that would never need a bailout.
Two months later, on January 3rd, 2009, Bitcoin went live.
The code of the genesis block referenced a headline in The Times of London newspaper for that day: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”.
What Is Bitcoin?
Bitcoin is open source, decentralized software. Bitcoin’s implementation can be separated into two components, 1) the Bitcoin network and 2) bitcoin (aka “BTC”).15
1) Bitcoin Network
Bitcoin (uppercase “B”) is an open monetary network and payments system that relies on thousands of global volunteers, referred to as nodes and miners. Nodes and miners work together and process transactions with specialized Bitcoin software.16
- Nodes validate bitcoin transactions as they are submitted to the network. Nodes also monitor and verify groups of transactions, called blocks, to be added in compliance with Bitcoin’s deflationary monetary policy as they are mined by miners.17
- Miners group transactions into blocks for addition to the blockchain. Miners invest energy and computing power to perform hashing and provide proof of work in a competition with other miners to secure the Bitcoin blockchain and earn newly issued bitcoin, or BTC.
Anyone can voluntarily participate as a miner and/or a node.18
Bitcoin mining is also accessible to anyone… However, becoming a miner requires a more significant investment because mining equipment can be expensive to own and operate.
As described below, miners that earn new BTC are essentially winning a computational lottery.
While bitcoin mining got its start in basements and dorm rooms, bitcoin mining operations are mostly industrial scale today.
2) bitcoin (aka “BTC”)
BTC or bitcoin (lowercase “b”) is the native digital asset, or currency, of the Bitcoin network.
BTC fulfills the three functions of money: a medium of exchange, store of value and a unit of account:
- Medium of exchange: Money must facilitate transactions. As a medium of exchange, BTC is highly liquid. Indeed, you can purchase BTC on any number of exchanges 24 hours a day, every day of the year. Each bitcoin is divisible into 100,000,000 smaller units, called Satoshis. Satoshis can be purchased or earned for free in various ways. Bitcoin is accepted as payment at thousands of locations. Countries are making it legal tender, states are adopting it, and professionals are being paid in it.
- Store of value: Money must hold its value over time. Like other scarce assets such as gold or real estate, over a longer time horizon, the value of bitcoin has gone up and to the right. This makes bitcoin one of the greatest stores of value in history. Like the stock market, Bitcoin is volatile… However, volatility is a very different metric than risk.
- Unit of account: The value of any good or service can be measured using bitcoin, or Satoshis, as a unit of account. Indeed, if all money is just a ledger, bitcoin is the first money with a verifiable, public ledger proving the ownership of each unit of bitcoin throughout history.
BTC is issued as a block reward for miners approximately every 10 minutes. The current block reward is 6.25 BTC.
The block reward is reduced by 50% every four years in an event known as the halving, or “halvening”.
The next halvening will happen around May 5th, 2024 at which time the block reward will be reduced to 3.125 BTC.
BTC has a limited supply and only 21,000,000 bitcoins will ever exist… The last bitcoin is expected to be mined in the year 2140.
What Does A Bitcoin Mine Do?
A bitcoin mine is a facility that hosts and manages bitcoin miners enabling them to:
- Group and confirm transactions
- Secure the blockchain
- Earn new bitcoins
Bitcoin miners are powerful computers that use Application Specific Integrated Circuits, aka “ASICs” specifically designed to compute hashes and perform proof of work.
While the bitcoin network does not need insurance because it is independently operating, decentralized software… Bitcoin mining insurance is needed to protect the physical bitcoin mining facilities and operations that perform proof of work.
As described below, bitcoin miners perform proof of work powered by a mix of low cost, on-site or off-site renewable and fossil fuel energy.
What Is Proof Of Work?
Proof of work is a cryptographic proof that ties a real world cost (the energy expenditure needed to perform brute force computations) to arriving at a probabilistic, mathematical outcome (a specific number, or “hash”).
Two Harvard researchers first conceived of proof of work (“PoW”) in the 1990s in an effort to deter distributed denial of service (DDoS) attacks. Later, a cryptographer named Dr. Adam Back used proof of work in Hashcash, a system to address the problem of spamming on digital message boards.19
Proof of work uses a “one way hash function”. The hash function is considered “one way” because it will always return the same output from a given input… However, it is difficult – but not impossible – to go in reverse and derive the input from the output (i.e. compute a hash).
The difficulty needed to compute a hash may be calculated in terms of an energy spend… By knowing the amount of energy needed to process the computing power to decipher a hash, the deciphered hash serves as “proof” the computational work had been done.
Proof of work is a security protocol that maintains the integrity of the blockchain history and prevents illicit double spending of bitcoins. PoW helped solve the double spending problem that had plagued prior attempts at creating digital currencies.20
Contrary to popular belief, Proof of Work is not the act of performing complex math problems… It is actually the processing of simple equations, repeatedly, as fast as possible.
Like rolling a pair of 10,000 sided dice hoping to get “snake eyes“, earning BTC in the mining process requires finding a specific number (the deciphered hash) that is, probabilistically, extremely challenging…
Today, the total hash rate on the Bitcoin network is approximately 200,000 trillion hashes (or dice rolls) per second.
Is Bitcoin Mining Bad For The Environment?
According to the University of Cambridge Bitcoin Electricity Consumption Index, Bitcoin uses a very small percentage (less than one percent, or approximately between 0.40-0.59%) of global electricity.
As described more below, bitcoin mining insurance may include coverage for physical renewable energy assets, such as ground mount, carport or rooftop solar panels, inverters, racking systems, etc. that are co-located with the mining facility.
More importantly, in the transition to renewable energy away from fossil fuels, Bitcoin can fortify24 the existing grid, while creating incremental revenue streams and enhancing the business models of renewables and transition energies, such as natural gas, in various ways:
- Grid stability: By participating in demand response programs, Bitcoin miners are helping utilities maintain stable loads while they transition to renewable energy from fossil fuels. Utilities can rely on Bitcoin to absorb excess capacity, creating incremental revenue during times when demand is low. And when demand is high, Bitcoin miners can respond to demand response events more quickly than other DR participants.
- Reduce Methane Emissions: Methane is a byproduct of many industrial processes, from agriculture to dairy farming to oil and gas production. Excess methane is flared or vented, causing worse environmental damage than when it is captured and utilized for mechanical purposes. Bitcoin helps reduce methane emissions by stamping out flared gas and stranded waste gas, transforming the management of flare gas from an expense to a revenue center.
- Efficient energy transportation: According to the World Bank, losses (waste) from electricity transmission and distribution ranges from 2%-71% in local economies across the globe. Unlike a conventional U.S. power plant that must produce and distribute electricity with average line losses of 5% (enough to power all seven Central American countries several times over)25, Bitcoin can store energy as money for use elsewhere. Bitcoin can then be transported instantaneously over the Internet to purchase electricity where it is needed.
- Natural refrigeration: The book “Drawdown” cites refrigerants’ ozone depleting potential (ODP) and global warming potential (GWP) as the #1 contributor to climate change/global warming. By relying more on natural refrigerants, society has the opportunity to reduce climate impact. Bitcoin mining operations utilize natural refrigerants, such as air cooling or immersion cooling methods which have zero or low ODP and GWP.
- Intermittent Renewables Monetization: As Bitcoin mining operations seek the least expensive energy sources, this is increasingly from renewable energy. Because bitcoin is an excellent offtaker, mining operations can be incorporated into a strategy of overbuilding renewable energy capacity. By colocating with renewables projects, bitcoin can help improve the profitability of renewables projects by utilizing energy at times of low demand when generation is high, creating incremental revenue, and by shutting down in demand response events when there is stress on the grid.
The world’s energy appetite is necessarily large and will continue to grow as more people in other countries are lifted out of poverty and seek to improve their quality of life…
ASICs Are Recyclable
Property coverage is one of the starting points for bitcoin mining insurance… This is because ASICs are highly valuable and can require long lead times to replace. However, even as they age, ASICs maintain their value.
However, as ASICs age, they may be resold on a secondary marketplace or migrated to different mining locations to optimize their value according to intermittency (percentage uptime), renewable energy mix and cost per kWh rates.
As described in the video above by Ro Shirole from Compute North, utilities and renewable energy project owners may purchase and employ older ASICs models, while still providing economic value to renewable energy projects and curtailment/demand response programs.
Types Of Insurance For Bitcoin Miners
The following are examples of common bitcoin mining insurance coverage types for operators to consider:
Commercial General Liability (CGL)
Bitcoin mining insurance starts with commercial general liability (CGL). CGL protects your company from claims of 3rd party bodily injury or property damage caused by your company’s operations.
If a visitor walks onto a jobsite and is injured in some way (such as a trip, slip and fall or from some other hazard) your business your CGL policy should provide coverage.
Your CGL should also provide protection for products and completed operations and liabilities you assume when entering into a contract that contains a hold harmless.
Products and completed ops covers damage caused by products your company sells, such as custom mining equipment, switchgear, etc.
However, products or property owned by others that are in the care, custody and control of an insured – such as mining equipment of others – are usually excluded under the standard ISO CGL policy form… This gap in coverage can be addressed by property insurance/inland marine coverage or bailees coverage.
Umbrella or Excess
Umbrella or excess coverage provides an extra layer of protection to the insured if the limits of your underlying commercial general liability policy are exhausted by a claim or claims.
Umbrella insurance is often less expensive per $1,000,000 of coverage because it is attached above the underlying CGL limits, meaning the underlying limits must be exhausted before the umbrella will kick in.
Property insurance protects your business property and/or business income from direct physical loss to covered property, or business interruption, from covered perils such as fire, theft, wind, hail, flood. Physical property insurance can cover:
- Buildings: Bitcoin mining facilities have buildings and other structures, such as shipping containers, that physically house mining equipment and other infrastructure. This can also include permanently installed machinery and/or equipment. Separately, there is power generation infrastructure to protect.
- Business personal property (BPP): Furniture, equipment, computers, racking, etc.
- Property of others: ASICs of 3rd parties, goods and materials held in storage, etc.
Unlike the challenges of insuring intangible items, such as NFTs, physical facilities can be insured against loss from common perils.
However, while bitcoin mining equipment may fall under the description of computer hardware, computer processing or data center server equipment, the value of ASICs is highly volatile and difficult to replace if damaged.
Losses may happen to buildings, ASICs (BPP) or property of others. In addition to theft, flood, fire, wind and hail, potential problems with bitcoin mining hardware include, but are not limited to, heat dissipation, electrical bridging, power quality and power surges.
If a loss due to direct physical loss or damage occurs, it may interrupt mining income streams, whether from BTC earned, rents, professional services or other fees.
Bitcoin mining facilities may be expensive to repair and require long lead times with the cost of ASICs today ranging from $10,000-$15,000…
Time is money in a bitcoin mining facility.
Business property insurance covers real property, business personal property (BPP) and business interruption (BI), tenant improvements and other first party property. Property insurance may be in the form of an “all risk” property policy, and is sometimes packaged together with general liability insurance in a business owner’s policy (BOP).
Bitcoin mining facilities can experience a “breakdown” of covered equipment, such as to hardware and electrical infrastructure, both inside and outside of the buildings.
Such property damages may be covered by an equipment breakdown insurance policy that includes the physical property at a covered location as well as business income and extra expense during a period of restoration.
Commercial crime coverage usually excludes cryptocurrencies… However, it’s possible to add the “Include Virtual Currency as Money” endorsement (CR 25 45) onto the commercial crime policy.
Coverage is sub-limited and contemplates fungible digital currencies (such as bitcoin) that have high liquidity based on public exchange rates.
As bitcoin mining operations regularly undergo expansion and adaptation, they may also be constantly under construction.
A builder’s risk policy, also called “course of construction” insurance, is a type of property insurance that protects real property assets, such as homes or buildings, while under construction.
Builder’s risk insurance is important because it protects property being built while the job site is active. After a project is complete, add the completed structure to a property policy.
A builder’s risk policy may be paid for by the general contractor, developer or project owner. Builder’s risk is often broader than inland marine coverage, or a property floater, or construction floater.
Professional Liability (E&O)
Professional liability (aka “errors and omissions”, or E&O) protects you if you or your business provides professional services such as bitcoin or crypto-related consulting, advisory services, ongoing maintenance of 3rd party machines or mining integration services.
E&O covers 3rd party claims related to professional consulting services and the providing of expertise, advice or counsel.
Directors and Officers Insurance (D&O)
Directors and officers insurance is a type of errors and omissions coverage that protects the personal assets of your company’s officers and the assets of their spouses and their estates from lawsuits seeking damages for financial injury.
D&O also protects the balance sheet of the company itself from lawsuits claiming financial injury by LPs, shareholders, investors, state or federal agencies or third parties, such as competitors, vendors or lenders.
A directors and officers insurance policy is broken down into three separate coverage types:
- Side A – Directors and Officers Liability: This coverage protects the personal assets of directors and officers. If a company is unable or unwilling to indemnify its directors and officers, perhaps because of insolvency, a bankruptcy filing or by law, Side A provides protection for company leadership. No retention applies.
- Side B – Indemnification: This coverage reimburses companies for the cost of indemnifying and defending their directors and officers in a claim. Retention applies.
- Side C- Corporate or Entity Coverage: Covers lawsuits filed directly against the corporation. If your company is sued for financial mismanagement, this coverage protects the company itself. Corporate coverage terms vary depending on whether the company is public, private or not for profit. Retention applies.
Each coverage type has its own terms and limits.
When deciding on the limits of D&O coverage, it’s important to consider that defense costs fall within the limits of insurance. This means that as legal costs mount, they erode the amount of coverage left for any claims payment that could result.
Inland Or Ocean Marine
Inland marine is a type of property insurance that can cover business machinery, tools, equipment and other physical property that may be used in the construction and operation and maintenance of a bitcoin mining facility…
Inland marine also covers property while in transit and at jobsites (be sure to read your policy location coverages and exclusions).
If equipment is stolen from a jobsite, or damaged, its value may be covered by an inland marine policy.
Inland marine may also be referred to as a “floater” policy and may be required by materials suppliers.
Ocean marine may be purchased to cover goods while they are in transit on water, being shipped in sea vessels from port to port and country to country.
Cyber liability protects your business from claims of financial loss or harm by third parties in the event of a data breach, loss of personally identifiable information (PII), damage to electronic property, loss of digital assets28 and valuable data.
Cyber should also provide first party coverage, protect your business, with coverage for ransomware, named and unnamed malware, social engineering/phishing, invoice tampering, hacking and services related to cleanup after a breach. Cyber liability can also even protect against damage of physical assets, such as computers.
Bitcoin mining facilities often have systems that are at risk of being hacked or taken offline by a cyber attack.
Such exposures may be complicated with the addition of a mining pool that maintains BTC balances before transferring to a wallet or permanent hot or cold storage. Not all wallets are created equal in terms of security. The most secure wallets sacrifice convenience and vice versa.
Auto (and Hired and Non-Owned Auto)
Auto insurance protects you from liabilities and physical damage related to the operation of your business vehicles
Hired and non-owned auto (aka “HNOA”) protects your business from liability claims related to the use of vehicles you hire or do not own, such as a rented vehicle or your employees’ vehicles that are used in the business.
Workers compensation covers injuries to employees who are injured in the course of their employment. Workers compensation is mandatory in most states.
If work related injuries fall outside of workers compensation, they may be covered by your employer’s liability policy.
Bitcoin Mining Insurance Summary
As a powerful demand response tool and renewable energy incentive, with no way to discriminate and monetary rules that apply equally to everyone, Bitcoin is the open-source environmental, social and governance based financial system people everywhere should care about.
At its core, bitcoin miners invest their energy and electricity in hashing power and collaborate with nodes to secure the network, to protect bitcoin users – irrespective of the size of their holdings – against malicious actors and 51% attacks.
Regardless of the unique exposures of your bitcoin mining facility, you should work with a business insurance broker who understands your operation.
By connecting with an experienced, licensed professional who has experience with bitcoin mining insurance29 and risk management, you’ll be better prepared for the challenges of insuring sustainable, energy efficient bitcoin mining operations.
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