AI data centres are banging on crypto’s door

The investor found kindred spirits at a bitcoin-focused data-center developer, now called IREN, and joined its board. They were among the few who saw locations like Childress, a tiny city in the Texas Panhandle with a population of 5,700, as ripe for massive infrastructure investment.

By the following year, the vision appeared flawed. During the crypto winter that culminated in the collapse of Sam Bankman-Fried’s FTX exchange, IREN shares tumbled toward $1.

Now, the company’s fortunes have reversed—and Microsoft is coming to Childress. Earlier this month, the software giant signed a $9.7 billion cloud-services contract with IREN to expand its rural data-center site to process Microsoft’s workloads for artificial intelligence. The hardware is expected to be rolled out in phases through 2026.

IREN is among a handful of companies initially focused on bitcoin mining that have pivoted to AI while tech companies pursue one of the most expensive infrastructure build-outs in U.S. history. IREN’s market value has swelled to more than $13 billion thanks to a more than 300% jump in its stock price this year.

Microsoft, Amazon.com, Google and other tech companies are spending tens of billions of dollars to build massive new facilities to house the thousands of power-hungry graphics-processing units required to train and run AI models.

They desperately need access to electricity. In many cases, bitcoin miners got there first and are eager to assist.

Miners have good reason to consider AI. They solve an increasingly complicated arithmetic problem to unlock bitcoin, but the difficulty has been increasing faster than bitcoin prices. Even with prices up from a year ago, mining profits have been declining.

“You literally couldn’t get hyperscalers interested in this six months ago," said Alfred, a hedge-fund investor who has focused on bitcoin since 2019. “And now they’re banging on your door."

The shift to AI has been especially prevalent in Texas, where today’s wildcatters are more interested in locking in electricity than discovering oil.

Cipher Mining signed a 15-year lease this month with Amazon Web Services for a site in West Texas. The company owns or operates part of five data centers for bitcoin mining but will add AI at two existing sites and pivot the 3.2 gigawatts of capacity it has in development to AI.

Google, meanwhile, will backstop part of a 10-year, $3 billion agreement with Fluidstack, which will be the cloud-computing operator at a different Cipher site in West Texas. Google will receive warrants for a roughly 5.4% equity stake in Cipher. It will also take an increased equity stake in bitcoin miner TeraWulf to support its pivot to AI at its site in New York.

Bitcoin miners swept into Texas en masse in 2021 after China banned the practice. They were enticed by cheap land and electricity, especially the abundance of renewable energy in West Texas that was sometimes stranded when transmission lines reached capacity.

Now, the miners are in a prime position because of the first-come, first-served nature of the electric grid. Prospective customers essentially line up at grid operators and transmission and distribution utilities to complete the engineering studies that ultimately lead to electric service.

“In our world, it doesn’t matter if you have infinite money; it does not matter if you’re Google or Meta," said Scooter Womack, founder and managing partner of Vega Energy Advisors, which works with bitcoin miners, oil and gas operators and data centers.

Womack says bitcoin miners control some of the best electricity assets in Texas. Projects that haven’t secured electric capacity “have to wait just like Joe or Sally or anybody else," he said.

It can take years to complete the studies and build out the electric infrastructure needed to accommodate AI-sized customers. In much of the country, wait times stretch into the 2030s.

The backlog of prospective projects waiting to plug into the power grid in Texas illustrates the shift. Nearly 70% of the customers seeking to connect to the grid were data centers as of September, according to the Electric Reliability Council of Texas, the state’s main grid operator. Just 12% were crypto miners.

But in early 2023, the crypto industry was the biggest customer seeking electricity service within Ercot, with 42% of the requests, compared with 31% for data centers, according to data from BNEF.

Nathalie Limandibhratha, U.S. power senior associate at BNEF, said mining sites that are already operational are likely to remain crypto-focused because switching to AI would be too costly. But many of the sites still in the planning stages are shifting their focus to AI.

For utilities and grid operators, that presents more challenges. Crypto miners can be flexible with their power needs, blinking off when electricity prices rise and putting less strain on the grid during times of peak system demand. Some participate in programs that pay them to shut down at those times.

Former Ercot independent market monitor Beth Garza of R Street Institute said she won’t debate the merits of cryptocurrency, but from an electricity perspective, bitcoin miners are “the best customers ever."

“Basically they use electricity when there is surplus, when it is low-cost," Garza said. “They are very disciplined and regimented about when they stop using it."

Cloud or AI data centers, by contrast, need access to large, stable amounts of power around the clock.

That puts more stress on the grid operator trying to manage ballooning demand. A new law in Texas could provide something of a stopgap, Garza said. It would require large new data centers to switch to backup power sources during times of high stress on the grid.

Write to Jennifer Hiller at jennifer.hiller@wsj.com