Digging deep: Exploring El Salvador's journey into Bitcoin mining

El Salvador made Bitcoin legal tender

Back in 2021, El Salvador became the first country in the world to adopt Bitcoin as legal tender, giving it the same status as the U.S. dollar in the current financial system. Nayib Bukele’s major decision was part of a bigger strategy to attract foreign investments, reduce remittance costs, and promote financial inclusion as well as obtain financial sovereignty.

As soon as the Bitcoin-related legislation passed, the country launched a government-issued wallet named Chivo, and committed to educating its citizens about cryptocurrency and using the Chivo wallet. In the beginning, this appeared to be an absurd law to many citizens, and a possible repeat of the 2001’s dollarisation. 

The legislation known as the Bitcoin Law mandated every business in the country to accept Bitcoin transactions. This move, aimed at boosting El Salvador's Bitcoin adoption, prompted mass discontent in the first place.

However, three years later, the plan is still in motion. At the beginning of 2023, El Salvador passed another legislation providing the legal framework for the Bitcoin-backed bond. The main goal of issuing so-called Volcano Bonds is to raise funds and seed a Bitcoin mining industry dependable on renewable energy. 

If you want to learn more about El Salvador’s Volcano Bonds, we suggest reading this article: ‘Bitcoin bonds: El Salvador set to launch Bitcoin bonds in 2024’. 

The Bitcoin community is looking for two things in El Salvador’s move into the crypto space – primarily, evidence that Bukele’s idea will demonstrate that cryptocurrency can function as fiat currency, and secondly, that Bitcoin mining can turn out to be a net positive for the country’s development. 

El Salvador's environmental context

The country is located in an active volcanic region which provides a lot of potential for geothermal energy production. The Tecapa volcano, located 106 kilometres east from the capital, has been utilised to power Bitcoin mining operations.  

Bitcoin mining refers to a process that includes solving complex mathematical problems to verify transactions on the Bitcoin network. This typically requires a broad amount of computing power and therefore, a significant amount of energy. 

To find out more about mining, why not read this article: 'Earning from mining crypto'.

The country’s power plant has produced 102 megawatts (MW) of energy, of which 1.5 MW were allocated to Bitcoin mining. The power plant uses approximately 300 mining processors to extract Bitcoin. 

The country’s officials have stated that El Salvador has the potential to generate electricity through hydroelectric, solar, wind and tidal power projects as well.  

El Salvador’s decision to mine Bitcoin was heavily criticised for environmental reasons, stating that the country’s Bitcoin cryptographic equations consume the same amount of energy as a whole other country. On the other hand, even critics agreed that Bukele’s move was correct from the side of production sustainability. 

Geothermal energy for Bitcoin mining

Geothermal energy can be defined as the power that comes from the Earth’s subsurface and is renewable. It is found below in the Earth’s hot molten rock and magma. It is deemed efficient when used for generating electricity and many countries have already found a way to utilise geothermal energy.  

Taking a look at several scientific reports, geothermal energy has the potential to reduce the carbon footprint of Bitcoin mining. Since the energy stems from volcanoes, it can be used all the time.  

Geothermal energy is self-dependent and more reliable than other renewable sources that, for example, depend on wind or sunlight. Additionally, energy produced from geothermal plants can be easily assessed; in other words, operators have the ability to predict the power output with a higher level of accuracy.  

When taking into account capital, operating, and maintenance costs, geothermal energy operations include one of the lowest life cycle costs which contributes in a positive way to the country’s economy. In terms of Bitcoin mining, it is considered that geothermal energy can reduce the cost of Bitcoin mining. 

However, reports also tend to mention that tapping into geothermal energy can be quite expensive in the beginning as it can cost an estimated $2 to $7 million with a 1 megawatt capacity. Taking all factors into consideration, geothermal energy presents a long-term investment and provides more advantages than disadvantages in the long run.

The power of Volcanoes: Iceland as another success story

In the other part of the world, the volcanic island of Iceland, has been deemed as a cryptocurrency mining success story. For many years, this European country has leveraged its volcanic energy for Bitcoin mining operations and supported the influx of miners seeking to utilise the country’s energy and set up mining farms.  

However, critics point out that there are huge differences between Iceland and El Salvador as a country situated in Latin America. For example, they often mention that Iceland’s outdoor temperatures are cold which requires little cooling technology to maintain mining rigs as well as the country’s energy surplus.  

Hash rates determine how much electricity is needed to mine Bitcoins. The more hashing power equals a more secure network, and it can be calculated based on the mined blocks and the blockchain difficulty. Special computers used for mining can overheat and need an efficient cooling system in that case.  

El Salvador’s decision was criticised from an environmental aspect as the country is situated in a region-wide volcanic arc with high temperatures and deforestation issues which amount to climate unpredictability and water shortages. 

 The Lava Pool project and Bitcoin adoption

Since El Salvador has been embracing Bitcoin as a legal tender, this small nation is considered to challenge traditional financial systems and the global financial status quo regarding cryptocurrencies.

Lava Pool refers to a public-private partnership launched in October 2023 to mine Bitcoin with geothermal energy that combines international business partnerships with infrastructure investments. The project aims to utilise Bitcoin mining-related support and software development with the commitment to creating an actual hardware infrastructure.  

The first phase of this project includes the construction of new Bitcoin mining facilities in Metapan, the country’s second-largest city which should be preliminary powered by solar and wind energy with a plan to harness geothermal energy as well. 

The purpose of this public-private partnership is to attract smaller-scale local miners to cooperate using their computational power, and eventually develop a Bitcoin community of active mining businesses for the local population to work in which could enhance Bitcoin adoption.

The Lava Pool project encompasses the advantages of opening El Salvador for business to multinational corporations and finding its place within the global economy. 

Can Bitcoin go green?

When talking about environmental protection, Bitcoin mining is often mentioned in a negative context. However, it is left unnoticed that Bitcoin mining has the potential to support the global energy transition towards renewable energy. By adding new technological solutions for using renewable energy, Bitcoin can become a flexible energy buyer to balance fluctuations in the renewable energy market.  

Bitcoin miners present unique energy consumers since they are location-independent and can make payouts in a cryptocurrency that is highly liquid. In addition to mining hardware, they only need an internet connection. They can help in removing intermittency and enable grids to utilise more renewable energy. Bitcoin miners use electricity when there is overcapacity and restrain their demand at peak times. Therefore, Bitcoin mining has the potential to provide flexibility and predictability in the renewable energy market. 

Mining could incentivise energy businesses that create renewable energy power plants and utilise wind, and water to invest in new power plants. Some reports state that novel power plants could be built in remote locations with suitable climate conditions.

For example, they could be built in Iceland, a country filled with geothermal resources, or in any desert area that could benefit from solar energy. Another success story is Texas where approximately 60% of Bitcoin production is mined with renewable energy utilising wind farms and a deregulated electricity grid.  

In case it would be done strategically, Bitcoin mining could meet regulatory requirements and deal with sustainability matters. Promoting clean energy projects requires a high degree of accountability of all value chains. 

Economic benefits of Bitcoin mining

Bitcoin mining is gaining popularity due to its economic implications and the potential to promote local economic activities. Basically, it enables the transformation of a country’s rural areas into industrial centres, provides locals with job opportunities and enhances the tax base. 

The establishment of Bitcoin companies in rural areas can help the local community to adopt new technologies and technological innovations into their livelihoods. Even though it doesn’t provide as many employment opportunities as other sectors, it still opens new positions for locals with required skills.  

The main perks of blockchain technology can enable a higher level of technological integration and the creation of novel business models that can be used within traditional infrastructure services.

Integrating Bitcoin transactions has the power to alter economic landscapes, along with the main feature of decentralised finance (DeFi) that makes people less dependent on traditional financial systems and their services.

Bitcoin education empowers users and provides them with a better chance to participate in the global economy. If you want to learn more about cryptocurrency, check out the courses at our Learn Crypto Academy.

How is Bitcoin mining helping the economic development of El Salvador?

El Salvador's Bitcoin adoption brought to the table several benefits to the country's economic status.

Mitigating remittances

First, it increases remittance efficiency. Looking at the El Salvador example, it can be spotted that more than 20% of the country’s GDP stems from remittances, mainly from the United States. Traditional remittance processes are costly with fees that can consume a big portion of the transferred amount. Bitcoin adoption solves this dilemma as it reduces costs and makes the whole process simpler and quicker. 

Many countries have stood in support of El Salvador's Bitcoin adoption, especially in South and Central America. Eliminating cross-border fees could mean significant savings for individuals and bring back into the country's economy.

Dealing with financial inequality and inflation

Secondly, El Salvador’s Bitcoin adoption enhances financial access to unbanked people. Approximately 70% of El Salvador’s citizens don’t have a bank account, and Bitcoin adoption is a broad step towards a higher degree of financial inclusion. Bitcoin redefines the valuation of traditional assets and provides a new perspective on investment and economic stability. A person just needs a cell phone with an internet connection.

Finally, the Bitcoin plan should reduce the country’s dependence on the U.S. dollar. El Salvador wanted to find a way to decrease its reliance on the foreign fiat currency and consequently, enhance its financial independence. There are many risks linked to depending on the national currency of another country so the Bitcoin adoption should potentially provide alternative savings options to enhance the country’s economic status. 

In countries affected by inflation, living conditions can descend rapidly. For citizens of these countries, cryptocurrency could be a safer substitute since it is not affected by the government’s monetary policies and can assume the role of a hedge against the risk related to fiat currency. Additionally, corrupt authorities cannot control or interfere with blockchain transactions, and thereby, individuals gain more independence to manage their finances. 

The Bitcoin movement didn’t come out of the blue; back in 2020, El Salvador had one of the lowest incomes per capita in Latin America so the cryptocurrency engagement has been utilised strategically to address several economic challenges and decrease financial inequality. It can be said that Bitcoin plays a significant role in the country's economic development and future investment prospects.

Helping businesses

The decentralised nature of crypto assets sparks a global economy in which users exchange cryptocurrency regardless of their citizenship and location. For businesses, this expands their target audience from a national level to an international level while removing the problem of exchange rates.  

As more and more entrepreneurs and other forms of business turn towards digital technologies, they can engage in various financial activities such as investing, saving or sending money worldwide. The development of the crypto market can enhance capabilities of local businesses and alter their market standing. 

Can Bitcoin circular economies be efficient?

A Bitcoin circular economy refers to a local economic system where Bitcoin is used as a medium of exchange, a store of value and a unit of account. 

In other words, Bitcoin circular economies use Bitcoin not just as a store of value or investment tool, yet as a primary currency for all economic activities within a local community. This includes paying salaries, funding projects and paying for goods and services. 

The term ‘circular’ refers to its self-contained nature where the cryptocurrency circulates within the community and diminishes dependance on fiat currencies and traditional financial systems. 

As opposed to traditional economies where financial intermediaries play a pivotal role, Bitcoin circular economies operate on a peer-to-peer (P2P) basis and in accordance with the main principles of DeFi. 

It is still too early to say whether Bitcoin circular economies could be efficient in practice. On the other hand, Bitcoin’s technology has matured and its adoption is growing, along with institutional acceptance and the recent approval of Bitcoin ETFs; the concept of using it for daily transactions gained traction.  

Could El Salvador's Bitcoin journey be successful?

To deploy a Bitcoin circular economy, a country needs to set out the required infrastructure. El Salvador started with deploying over 200 commission-free Bitcoin ATMs to make Bitcoin accessible to its citizens. 

Secondly, El Salvador became the first country to officially hold Bitcoin in its treasury to serve as a national exchange guarantee scheme created to increase the impact of volatility for Chivo app users. 

Once the initial infrastructure has been laid down, the country tapped into Bitcoin mining opportunities to further leverage Bitcoin's potential. El Salvador is home to over 20 active volcanoes so it encompasses a broad amount of geothermal power available to use as a renewable energy source. 

This Latin American country saw the introduction of cryptocurrency as a legal tender and Bitcoin mining activities as a way to separate from the U.S. dollar, which it has relied on since 2001. 

The world is watching whether El Salvador’s crypto experiment will work out. This approach demonstrates that Bitcoin mining can also accelerate the exploration of green energy resources and remain compliant with sustainability criteria while helping out their citizens and local businesses in gaining a higher degree of financial freedom and new financial opportunities on the market.