Feb
El Salvador, the first country to legalise Bitcoin (BTC), has recently announced the relaunch of its wallet app Chivo, which is expected to address the previous version’s stability and scalability issues. The update is welcome news for the Central American country’s crypto experiment, which has encountered some difficulties and harsh criticism in recent months. While much of the attention has been focused on aspects such as retail crypto adoption and the geopolitical implications of Bitcoin’s legal status in El Salvador, the nation’s mining industry’s progress toward President Bukele’s moonshot vision has received less attention recently. Here are the current prospects for El Salvador’s mining industry.
“Endless” possibilities
In October 2021, El Salvador had already become the world’s first country to adopt Bitcoin, and one of the country’s top energy officials expressed optimism about the country’s crypto mining prospects.
Daniel Alvarez, president of the state-run Lempa River Hydroelectric Executive Commission, told journalists that there are “endless possibilities” for producing energy through hydroelectric, solar, wind, and tidal power plants, with “willpower” being the only requirement for success. “We don’t waste resources that pollute the environment, we don’t rely on oil, we don’t rely on natural gas, we don’t rely on any resource that isn’t renewable,” he added.
El Salvador’s current energy capacity, on the other hand, is rather limited. According to reports, it only has two geothermal power plants that contribute to Bitcoin mining, one at the base of the Tecapa volcano and one in Ahuachapan. They generate slightly less than 200 megawatts of electricity combined, with only one of them allocating 1.5 megawatts — the only known figure to date — to Bitcoin mining. As a result, the El Salvadorian leadership’s ambitions would clearly necessitate massive new facility development. They appear to have some ideas in that regard.
The Bitcoin city megaproject
El Salvador’s President Nayib Bukele announced plans to build a new Bitcoin city in November 2021. The settlement will be built in the shape of a “coin” at the base of the Conchagua volcano, whose geothermal energy will be used to mine Bitcoin. According to Bukele’s vision, it should be a perfect combination of glittering neon lights and a lack of taxation:
“Everything devoted to Bitcoin: residential areas, commercial areas, services, museums, entertainment, bars, restaurants, airport, port, rail.”
In keeping with regional customs, this ambitious construction project will be backed by a daring financial scheme — $1 billion in bonds, half of which will be used for city construction and the other half will be invested in Bitcoin. The bonds are expected to last ten years and pay a 6.5 percent annual interest rate to holders. Any investor with a bond holding worth more than $100,000 may be eligible for Salvadoran citizenship.
Major players in the cryptocurrency industry have backed the scheme. Blockstream, a blockchain technology company based in Canada, will be in charge of issuing the bonds in the form of tokenized securities on the Liquid blockchain, while Bitfinex will host them on its platform. According to Blockstram’s chief strategic officer, Samson Mow, by the end of the bond’s tenth year, the annual percentage yield will be at 146 percent, as the BTC price is expected to reach $1 million within five years. El Salvador would become the “world’s financial centre” and the “Singapore of Latin America” as a result.
The many challenges
There are a number of issues associated with the Salvadoran Bitcoin turn, including political backlash against President Bukele and his initiatives, pressure from the IMF and other international actors, and the early difficulties of the Chivo app. There are also a number of roadblocks in the way of plans to massively improve the country’s mining infrastructure.
The Bitcoin city announcement caused existing fiat-denominated El Salvador bonds to plummet, prompting investment experts to ask, “Why buy Bitcoin-backed Salvadoran bonds when you can just buy Bitcoin?” Some pointed out that the country already has a track record of failed charter city plans, as well as the fact that the Conchagua volcano, which is supposed to power the city and its BTC mining operations, has recently shown signs of seismic activity.
Worse, some critics argue that El Salvador’s overall energy profile does not provide a favourable environment for crypto mining. One source of concern is that the country still needs to import around 20% of its energy, primarily from Honduras and Guatemala. Current industrial energy rates in El Salvador are estimated to be between $.13 and $.15 per kilowatt-hour, while the global average price of Bitcoin mining is around $.05 per kilowatt-hour.
According to data from a recent study by the DEKIS Research group at the University of Avila, El Salvador ranks 73 in the global crypto mining potential ranking, with 35% of energy coming from renewable sources. In the United States, for example, this proportion is around 7.5 percent. El Salvador’s levels of national R&D expenditure, human capital index, and energy prices place it among the least sustainable countries for mining operations.
Pivoting to renewables
Despite some obvious limitations, the notion of El Salvador’s “endless possibilities” in mining is more than just hyperbole. El Salvador, like many other Latin American countries, has significant, albeit unrealized, renewable energy potential. Philip Ng, vice president of corporate development at green data centre provider Soluna Computing, emphasised the global trend toward making renewable energy more accessible, noting that it will benefit countries such as El Salvador:
Renewable energy is now astonishingly affordable, with the cost to build wind falling 72% since 2009 and solar falling 90% over the same period […] Renewable technologies offer a profound opportunity for South American power markets. Renewable energy assets can be built at a significantly smaller scale when compared with conventional energy. The result is that grids no longer face large transmission and infrastructure buildout costs when trying to add cheap and clean power.
Ng cited Chile as an example, where recent investments in renewable energy have enabled the country to shift from being a net importer of carbon fuels to an exporter of renewable energy. Demand, which is difficult to grow in countries with small populations, is a critical step in triggering such a transition.
One solution could be to create a “consumer of last resort,” or a layer of users, to ensure that power producers have a diverse revenue stream and are not solely reliant on utilities. Bitcoin miners could become this type of consumer. Establishing such a system would also mean that power producers would never have to reduce their excess output. Kenya is one such example, where hydroelectric plants share excess renewable energy with crypto mining facilities.
According to a Blockstream spokesperson, an announcement regarding the status of El Salvador’s Bitcoin bonds project will be made sometime in Q1 2022. It remains to be seen whether Nayib Bukele’s exotic dream of constructing a coin-shaped city at the base of a volcano will be realised in a pragmatic strategy that attracts foreign investment. However, it is clear that getting ahead in the renewable energy race will be critical for the success of El Salvador’s massive crypto mining projects even today.
