Will El Salvador Mine Bitcoin With a Volcano?

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Sept. 29, 2021

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CRYPTO EATS FINTECH: R3, the enterprise blockchain startup, is looking to enter the vast expanse of decentralized finance (DeFi) with a “private, permission-less” network. “The need for privacy, identity, finality and governance in the financial industry has remained unchanged. It is for the blockchain technologies to meet the requirements, not the other way around,” an R3 representative told CoinDesk. Meanwhile, publicly traded fintech player Affirm Holdings will soon allow customers to buy and sell crypto.

CONFLICTS OF INTEREST: South Korea banned virtual asset services providers (VASPs) and their staff from trading tokens they issue, the country’s Financial Services Commission said in a Wednesday statement. Meanwhile, Eliza Gkritsi writes an in-depth feature about Huobi’s complicated relationship with its home country, China, and its struggles to shift key parts of its business abroad ahead of Beijing’s latest, and most severe, crypto crackdown.

NFTs FOR THEE: Ripple is launching a $250 million fund focused on exploring new use cases on non-fungible tokens (NFTs) on the XRP Ledger (XRPL). This “Creator Fund” is being launched in partnership with NFT marketplaces Mintable and mintNFT, and brand design agency VSA Partners. Meanwhile, a startup called NFTfi is allowing users to borrow against their NFTs, sort of like a digital pawn shop.

CFTC CRACKS: Kraken will pay $1.25 million to settle charges with the U.S. Commodity Futures Trading Commission (CFTC) that it offered illegal margined digital asset transaction services and did not register as a futures commodity merchant. Kraken offered margins of 5:1 on some of its crypto products between June 2020 and June 2021, and had sought to clarify what constitutes “actual delivery” for novel crypto assets.

MINING GIANT: Bitmain, one of the world’s largest manufacturers of bitcoin mining machines, is planning to suspend sales of its machines in China following the latest Chinese government ban on crypto activity, according to three sources who spoke to CoinDesk after learning about the move from Bitmain. The privately owned Bitmain will also move the majority of its production out of Shenzhen in southern China and into other countries.

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Putting the news in perspective

The Takeaway

The Inexorable Green Logic of the Bitcoin Volcano

Yesterday afternoon, Salvadoran President Nayib Bukele posted a short video of workers installing a shipping container full of cryptocurrency mining rigs at a geothermal power plant surrounded by thick jungle. “First steps … #Bitcoin,” the president tweeted.

There is still a deep vein of skepticism about El Salvador’s bitcoin project. But taken at face value the video shows progress towards its second stage. The first came in early September when the Central American country made bitcoin legal tender. Now Bukele wants to harness the country’s potentially huge supply of clean, renewable energy to mine more of the cryptocurrency.

The implications, not just for crypto but for geopolitics, could be huge. El Salvador sits on the edge of the Pacific “Ring of Fire” and has 20 “potentially active” volcanoes, according to VolcanoDiscovery.com. They run the length of the entire country and have been harnessed to generate 21.7% of the country’s energy, according to the U.S. International Trade Association. (For comparison, all renewable energy sources together comprise only 12% of U.S. energy.)

Even this large proportion represents only a fraction of the energy that could potentially be drawn from El Salvador’s volcanoes. But some potential sites sit miles away from population centers like San Salvador and San Miguel. Connecting them to the power grid would require extensive infrastructure buildout, much of it in inhospitable conditions.

Bitcoin miners, by contrast, can be installed on even the remotest site, and connected to the Bitcoin blockchain wirelessly. As bitcoin adoption continues to grow, this has the potential to radically upend the logic of energy generation, including the utilization rate of “stranded energy” like El Salvador’s remote volcanoes, wasted outputs like the methane flares produced by natural gas mining or unneeded energy from off-peak wind or hydroelectric generation.

El Salvador’s push illustrates why the most powerful benefits will likely accrue to renewable energy sources: They’re generally cheaper than fossil fuel sources. A volcanic power plant is simplicity itself. Basically, you drill a few big holes in the ground and use the heat to drive turbines. Compare Iceland’s Krafla volcanic power station, which looks like a red barn with a couple of tubes coming out, to the towering, tangled monstrosity that is an average natural gas power plant, and you can see the cost savings.

Some argue this makes bitcoin a potential driver of further renewable energy development, as laid out in the new documentary “This Machine Greens.” El Salvador may become a case study. If Bukele follows through, bitcoin could subsidize development of a much greater proportion of the country’s previously dormant power resources. And, in the long run, not all of that new energy will go to mining bitcoin – nearby communities could also benefit, and other new industries could even grow from the availability of cheap, clean power.

That’s where geopolitics comes in. El Salvador’s immense supply of volcanic energy has never been fully harnessed for the betterment of the nation because of technological limitations. By making energy portable, bitcoin has the potential to empower many nations with underutilized clean power resources. Guatemala, next door to El Salvador, has its own volcanic bumper crop: No surprise that nation, too, is thinking about bitcoin.

–David Z. Morris

Financial advisors are taking a cautious approach to bitcoin as client interest in the space increases and new products offer retail investors easier access to this new asset class. As trusted guides, advisors cannot risk falling behind, even if the jury is still out on bitcoin's role in a client's portfolio.

At Bitcoin for Advisors 2021 on Oct. 6, Michael Kitces and Tyrone Ross share insights from the front lines. Apply today.

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