At around 5:00 AM EST on October 1, El Salvador’s President Nayib Bukele tweeted that his nation had just mined its first Bitcoin using geothermal energy, power generated from the jets of scalding water and steam boiled by a towering volcano set deep in the jungle. An hour later when the press reports emerged, Bitcoin did a hockey stick, jumping in minutes from $44,900 to $47,300, and partied to $48,000 by mid-afternoon, adding 6.9% or $58 billion to its valuation. Though it’s always difficult to tell what news drives the careening course of Bitcoin, it’s likely that buyers pounced thinking the report that El Salvador was mining coins using volcano-driven electricity would soften worries surrounding the signature cryptocurrency’s gigantic carbon footprint.
Bukele––the self-described “coolest dictator in the world”––is promoting El Salvador as a new hub for green Bitcoin production. In a June tweet, he announced an order for LaGeo SA, the state-controlled geothermal electric utility, to “put up a plan for #Bitcoin mining with very cheap, 100% clean, 100% renewable, 0 emissions electricity from our volcanos.” The campaign dovetails Bukele’s drive to make El Salvador the first country to accept Bitcoin as legal tender, a plan he first unveiled in June at the industry confab in Miami. On September 7, Bitcoin became an official currency in the nation of Central American nation of 6.5 million. Bukele dotted the towns with ATMs that exchange the tokens for the dollar, which remains the country’s main currency, and requires all companies to accept Bitcoin for payment, causing an uproar in the business community since the value of their coins or Bitcoin receivables can be worth a lot less at 5:00 PM than when customers paid for meals or supplies that morning.
Where’s the new Bitcoin coming from?
A few days before Bukele announced that El Salvador had produced its first batch of Bitcoin, he posted a flashy teaser video featuring the facility being outfitted for mining. The 25-second clip shows an aerial shot of the sprawling geothermal plant in the department of Berlin in Eastern El Salvador, a single van delivering mining gear, and workers plugging in a bank of the ASIC computers that whir 24-7 spouting the random codes that unlock awards. The video went viral, attracting around 2.3 million views. The amount of Bitcoin the facility appears to be producing, however, is somewhat more modest. On the maiden run on October 1, the plant produced just one-hundredth of a Bitcoin worth less than $500. Alex de Vries, a Dutch economist whose website tracks Bitcoin’s environmental profile, estimates that assuming the output represents several hours of production, and judging from the small number of machines shown in the video, the center will be producing just a few thousands of dollars a day worth of Bitcoin at best. “It’s mainly a publicity stunt,” says de Vries.
Bukele wants to lure miners, but the program’s bad for El Salvador
Berlin is one of two geothermal plants in El Salvador, with the other in eastern El Salvador. Together, they generate just over 200 megawatts of electricity, twenty-five percent of nation’s output, one of the largest proportions for any country. Bukele wants to attract the world’s miners, many of whom were recently expelled from China and are seeking new homes, to locate near the plants. His pilot project at the former is apparently a promotional vehicle showing that El Salvador is mining away and open for business.
But for the people of El Salvador, the plan’s a loser. In the absence of big state subsides, El Salvador offers poor economics for minting Bitcoin. Its cost of industrial electricity runs between 12 an 15 cents a MWh. That’s wildly expensive versus places where the Chinese diaspora and other producers are flocking, notably Iran and Kazakhstan. In those two coal-intensive nations, costs run between 3 cents and 5 cents. A new project in Alberta, Canada running on natural gas is offering power at 3 cents, and at waste coal facilities in Pennsylvania, the juice is even cheaper.
Hence, the only way Bukele can make El Salvador a crypto-capital is by offering grants big enough to close the gap between the nation’s costs and the super-bargain rates offered by competing locales. That wouldn’t be the case if the “Tom Thumb of the Americas” were capable of generating far more electricity than its households and businesses are consuming. But it’s just the opposite: El Salvador imports 20% of its power––one reason its costs per KWh are so high. Instead of benefiting from excess capacity, it’s suffering from a shortfall in domestic production. To make the mountainous volcano regions a go-to place for miners, Bukele would need to offer them electricity at less than one-third what Salvadorans are paying. It takes years to build new geothermal plants. So the government would be obliged to replace the power allotted to the miners by importing more high-priced electricity. Most of the energy sent to El Salvador flows from Guatemala, a nation that relies on fossil fuels for almost 40% of its output.
The impoverished nation’s citizens would face either higher taxes, inflation, or both, plus inflated electric bills. “The whole exercise has been good PR for Bitcoin,” says de Vries. “But El Salvador is totally uncompetitive as a place for mining.” “Going geothermal” and volcanos as a fount of green energy sound great to an industry fretting that pollution that gets worse the higher its price goes could be its downfall. El Salvador’s president-cum-Music Man craves the glamor of making his nation a world capital for Bitcoin. His people would pay the bill for his ambitions, and it would be a whopper.
Subscribe to Fortune Daily to get essential business stories straight to your inbox each morning.
