You read that right. A cryptocurrency (Bitcoin) is now a national currency in El Salvador. Not only that, this currency revolution is powered by volcanoes. This is your guide to what that even means.

Chingo Volcano in El Salvador, Photo by Giuseppina Kysar, Smithsonian Institution (Giuseppina Kysar, Wikimedia).

What is Bitcoin?

Bitcoin is a cryptocurrency, a digital peer-to-peer currency, that cuts out third parties like banks or the government. This is ironic now that it’s being used as a national currency. Bitcoins are basically computer files that sit in a digital wallet app you can download for your smartphone. It’s secure and untraceable and its value historically has been pretty volatile

Sounds sketchy, right? Maybe, but people have bought into it. Since its founding in 2008, Bitcoin’s value and quantity have skyrocketed. One Bitcoin is currently worth $60,960.86 and daily Bitcoin transactions exceed $28 billion. That’s a lot of money invested in something that is not physically tangible. You can get Bitcoin by buying it with other currencies, taking Bitcoin as payment, or creating it by Bitcoin mining. 

How does Bitcoin mining work?

Bear with me on this one. Bitcoin mining is based on computers solving complex computational problems. Under its current system, Bitcoin transactions have to be “validated” to protect from fraud. Unlike a physical dollar bill, which cannot be duplicated, it’s much more complicated to ensure that there are no duplicate transactions when your currency is virtual. The mining process produces new Bitcoin and verifies transactions of the Bitcoin already in circulation.

Although this ensures the integrity of Bitcoin, it also ends up being a big environmental problem. Bitcoin mining requires a lot of electricity. It consumes more electricity annually than the entire nation of Finland and produces 22-22.9 million metric tons of CO2 annually. It also produces a lot of e-waste (22,000 large dump trucks worth per year, a number currently on the rise). Between energy use and e-waste, Bitcoin is a drain on the environment.

President Nayib Bukele and his wife, Gabriela Rodríguez in 2016 (Presidencia El Salvador, Wikimedia).

So, what’s happening in El Salvador?

Starting in September, El Salvador became the first country to adopt Bitcoin as a legal currency (in addition to the US Dollar, its other official currency). El Salvador’s president, Nayib Bukele, tweeted that “El Salvador has the right to advance towards the first world.” 

The government produced its own digital wallet app called Chivo, Salvadorean slang for “cool.” It encouraged Salvadorans to use the app by offering $30 worth of Bitcoin for signing up. El Salvador bought 650 Bitcoins (worth approximately $32.9 million at the time). The app allows Salvadorans to exchange dollars for Bitcoin, use Bitcoin as a form of payment, and transfer money using Bitcoin. With half a million more users than expected, officials scrambled to keep up with demand.  Chivo was temporarily disconnected because of the influx of people using it. But, later that same day it was already being used by local McDonald’s as a form of payment. 

Why would El Salvador adopt Bitcoin?

President Bukele hopes that Bitcoin will help alleviate El Salvador’s economic problems. Fees associated with remittances, when Salvadorans abroad transfer money back home, are a major concern. According to Bukele, Bitcoin will help Salvadorans avoid hefty cash transfer fees. For context, the monthly minimum wage in El Salvador is $365 and the average monthly remittance transfer is $195. These remittances make up one-fifth of El Salvador’s economic activity. With Bitcoin, the transfers from abroad can happen in minutes and occur fee-free, saving Salvadorans $400 million per year. It will also support the 70% of Salvadorans that do not have bank accounts but might use the app instead.

Is this a good thing?

The consequences of El Salvador’s move are unclear. Certainly, the additional financing options, especially fee-free remittances, should help the country’s struggling economy by avoiding hefty fees (which usually go to foreign companies). That being said, there’s also the volatile Bitcoin market to look out for. 

Protests followed the move. Demonstrators claimed that there are risks of inflation in El Salvador and Bitcoin’s instability. However, his latest approval rating was 85.7% and it’s been consistently high across a variety of independent polls, so these fears aren’t widespread or at least are not enough to turn people against him.

So, the volcanoes?

El Salvador is using volcanoes to power Bitcoin mining. 

Read that again. 

President Bukele tweeted out this video showing the geothermal energy production, powering the country’s Bitcoin mining. Geothermal energy already makes up nearly a fourth of domestic energy production in El Salvador. Bukele encouraged the state-owned geothermal company to offer facilities to mine Bitcoin with “100% clean, 100% renewable, 0 emissions energy from [El Salvador’s] volcanoes.” 

It appears that he’s followed through on that promise. 

Mining Bitcoin with geothermal energy isn’t new. In countries like Iceland and Norway, Bitcoin miners take advantage of cheap geothermal (and hydroelectric) energy in order to power their computers. This is exciting in El Salvador, dubbed the land of volcanoes, as they can further take advantage of their natural resources in a sustainable way.

What’s next?

Salvadorans will continue to use Bitcoin as currency and volcanoes will continue to power Bitcoin mining as the country tries to increase its Bitcoin portfolio. Bukele has yet to say what direction El Salvador will take next. But, with all of the funding put into this system, it doesn’t seem to be going anywhere.

This opens up bigger questions:  Why didn’t Iceland make Bitcoin legal tender? Will other countries follow suit or will they follow China’s latest decision to ban cryptocurrency transactions and mining in favor of its own new coin? Is volcano (or a different renewable energy) powered Bitcoin the future of national currency globally? Regardless, this is a major step for both the cryptocurrency market and El Salvador, as both try to establish themselves further in the global market.