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El Salvador Effect: How the Bitcoin mining landscape is changing

Bitcoin officially becoming legal tender in El Salvador is an unprecedented event, and, as such, it might as well have unprecedented outcomes. At the same time, China’s continuous efforts to ban cryptocurrency mining lead to a large-scale miner exodus out of the region. The mining landscape is changing, and the supply of cheap electricity, friendly government regulations and taxes, and available mining infrastructure will be critical in how it will develop in these next months.

Why El Salvador’s decision makes sense

Twenty years ago, in 2001, El Salvador’s government decided to stop issuing its national currency, the Colón, and established the US dollar as the national currency. The aim was to achieve macroeconomic stability, stop inflation and avoid devaluation.

However, the exchange rate fixed by the government wasn’t proportional to each currency’s purchasing power, causing significant loss among the population, who saw their savings and salaries affected. In addition, being unable to define its monetary policy, the country lost maneuverability, depending exclusively on the FED decisions.

Bitcoin and US dollar bills
Bitcoin and US dollars are both legal tender in El Salvador

Eventually, job generation was affected. The lack of possibilities drove young people to look for new opportunities abroad, mainly in the United States. Nevertheless, those who weren’t able to emigrate faced terrible financial conditions.

In ES, ~70% of the population doesn’t have access to a basic bank account. These people have enormous difficulty accumulating wealth and even make a living. Hence, remittances from abroad are the primary source of income of ~25% of households and 16% of the GDP. Of course, the big winners in this scenario are banks and payment companies, which charge high fees for their services.

Enter Bitcoin, the most efficient, decentralized monetary network in history. An invaluable tool for an economy like ES — and frankly, most Latin American countries. With it, the people have broken free from banks and payment service providers’ ridiculous fees. Now, financial inclusion requires nothing but an internet connection.

El Salvador makes Bitcoin legal tender: Repercussions

Thanks to the joint efforts of Jack Mallers and ES President Nayib Bukele, Bitcoin is now legal tender in a sovereign country. For all we know, the process we know as hyperbitcoinization might as well be taking its first steps.

Mallers’ company Strike was critical in setting up the platform to make Bitcoin a liquid, convertible currency in ES. Through the Lightning Network and partnerships with financial institutions and cash point distributors, people can now easily turn their wallet balance into cash in several locations.

Moreover, as if that wasn’t epic enough, Bukele has already announced projects to build a bitcoin mining operation using geothermal energy obtained from volcanoes.

It seems like yesterday when a new wave of environmental FUD we had already seen years before flooded social media, mainly led by a series of Elon Musk’s tweets. Tesla’s CEO set off a discussion about bitcoin mining carbon emissions and the usage of fossil fuels.

However, the President’s announcements put it to an abrupt end. He cleared the FUD, putting his country in the spotlight of the bitcoin and the cryptocurrency community in general. A whole new debate has arisen: What effects will adopting bitcoin as legal tender have on ES?

The El Salvador Effect

Volcanic geothermal energy is clean, renewable, and sustainable, as it has practically zero environmental impact and involves no danger to the capability of future generations to use their own resources. It reduces the energetic dependence on fossil fuels and non-renewable resources, leading to significant savings, both energetic and financial.

These, added to several other benefits announced by ‘El Presidente’ — no capital gains tax on bitcoin, no property tax, immediate permanent residence for entrepreneurs — rapidly gathered the attention of VCs and mining operations. Many popular bitcoin and crypto personalities have already shown interest, visited the country, or even met with Bukele. At the same time, Google searches for “El Salvador Real Estate” spiked to all-time highs globally.

It is no coincidence that, after the ES congress passed the “Bitcoin Law” and seeing the positive impact of bitcoin adoption, many political leaders from other countries in the Latam region, like Paraguay and Colombia, announced they were working on similar bills.

Indeed, this news was the push emerging markets needed to kickstart new initiatives to bring the crypto and blockchain industries to their nations.

Current state of the Bitcoin mining landscape

The timing couldn’t be better for all these bitcoin projects and initiatives. China, the home for around 70% of mining computing power, called for a crackdown on high consumption, energy-intensive activities, detonating a bitcoin miner exodus from the country like no other.

Now, ES and the rest of emerging markets have a once-in-a-lifetime chance to gain a significant share of the world’s hashpower. Whether they are successful or not will depend on four factors:

  • Access to cheap, clean electricity.
  • Friendly government regulations.
  • Low taxes.
  • Available mining infrastructure.

Of course, because of all we’ve just said, ES seems to be the horse to bet on right now. But nothing guarantees that other big players could come up strong trying to steal its thunder.

Opportunities and limitations of hashpower migration

We stand before a situation we’ve never experienced before. And that’s a good thing.

Hashpower re-distribution favors decentralization and, in turn, improves the network’s security. Also, as we said before, these initiatives help dispel and disavow the environmental FUD that has haunted bitcoin for years. Not to mention that lowering mining operation costs will boost hashrate and the network’s efficiency. Of course, we can’t forget to mention the main reason behind all these efforts: many people from troubled economies will have access to bitcoin and enjoy financial inclusion.

However, there is a downside to the whole situation. Although better for decentralization, the fragmentation of crypto mining across the planet reduces the potential profit for miners, makes it difficult for small players to get economies of scale, and reduces the access by the market to overall crypto compute power.

On the other hand, if a country like ES is offering such good conditions for cryptocurrency mining (which it is), it may just be a matter of time until we swap one centralization for another. For hashpower to become decentralized, accessible, and profitable for small miners, we need it to become a liquid, tradeable asset.

That is what Titan aims to provide: a trustless, decentralized protocol for accessing, distributing, trading, and managing crypto mining power from anywhere on the globe; decoupling control of hashpower from its geographical location.

Conclusion

The mining landscape is changing by the hour and, although we can take a guess, it’s not clear how it will turn out to be in the next couple of months. What is clear is that as the situation develops and evolves, it will become harder for small players and non-enterprise-level mining operations to access hashpower and stay profitable.

We at Titan believe that Bitcoin becoming mainstream on the whole planet is a matter of when, not if. For that to happen, we need innovative solutions that enable anyone and everyone to access, distribute, trade, and manage hashpower. That way, we can ensure the decentralization and democratization of bitcoin mining, no matter where, how, or by whom it is done.

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