The city will be circular, with an airport, residential and commercial areas, and feature a central plaza designed to look like a bitcoin symbol from the air.
El Salvador has plans to build the world's first "Bitcoin City", funded initially by bitcoin-backed bonds.
President Nayib Bukele made the announcement on Saturday at an event closing a week-long promotion of bitcoin in El Salvador.
"Invest here and make all the money you want," Bukele said in English, dressed all in white and wearing a reversed baseball cap, in the beach resort of Mizata.
The city, planned in the eastern region of La Union, would be “fully ecological”, getting geothermal power from a volcano, and not levying any taxes except for value added tax (VAT).
Half of the VAT levied would be used to fund the bonds issued to build the city, and the other half would pay for services such as garbage collection, Bukele said.
'A new Alexandria'
El Salvador in September became the first country in the world to adopt bitcoin as legal tender.
Although Bukele is a popular president, opinion polls show Salvadorans are skeptical about his love of bitcoin, and its bumpy introduction has fueled protests against the government.
"If you want bitcoin to spread over the world, we should build some Alexandrias," said Bukele, a tech savvy 40-year-old, likening his plan to cities founded by Alexander the Great.
El Salvador planned to issue the initial bonds in 2022, Bukele said, suggesting it would be in 60 days time.
Samson Mow, chief strategy officer of blockchain technology provider Blockstream, told the gathering the first 10-year issue, known as the "volcano bond", would be worth $1 billion.
Half of the sum would go to buying bitcoin on the market, he said. Other bonds would follow.
After a five year lock-up, El Salvador would start selling some of the bitcoin used to fund the bond to give investors an "additional coupon", Mow said, positing that the value of the crypto currency would continue to rise robustly.
"This is going to make El Salvador the financial centre of the world," he said.