Judging from the mostly vertical walls of the gorge and the relative smoothness of the rock walls, it was probably carved mostly by water, possibly with some help from the glacier. The shaft down which the little clear stream trickles was probably originally a crack in the rock or maybe a vein of softer rock which over time got worn away by trickling water.
The walls of the cave, like the walls of the gorge, are partially covered in vegetation and constantly sprayed with water. This makes for a stunning play of light on the walls and water when the sun shines down the hole in the roof of the cave.
Krosslaug (the Pool of the Cross) is a small hot pool in Lundarreykjadalur in south-west Iceland. As the story goes, in the year 1000 C.E. when the people of the country voted to accept Christianity in Þingvellir, the contingent from the west of the country refused to be baptised in the icy waters at Þingvellir (we’re talking immersion baptism) and were instead baptised in this hot pool.
There is a plaque in Latin commemorating the event, and the pool is surrounded by a small and lovely planted forest. Unfortunately, as I have seen at almost any place of interest in Iceland that lacks sanitary facilities, the area near the pool is strewn with toilet paper and the ever-present lone tampon (there is always just the one – I have never seen more in any place, and so far I have been spared finding any fresh ones). I also found a lone sock, no doubt lost by someone who wanted to bathe their feet in the warm water.