The Venezuelan Petro 

Venezuela will launch its own cryptocurrency on November 5th. This will be the first time a nation or country will issue an official crypto currency which will also be backed by oil and other commodities. However, there are many problems with this new currency, the price of its offering, and other issues when you start to analyze the money trail.

They are doing this to get around sanctions which have crippled their economy. The price of the currency is supposed to be backed by oil and other materials but there is a lot of doubt as to how that will be done or whether the initial asking price of 60 dollars will be a fair price to pay for the initial offering. The price is set by the Venezuelan government initially, which they want to peg to the price of a barrel of Venezuelan oil, however, there seems to be much doubt in the cryptocurrency markets as to the validity and function of this cryptocurrency from Venezuela. Venezuela is a massively corrupt government, which has failed to control its own currency, the Bolivar, against hyperinflation of 1.3 million percent this past year, according to the International Monetary Fund (IMF).

The President of Venezuela has stated that it will begin trading on six major cryptocurrency markets, but there is a lot of skepticism as to the validity of the price and whether it will be properly backed, as they claim it will be by commodities. This could be a sign of desperation by the Venezuelan government to respond to a crisis in their currency devaluation by issuing a new currency which they now claim is backed by real materials.

Analysis

Based on the reports of an IPO of this currency, many in the cryptocurrency market are very skeptical of the validity of this and some calling it a stunt by President Maduro to cover the abysmal failure of the Bolivar.

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In any initial offering, the only one assured to make money is the person or entity selling the currency. Assuming people buy into the 60 dollar price of the initial offering, they will most likely make a few billion, and along with the 5 billion dollar loan from China recently they have a few billion more to keep functioning until they can pull another scheme to make money. If you follow the money, the loan to Venezuela was secured mainly by oil, that means in some way your new purchase of the new cryptocurrency is owned by China. If Venezuela defaults or is unable to repay China, the cryptocurrency they issued will be worthless if China seizes the assets which Venezuela cannot pay.

Speculation and Theory

If you follow the chain of events in a timeline, it could look like this:

  • Venezuela offers an IPO of a cryptocurrency gaining a few billion. Let’s say 3 billion, as some have suggested. China loaned Venezuela 5 billion secured by oil, and very likely other materials. Perhaps those other materials are backing the Petro?
  • Venezuela is unable to repay China for the 5 billion because their economy is in such bad shape.
  • China then takes and seizes the oil from Venezuela, however, the big loss will be to the cryptocommunity since the currency will be not backed by anything at all.
  • Crypto investors are left with nothing but a worthless speculative investment in an already crowded cryptocurrency market.

The corrupt government of Venezuela may end up, if successful, selling the underlying assets twice. The possible end result could theoretically be the equivalent of selling a contract which states that the person who owns this contract owns your car. However, due to financial difficulties you take out a loan secured by your car. If you default on your loan the bank takes possession of your car, however, the person who bought the contract or note to your car has no car underlying their note. You basically sold your car twice, the loser in this case is the person who purchased the note to the right to your car. In this case, the loan was made to China first, so they have first claim to the underlying oil in the country, not those investors and speculators who hold a currency backed by the oil.

Note:  The author of this article owns no cryptocurrency or any investment in this article.