Venezuela’s proposed 'petro' is a risky bet, with purported combination of cryptocurrency, oil reserves

Alex Endress, World Oil
2/9/2018

As the buzz around cryptocurrencies begins to reach a fever pitch, the Venezuelan government has announced a plan to release a new digital currency to help shore up its struggling economy.

Called the "petro," Venezuela has suggested that the cryptocurrency will be released to the public on Feb. 20, and will be backed in some fashion by oil, gas, gold and diamonds. Venezuelan President Nicolas Maduro also is pitching the currency to OPEC as a potential partnership. The news comes as U.S. officials warn investors against acquiring petro coins, informing prospective buyers that such activity could violate U.S. sanctions, which ban purchases of new Venezuelan debt. For its part, the investment community has reported its own reservations regarding the petro.

Aside from the natural uneasiness that one should have about investing in a currency from a country with a failing economy, it also has been pointed out that tying the value of a cryptocurrency—something inherently volatile in nature—to the value of commodities, isn’t necessarily a recipe for stability.

The idea that commodity prices—themselves subject to pretty sharp fluctuations—will dictate the price of the petro is absurd,” says David Floyd, staff writer at Investopedia.com. “Even accepting Maduro's claim that the cryptocurrency is backed by natural resources, that stabilizing influence would hardly still the needle amid the rapid-fire booms and busts of the cryptocurrency market.”

Another problematic factor is that as the country has stacked up massive debt, it has been challenged to extract the hydrocarbons from its own oil fields, putting any potential hydrocarbon backing in jeopardy. Moreover, investors point out that such an item could be used by the government as a money-laundering tool to pay its bills.

Venezuela is to release some 38.4 million petros, when the currency is made public later this month. The final count to be released is 100 million, although it has been reported that the government will discount early issues of the currency to encourage demand.

Though the petro is an interesting concept, investment in the cryptocurrency would be a hefty gamble. With the Venezuelan government in default, and U.S. sanctions still intact, prospects for the digital coins are speculative, at best, and perilous, at worst.

Maduro is expected to urge fellow OPEC members, and even non-member states, to join his country’s cause, according to Al Jazeera, which quoted him after the leader’s meeting with OPEC Secretary General Mohammed Barkindo. If OPEC agreed to partner on the cryptocurrency, the oil cartel’s affiliation could add credibility and raise the profile of the petro, but it’s puzzling to understand why countries like Saudi Arabia and Kuwait would want to work together on such a project.

As it stands in its current state of limbo, tracking the petro’s future will be more of an entertaining activity for spectators, versus a strong investment opportunity. Those willing to test the waters of the cryptocurrency domain, which is risky enough already, should stick to the major established digital coins.

The Authors ///

Alex Endress Alex.Endress@worldoil.com

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