This week Venezuelan President Nicolas Maduro announced the sale of the first-ever national cryptocurrency. If I were a holder of bitcoin or any of the other recently issued cryptocurrencies, I’d be worried. The Venezuelan “petro” will inevitably fail, and when it does it may well take down the flimsy foundations on which the other cryptocurrencies are based.
Though a number articles and commentators have already persuasively argued why the petro is a ridiculous flight of fancy doomed to failure, it’s worth recapping some of their arguments. First, the essential ingredient for any currency to become and remain a store of value and to grow in value is trust. That is especially true of cryptocurrencies in which users must have a mutual belief that there is shared value that will hold, and that the issuer will not mine more “coins” willy-nilly.
Now consider that in the case of Venezuela’s petro, the issuer is the government that has created one of the worst economies in the world. This year alone, Venezuela’s economy, is predicted to contract by 15% and inflation may reach 13,000 percent. What is to stop the same government that has indiscriminately printed new paper bills, the bolivar, and that has maintained a complicated, corrupt, distorting exchange rate from issuing more coins in the hopes of keeping its sinking economy afloat—especially as the president rushes headlong into an April 22 election with an approval rating around 20 percent? Nothing. Investors would be fools to bet otherwise.
Second, largely to assuage the concerns over the trustworthiness of the new currency, President Maduro has pledged that each petro will be backed by a barrel of oil. Leaving aside the sad irony that a petroleum dependent country would name its currency after the very resource that has cursed the country in recent decades, those pledged barrels behind the petro are in fields that haven’t been tapped yet in the Orinoco Belt. That would be like me offering a new currency on a job that I haven’t gotten yet, but that—I promise—will earn me a salary in the seven digits. Would you buy it? (And I don’t even have 13,000% inflation or a contracting personal economy, I promise.)
Last, this new currency is being issued by one of the most corrupt countries in the world (Venezuela ranks 169th out of 180 in Transparency International’s most recent Corruption Perceptions Index). Billions of public funds and investments have been lost to personal accounts—including allegations that the former head of the state oil company, Rafael Ramirez embezzled $4.8 billion. More than 40 members of the government are under U.S. sanctions for allegations of corruption and ties to narcotics trafficking. The Maduro regime destroyed the independence of the Central Bank and state oil company, PDVSA, raiding their reserves to fund their political projects. As expected, both have gone broke. Cryptocurrency? For Venezuela, kleptocurrency seems more appropriate.
So why should investors in the other cryptocurrencies be nervous? Because Maduro’s embrace of the financial trend of the minute will demonstrate that the innovation is a house of cards and show how fragile these virtual creations really are. While bitcoin and other cryptocurrencies are separate from the ill-conceived and deeply flawed petro, there is a risk of panic as the petro crashes and skittish, short-term investors begin to question the basic assumptions that undergird the entire cryptocurrency fad. As with most market or currency booms and busts it only takes one or two failures to trigger a panic that sees investors running for the doors. And before you know it the bubble has burst. Rarely are these things rational.
In short, bitcoin investors, meet your new threat: the Venezuelan shitcoin. Be scared. Very scared.