When what may be the world’s foremost Banana Republic starts using a form of cryptocurrencies to raise money to finance itself you know there may be something of a bubble going on.
The petro is Venezuela’s new cryptocurrency utilizing blockchain technology. Supposedly backed by oil. Maybe that’s just in name only. It’s backed by oil in the sense that the Venezuelan government pegs the petro the price of oil. You can’t exchange a petro for any actual oil. The petro is only available from the Venezuelan government in U.S. dollars. So the average Venezuelan cannot actually buy it since they generally don’t have U.S. dollars laying around. And it can only be used to pay Venezuelan taxes. Hardly making it appealing to non-Venezuelans.
Otherwise, it’s just your standard government issue currency(!).
Venezuela’s economy is the basket case of the western hemisphere. Their economy has shrunk by about 38% since 2014. Plus they have the hyper-inflation thing going on too. People are literally passing out at work from hunger – lack of food. The country is unable to pay its required scheduled bond payments. It is pretty much cut out of the international markets for raising new debt. The U.S. government has laws against Americans and their businesses from buying Venezuelan debt too. So what is a failing government to do?
Print money and call it a cryptocurrency. That is the answer!
The Venezuelans say they have so far raised well over $700 million from this little scheme.
Joe Kennedy said in the late 1920s “”You know it’s time to sell when shoeshine boys give you stock tips”. He then exited the market before the crash. The same theme is in the book/movie The Big Short, when an investment team was talking to a stripper at a club and found out she owned several investment condos. Purchased with no documentation (no income) type loans. The investment team knew for sure there was a problem with the mortgage market. And went short on real estate.
On March 19, the Trump administration banned Americans from using the Venezuelan cryptocurrency. Under the presumption that it is intended to allow the bypassing of U.S. sanctions on Venezuela.
For the average person, stay away from cryptocurrencies. I’m reminded of the brother of a friend who lives in a sparsely populated western state. His job is as a tradesman. And he is expert at fixing cars and trucks. He is a good guy. But he went all-in on bitcoin at its peak. I haven’t heard his reaction after all the bitcoin volatility and decline. He almost certainly lost a lot. I would let that fellow fix my car any time. But making investing decisions? Not so much.
When you see crazy situations in a market or financial product such as the Venezuela petro, it is Buyer Beware more than usual.
