Venezuela is on the brink of an economic collapse. It seems like every week Venezuela is making international headlines regarding food shortages, increased crime rate, corruption, lack of medical resources, increased unemployment rates and hyperinflation. It is almost unbelievable to think the nation has lost almost about a third of its Gross Domestic Product over the last five years. This is partially a result from the dwindling petroleum prices since 2012, which also happens to be Venezuela’s number one export. According to OPEC, revenue from petroleum exports account for more than 50% of the country’s GDP and roughly 95% of total exports.
In an attempt to save the Venezuelan economy, what does the government do? You said it- print more money. According to Bloomberg, inflation rates on the nation’s native fiat currency, the bolivar, has hyperinflated up to more than 4300% in 2017. This has wiped out entire savings accounts of Citizens and it is no surprise why they no longer trust their nations native currency.
However, there is a glimpse of hope. Venezuelan President Nicholas Madura aims to use cryptocurrency to not only help relieve the government’s $60billion USD debt to foreign creditors (Bloomberg) but also completely rid the country of its inflation problem. He has announced the creation of its so-called cryptocurrency named the “Petro”. The Petro will be an asset-backed token on an existing network such as Ethereum or NEM (It is clear that you understand the difference between a coin and a token, and that they are issuing a token here, and not a coin.) President Madura plans on fundraising a maximum amount of $4.9 Billion USD by selling 82.4 Million Petro tokens in exchange for $60 USD per token, a value that’s based on a barrel of oil. On the first day of the token presale, the government was able to fundraise around $780 Million USD.
First off, what exactly is a cryptocurrency and what traits make it desirable for President Madura and his economic disaster? Well, let’s start with the basics. A cryptocurrency is a digital currency that uses complex encryption methods to regulate the generation of units and verify the transfer of funds. This means that nobody can just go into the blockchain and create more coins and each coin’s transaction data is permanently stored and verified. Nobody can go back and rewrite any data that was previously stored on its blockchain. This would instantly solve Venezuela’s inflation problem as there will always be a fixed supply of its digital currency- in this case, 100,000,000 “Petro”. On top of that, network security would surpass traditional systems. Because the network is spread over a countless number of “miners”, or individuals running the network, there is no focused point of attack; thus making it almost unhackable. President Madura
Well, let’s start with the obvious. Venezuela is broke. It cannot afford to feed it people. It cannot afford medical supplies to help the sick. It is in debt to its neck and unemployment is at 26% (Cia.gov). In addition, Venezuela and its state-owned oil company PDVSA just also recently defaulted on their USD debt in November 2017 (Forbes). What gives you any idea that you will get any return from this token? Will buying this token magically get Venezuela out of its financial hole and lead you to the green? Let’s face it- you are basically buying a gift card to Venezuela. Also, If you are an investor and a company approaches you that is heavily underwater with the end not in sight, would you put your hard earned money in their hands? You don’t want to catch a falling knife.
Also, the lack of trust from the Venezuelan people will pose adoption issues. This is a problem because cryptocurrencies rely on network effects for their value. Interesting enough, you can’t even purchase the Petro with their current fiat currency. This is completely shutting out residents in the country in investing in it’s own token and likely reducing adoption rate. This token is also not decentralized by any means. Not only do you have to register with Venezuela to be a miner, but its operation will also be supervised by the Superintendency of Cryptocurrencies and Related Assets. The government basically controls everything from price to operations to mining. Let’s top this off with market cap. The Venezuelan government is seeking a 6,000,000,000 USD Market Cap. That would land it in a seat as a top 10 crypto, but does it even come close to the utility, security, sentiment, and adoption as its peers?
Ultimately, there are some very big roadblocks Venezuela will have to resolve moving forward, but at this point cryptocurrency is the best chance Venezuela’s got. Should you invest in it? Very questionable.