Petro Coin Venezuela: A Global Crypto Confidence Trick?

This article is opinion only and has drawn upon our network of contacts on the ground in Venezuela. President Maduro calls Petro a cryptocurrency but we, at TotalCrypto, see it as nothing more than a scheme to keep his regime in power for as long as possible. Petro is simply a method keep selling debt to foreign investors, dressed up as an oil backed cryptocurrency. It’s a crypto confidence trick; don’t fall for it.

Why Petro Could Be A Threat To Cryptocurrency Markets?

Silk road hidden site seized

TotalCrypto predict that the Venezuelan Petro ‘cryptocurrency’ will fail and that this will be a major negative news item in 2018. We worry that Petro’s failure will harm credible cryptocurrency projects and create negative sentiment in cryptocurrency markets.

Indeed, Petro’s failure could even be used as an excuse for over regulation and to stifle the innovation that is happening in the cryptocurrency space. Even worse outcomes would see Petro being used as excuse to promote a mainstream narrative claiming that cryptocurrencies are mechanisms to facilitate fraud and illegal activities.

Cryptocurrency has come far since it’s reputation was tarnished by Bitcoin’s use on the Silkroad. However, most would agree that there is still a stain hanging over from this even today. It is almost certain that some of you have spoken to friends and family about Bitcoin who believe cryptocurrency is mainly used by criminals.

In this article we will explain why we think that Petro is not a real cryptocurrency. Instead, it is a confidence trick used to raise foreign currency to pay Venezuela’s debtors and keep the country afloat that little bit longer.

Quite simply, if Petro fails it may unfairly negatively impact on cryptocurrency markets and we must resist the temptation to spread fear, uncertainty and doubt.

How Big Is Petro Coin?

According to CCN, the Venezuelan President Maduro claimed that $5 billion has been raised in the Petro coin ICO pre-sale. It seems doubtful that the Petro presale raised anywhere near this amount. However, this is exceptionally hard to prove one way or the other.

If Maduro is to be believed, then this would make Petro at least a top 8 cryptocurrency (if it were listed on Coinmarketcap).

What does Robbing Peter To Pay Paul mean?

To rob peter to pay paul definition

Why Is This Relevant To PETRO?

It is no secret that the Venezuelan economy is struggling with hyperinflation and US sanctions. The economy is heavily dependent on oil, and this commodity represents 95% of Venezuela’s exports. CNN reported that Venezuela has no other source of foreign income. This makes the country solely reliant on the PDVSA (the state oil company).

Venezuela owes bond $9 billion in bond payments in 2018 denominated in foreign currency:

Venezulean bond payments schedule 2018

  • $2.3 billion in PDVSA interest payments.
  • $0.84 billion in PDVSA principle payments.
  • Total PDVSA payments: $3.14 billion

According to the sources, below Venezuela had only $9.615 billion in foreign currency reserves in February 2018. This figure also includes the countries gold reserves. This means that if Venezuela liquidated their entire foreign currency reserves, then the government run out of this money in around a year.

Venezuelan Foreign currency reserve chart 2017 to 2018

Possibly the rise in Venezuela currency reserves in February was due to the Petro pre-sale launched on 20th Feb.

With sanctions taking their toll on the economy, Maduro is desperate to get his hands on foreign currency to keep the country afloat by making future bond payments. It seems no coincidence that foreign currencies like USD and Ethereum / Bitcoin (which can be freely traded to USD) were offered as Petro payment methods. President Maduro revealed that Petro sales comprised of:

  • 40.8% USD.
  • 6.5% EUR.
  • 18.4% Ethereum.
  • 33.8% Bitcoin.
  • 0.2% Yuan.

It seems extremely likely that Petro investors are going to have their investment capital used to fund Venezuelan bond repayments. Indeed, the whole Petro experiment could be seen as nothing more than a mechanism to keep selling Venezuelan government debt to foreign investors.

But Petro Is Backed By Oil And Venezuela Has A Lot Of It…

Venezuela flag and oil mining

Maduro has claimed that five billion barrels of oil have been allocated to back the Petro cryptocurrency. The question is: Where are these 5 billion barrels of oil? Is it stored away so that the Petro cryptocurrency is backed properly?

We can see below that The United States has the largest strategic petroleum reserves with a total capacity of 727 million barrels.

Fact: The United States has the largest strategic petroleum reserves with a total capacity of 727 million barrels.

5 billion barrels of oil is equal to 794,936,474.64 cubic meters1. That’s nearly 795 million cubic meters.

There are 2,500 cubic meters of water in one olympic sized swimming pool2.

This means that if Maduro has set aside 5 billion barrels of oil somewhere, enough to fill nearly 318 thousand olympic swimming pools3.

Where are the 5 bn barrels of oil backing Petro cryptocurrency?

That’s a lot of oil and it seems odd that no one can tell us where this huge stockpile of oil is being held. You would have thought that such a storage facility would be quite hard to hide and that locals on the ground would know about it.

It seems that Maduro is probably talking about 5 billion barrels of oil that are still in the ground and is backing Petro with the potential oil rather than usable oil.

It’s Alright The Oil Is In The Ground & We Can Get It Later

Venezuela has the largest proven oil reserves in the world with OPEC stating that Venezuela has over 302 billion barrels of proven crude oil reserves in the ground.

Jose Toro Hardy, an economist and member of the PDVSA board until 1999, explained the oil infrastructure issues caused by the state run oil company in Venezuela:

Jose Toro Hardy formed PDVSA board member

“The problems started in 2002 and 2003 when President Chávez fired 20,000 PDVSA workers. That personnel had an average of 15 years working for the industry, so they threw to the trash 300,000 years of experience and knowledge,”

Hardy went on, “None of the necessary investment and maintenance plans have been done. The resources of the company have been diverted to fulfill the Government’s political priorities. The oil company mission that includes exploration, production, refining, and commercialization was lost. Now it has become a political party dedicated to importing food, build buildings for the Housing Mission, solve health problems of the Health Mission, and other things that have nothing to do with its function”.

The former PDVSA board member finished by saying, “in Venezuela, there is not enough oil.” “According to OPEC we are producing 1,600,000 barrels per day and the priority is the payment of debts with oil shipments to China – amounting US$20,000 million-, to Russia and to Cuba,”

In November 2017 it was feared that Venezuela would default on its debt payments. Most of it was paid, but always in the 30 day grace period after the deadline.

It looks like Maduro is backing Petro with oil that is still in the ground and without the infrastructure to extract it. Even allies of Venezuela such as Russia and China, have refused to take over oil refineries in Paraguaná, after realising the cost to get them operational again. 

It Gets Worse: The State Owned Oil Company Is Broke

PDVSA flag and Venezuelan oil rig

The Venezuelan government is entirely dependent on the PDVSA for revenue.

Siobhan Morden of Nomura Securities writes “”Venezuela and PDVSA have already defaulted to bondholders, (and) the cashflow crunch now threatens the ultimate priority of rental, corruption income to the military,”

A previous board member of the PDVSA went on record to say:

“State companies do not go bankrupt, Venezuela is the one in ruins. PDVSA, which became the company that contributed most to the growth of the Venezuelan economy, today is responsible for the impoverishment of the country.”

“PDVSA’s ongoing deficit cash flow is gigantic. In order for the company to keep its doors open, the Central Bank issues huge amounts of money without support. That money that PDVSA receives is incorporated into the money supply, it grows phenomenally and that translates into demand for goods. But since there are no goods in the country, and we are in a very serious shortage, the consequence is higher prices, that has led us to have the highest inflation in the world and to be already plunged into an unprecedented process of hyperinflation in the history of the Western hemisphere”.

Hardy explained “The primary cause of impoverishment is inflation and the cause of the inflation in Venezuela is PDVSA”.

It will become clearer in time, but we speculate that PDVSA debt holders will have their debt swapped for PETROs. This strategy would further mask the default already happening and keep the show running a bit longer.

Ultimately, if the oil infrastructure has been destroyed and the state run oil company goes broke, does it really matter if Venezuela has the largest proven oil reserves in the world?

$100 in Venezuelan currency

Crypto YouTuber David Hay shows us $100 in Venezuelan currency.

The Long Term Outlook Seems Bleak

Our Venezuelan contacts have reported that:

  1. Barely anyone in Venezuela currently pays taxes.
  2. All services are almost free. Bills and tax receipts are billed in Bolivares in arrears (meaning you pay last months bill today) and because of hyper inflation, the price people end up paying is significantly less than the value of services received.

Most governments generate the majority of their revenue through tax receipts and it appears that the Venezuelan government cannot even rely on this as a source of income. It therefore seems unlikely that the Venezuelan government will be able to repair their oil infrastructure, even if they wanted to.

Venezuela President Maduro with binoculars

Maduro viewing the outlook for Venezuela

The Confidence Trick

Maduro claims Petro is a cryptocurrency. But isn’t a cryptocurrency meant to be decentralized and free from government control? Instead, many have portrayed Petro as a security token, which is meant to be backed by oil reserves.

The problem is that:

  • The oil is not above ground or accessible to the Venezuelan government.
  • The destruction of Venezuela’s oil infrastructure means it is unlikely that Venezuela can even get 5 billion barrels out of the ground anytime soon.
  • It looks increasingly likely that the state oil company (PDVSA) cannot be saved, despite the use of financial trickery.  
  • The white paper makes no mention of token holders being able to trade Petro’s for physical oil. If the crypto was truely backed by a commodity like oil, surely you could trade the token for the commodity it was meant to be backed by? Our guys in Venezuela have also said there are no exchange houses to convert Petro into oil in Caracas and they have not heard of any plans to open any.
Venezuela's largest oil refinery on fire

Venezuela’s largest oil refinery: doesn’t look in good shape.

Our assessment is that Petro is neither a cryptocurrency or a security token. Instead it is simply a mechanism to keep selling debt to foreign investors and using the foreign currency collected to pay back scheduled bond payments. It’s a game of robbing Peter to pay Paul.

The confidence trick is dressing Petro up as a cryptocurrency and saying it is backed by oil. Our research leads us to conclude that Venezuela does not have 5 billion barrels of oil allocated above ground. The oil infrastructure issues faced by the country and the fact that the PDVSA is broke, makes us question the ability of the government to even access the oil that Petro is meant to be backed by.

A President That Inspires Confidence

On the 22nd March 2018, Venezuelan President Maduro announced that he had come up with a solution to strengthen the national currency, by knocking off three zeros. This change would take effect on the 4th June.

It seems that Maduro is making things up as he goes along.

With the Petro cryptocurrency we have to ask ourselves: who is buying it? Who has parted with $5 billion? It seems increasingly likely that these claims are just smoke and mirrors and are only made in the hope that some investors will read the headline and follow the reported $5 billion by investing in Petro.

The US Will Go To Extreme Lengths To Protect The Petrodollar

If the Petro was properly backed by oil (as claimed), this could create an even bigger problem for Petro investors.

Nearly every oil exporting country in the world sells their oil in USD (the PetroDollar), which means that countries are forced to hold a lot of USD in their foreign currency reserves. This system means that the US can print loads of new dollars, without hyperinflating their currency. The inflation is instead transferred to oil exporting countries.

Naturally, the US government doesn’t seem to take to kindly to countries that want to ditch the Petrodollar:

Iraq

second Iraq war. Oil fields on fire and brown up tank

Iraq switched from the petrodollar and began trading oil in Euros in 2001. Two years later Iraq was invaded and the regime toppled. The WMD that were cited as the cause of the conflict were never found.

Libya

Stop bombing Libya protest: No war for oil

Gaddafi, the leader of oil producing Libya, thought he had stumbled upon a great idea. The concept was to create a African gold backed currency; the Golden Dinar. Gaddafi was also delighted to see that this idea got a lot of interest from African and Middle East countries.

The US felt the Petrodollar was under threat in a key oil producing region and the subject was leaked in an email from Hillary Clinton. The result was an attack by NATO that killed Gaddafi, overthrew the government and killed the idea of the Golden Dinar.

Venezuela

Trump hands off Venezuela protest sign

It’s safe to say that Maduro chose the name Petro to infuriate the United States and stick two fingers up at the Petrodollar.

History has not shown good outcomes for nations that defy the Petrodollar. Even if Petro was properly backed by oil, investors have to consider the likelihood of US reprisals and the impact that these could have on Venezuela’s oil producing capacity.

The Masters Of Money Are Entering Cryptocurrency Markets

Rockefellers money graphic

Much has been made of recent revelations that:

  • The Rothchild’s recently got exposure to Bitcoin through the Grayscale Bitcoin Trust.
  • George Soros has approved his family office to trade cryptocurrencies.
  • The Rockefellers are investing in cryptocurrencies through Venrock (their venture capital fund).

Most have seen the entry of these prominent financial players into cryptocurrency as a good thing. We are not so sure…

  • Baron Rothschild – “Buy When There’s Blood In The Streets”.
  • George Soros – Seems to be the type of chap to find markets, manipulate them by pouring petrol on the flames and making a bunch of money in the process. In 1992 Soros single handedly broke the Bank of England and crushed the UK monetary system in one day. He shorted the pound and made billions off the destruction.
  • The Rockefellers initially made their money by creating a monopoly in the oil industry. Just keep that in mind, when thinking about the Rockefellers involvement in cryptocurrency.

We hope that any failures of Petro will not be used to negatively influence cryptocurrency markets and harm legitimate projects. We hope that any attempts by cryptocurrency market manipulators to spread fear, uncertainty and doubt by leveraging Petro’s failure, will fall on deaf ears.

What About Petro’s Impact On Bitcoin and Ethereum Prices?

If the claims of Maduro are actually true, then he holds just over $2.5 billion in Bitcoin and Ethereum. Most will be exceptionally skeptical that the Venezuelan President is in possession of anywhere near this amount of crypto.

However, if Venezuela does hold this much crypto then we can look at the bond repayment dates and account for each payment having a 30 day grace period. When there was hysteria in November 2017 surrounding a potential payment default from Venezuela, the government did end up paying most of the payment, but only after the deadline expired using the 30 day grace period.

Big Venezuelan bond payment dates in 2018 graph

With the 30 day grace period accounted for, the key months would be May, September, November and Jan 2019 for large bond repayments. If Maduro was funding repayments from cryptocurrency holdings, then we could expect significant sell side action in these months.

With Petro we think that any cryptocurrency investor should pretty much ignore any news surrounding it: just keep calm and carry on.

Conclusion:

The true plan for Maduro’s Petro and the scale of its success or failure will only be revealed in time. There is a small concern that if Petro fails, that this can have a negative impact on legitimate cryptocurrencies and be used as a tool to suppress price or overregulate the market.

Our predictions:

  • Petro will fail.
  • Petro will be revealed as nothing more than a mechanism to keep selling debt to foreign investors. It is simply dressed up as a cryptocurrency backed by oil.
  • Any proceeds of the Petro ICO will go towards Venezuelan bond repayments.
  • The PDVSA (State oil company) will fail.
  • Maduro will be shown as significantly over reporting the ICO sale figures.

If mainstream media try and use Petro to create FUD and try to harm legitimate cryptocurrency projects, let’s keep supporting the innovation happening in the cryptocurrency space.

Further Reading At TotalCrypto.io
1) How to Build a Crypto Portfolio? Our Investment Strategy Revealed. 

2) Scared Of The Impact Of FB, Google & Twitter Ad Bans On Crypto? Is It Time For The Rise Of Social Influencers Like: Suppoman, DataDash & Boxmining?

3) Can Cryptocurrency really make the world a better place? Take a look at the great things crypto is doing and amazing projects like Power Ledger and Substratum.

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Footnotes:

Fig.1

5 billion barrels of oil in cubic meters

 

Fig.2

How many cubic meters in a Olympic swimming pool?

Fig.3

The number of olympic swimming pools that 5 billion barrels of oil can fill

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