Investing in Petro (PTR) – the oil backed Venezuelan government ICO

Author: Kaloyan Roussev
Date: 10 February 2018

Do not make investment decisions based on this article – read the disclaimer before you proceed and leave the website if you disagree with it.

It is 10 February 2018 today. This review takes into consideration investing in Petro upon its launch at presumably 1 Petro being tied to the price of 1 barrel of oil.

Project/token summary

Venezuela is in a dire crisis. There are US-imposed sanctions of it exporting crude oil to the US and also on creating new debt by issuing government securities such as bonds. Venezuela’s president Maduro is using the cryptocurrency craze to go around those sanctions and issue Petro – a pre-mined ERC-20 (running on the Ethereum network*) cryptocurrency backed by 100 million barrels of oil** – one barrel per token (currently oil is around $60 per barrel) in an attempt to raise hard cash for the country which is in desperate need of medicine and food. This will amount to about $6 billion for the ICO, which will start with about 38 million tokens at 20 February 2018 pre-sale and a main ICO later on (according to their whitepaper)

* The ICO will be an ERC-20 token but then it will be swapped for the Petro which will probably run in a private blockchain… (or something along those lines)

** Some sources claim it will be backed by oil, gas, diamonds and gold

Here is one of many interesting comments I stumbled across in the comment sections of youtube videos about Petro:

To add to my comment above, the Venezuelan “Hydrocarbons law, article 3” says that all natural resources belong to the Republic and are of Public Domain, and therefore are inalienable and imprescriptible (This means that all natural resources are not subject to being taken away or given away by the possessor, the possessor being the government)… What can be said, the government here is the first to break the law.

The crypto crowd is enthusiastic of such a serious and valid use case for cryptocurrency and blockchain – it validates our hopes and aspirations of the usefulness of crypto. It is possible, however, that the implementation and intention behind Petro will not live up to the hype. I read numerous comments below many youtube videos about Petro, and I would say about 50% of commenters disbelieve Maduro’s ability or desire to fullfill on his promises and enable people to redeem oil via their tokens (confirmed by Reuters – there is no information from Venezuelan government of how that would work) or that he is going to put the raised capital to good use. Many Venezuelan citizens claim that this is not the first time he’s tried to raise money and he never delivers, that he is a liar and can’t be trusted. There are two main differences with traditional cryptocurrencies – the Petro will supposedly be backed by commodities and more imporantly – it is centralized – which is a very negative trait in the world of blockchain technology – there will be no public ledger. And no hard limit imposed by any means. So crypto enthusiasts should hold their horses on this one, as it is hardly a real cryptocurrency.

Venezuela has the biggest oil reserves of any country in the world – 300 900 000 000 barrels. Of which 100 000 000 are supposedly going to back the Petro. However, it seems that Venezuela is heavily in debt to the US, EU, India, Russia, China and other countries and this same oil serves as collateral there too. In addition, their oil is of perhaps the lowest quality – heavy and sour, and it requires additional equipment to refine into something usable.

There’s also the proposition to sell a big amount of the tokens at a very steep discount in a private offering. We all know what that means for ICOs – the whales that accumulate tokens at pre-ICO discounts, later on dump their holdings a little below ICO price when the token hits the market – and  all ICO participants are badly hurt by the price drop.

Not to mention, assume you buy into the ICO, and a couple of weeks later, it becomes known that it is, in fact, impossible to redeem commodities for your tokens – the whole thing is going to break apart. Do we even know that those barrels are there? Maybe they are under ground, or believed to be under ground.  Here’s the relevant part of their whitepaper:

“The Bolivarian Republic of Venezuela guarantees that it will accept Petro’s as a form of payment of national taxes, fees, contributions and public services, taking as a reference the price of the barrel of the Venezuelan basket 18 of the previous day with a percentage discount of Dv .19
In this wat, it is guaranteed that the purchaser always has a recovery value adjusted to the investment.
These payments will be accepted in bolivars at the exchange rate resulting from the operations of the authorized exchange offices, determined by market mechanisms and in accordance with the legal provisions issued by the competent authorities of the Republic.”
My interpretation is that for those who want to exercise the redeemability of their tokens, they could do so by using them to pay to the Venezuelan government with. I don’t know how the oil comes into play here, though. In my opinion the “backed by oil” argument is only used to try to appeal to all the Austrian economics/gold bug/anti-fiat fans (of which there are plenty of) with no real connotations.

Here are a few quick points I want to make:

  • if you need an excuse to invest, or not to invest, to satisfy your mind’s rational hunger for a rationalization over either gambling on the ICO or not, pick one: investing in Petro would mean contributing to the world-wide transfer of money over to Venezuela, and hoping their corrupt government will put it to good use and ease the suffering of their people, you can view it as a donation; not investing in Petro would mean believing that investing in it is supporting and prolonging the reign of a corrupt socialist dictator who is going to commit another fraud and do nothing for the Venezuelan people
  • having invested in Petro would essentially mean a mix of being long the Venezuelan government’s promises that it is, in fact, backed by those commodities and actually they are redeemable – the Petro being an IOU on those; and also being long crude oil and gold – because as Petro is backed by those commodities, its value and price is in almost 100% correlation to the price of crude oil and gold. One must find out what percentage of which commodity comprises a Petro.  The whitepaper only mentions oil, however two different sources mention other commodities too.
  • Many people speculate that Venezuela trying to go around USA’s ban on buying Venezuelan crude oil, by issuing debt via this cryptocurrency, is going to lead to the same fate that caught up with Muammar Gaddafi and Saddam Hussein, who according to conspiracy theorists were overthrown by the US because they tried to circumvent using the US dollar as a reserve currency in international trade – so in a way, they say it is possible that Trump declares a war on Venezuela and bombs start raining. This will bring further demise to their country, and of course, to the Petro
  • United States position on the Petro (not positive at all): https://www.reuters.com/article/us-venezuela-economy-cryptocurrency/u-s-warns-investors-over-venezuelas-petro-cryptocurrency-idUSKBN1F52AB
  • Unlike free floating currencies and cryptocurrencies, that are backed by nothing, and whose price is determined by supply and demand, the Petro is backed by commodities, so it wouldn’t make sense for 1 petro to cost much more than 1 barrel of oil – so I don’t think it is possible for the price to significantly rise in order to justify a speculative venture into Petro, with all the risks attached to it. There being 100 millions of those digital tokens, it will hardly have any scarcity or collector value to justify a price increase too.
  • On the other hand, those Venezuelan citizens (out of 31 million) who buy the Petro and are able to use it to pay taxes and/or buy food/services with it, and save themselves 10 hours of waiting in line in front of bank offices to get Bolivars, and then spending the next day waiting in line to buy a piece of bread, this might actually create demand for the Petro and black market price for it could increase over the underlying value. But this is a long shot. Also, betting on this means speculating on people’s suffering there.
  • You cannot use oil or an oil backed currency to hedge against the US stock market of world economy, as there is little correlation between oil and the stock market – https://www.investopedia.com/ask/answers/030415/how-does-price-oil-affect-stock-market.asp and nor is it correlated to the US dollar – https://seekingalpha.com/article/4108050-crude-oil-correlation-dollar-farce

Branding/Positioning

It’s branded as the first nation state subsidized ICO, a cryptocurrency backed by commodities. Since it is going to run on a private blockchain, owned by a corrupt socialist dictatorship government, I don’t think it is a cryptocurrency. It is just riding the wave of the cryptocurrency wave, framing an electronic way of issuing debt as crypto.

Token utility

The token will be used to pay for taxes, fees, contributions, services, debt, goods. Backed by oil, but possibly will not be able to redeem oil.

General

  • Website: does it look good/presentablehttp://elpetro.gob.ve/index-en.html – it is a simple website with a soothing color theme. Quickly put together. I don’t even know if this is actually the government-mandated website for Petro or a large scale phishing attempt. I dont see any connection with the government there.
  • Roadmap – no roadmap. The chronology of events is as follows: private offerings at steep accounts, then a public ICO at 20 February. From then on, its trying to not get bombed by the US, I guess.On a more serious note, these are some of the initiatives that the government has promised to undertake:
    “Among the initiatives are the following:
    The Venezuelan State, through the Superintendency of Cryptocurrencies, will take the necessary actions
    to promote the exchange of Petro in international cryptocurrency trading houses, with special emphasis
    on those that operate legally in emerging countries and allied nations.
    The use of Petro will be promoted by PDVSA and other public and joint ventures, as well as national public
    entities and regional and local governments.
    The payment of extraordinary labor commitments and benefits in Petro will be encouraged, as well as
    accumulated social benefits, provided they have the expressed individual approval of the benefitted worker.”
  • Whitepaperhttp://elpetro.gob.ve/Whitepaper_Petro_en.pdf – starts out with generic politic-economical information on the intentions behind Petro. Goes on into basic detail about cryptocurrencies, blockchain, and attempts at creating international currencies such as the SDR. Tries to propose the Petro to become such a currency, and even tries to appeal to crypto investors as being a suitable form of store of value. No authors are credited. No mention of how the ICO is going to be made public at the specified date.
    “Petro will give investors the opportunity to enter the crypto asset market with an instrument of intrinsic value
    that is safer, more stable and susceptible to a fundamental analysis because it is linked to a widely known

    industry, and therefore, suitable to be used in large transactions and even as a store of value.”

     

    “PTR will be divisible by 100.000.000 units. The minimum exchange unit will be called Mene (0,00000001)”
  • How does the cryptocurrency name sound (does it sound legit and like a good brand name) – it is a simple, easy to remember, very relevant brand. However, it collides head on with the petrodollar, which has been the nickname of the US dollar which is the reserve currency used for international trade of crude oil. Not a good idea to piss the greenback off.
  • How does the logo look – It looks like a plant that grew atop petrol, something like a phoenix rising from the aftermath of hyperinflation. It is similar to the Bitcoin logo. It is among the better crypto logos I’ve seen
  • Is it a PoW, PoS or PoW/PoS coin, what is the mining difficulty or APR, does it suffer from inflation – pre-mined. Currently capped at 100 million tokens, initially 38 million will be publicly offered, and some has been already sold at private offerings, possibly. But who’s to stop them from issuing more in the future. Here’s an excerpt from their white paper:
    “The Venezuelan State will not be able to make new emissions Petro. The design of the network includes the
    possibility of generating an incentive for proof of stake (PoS). This feature will be initially disabled and can only be activated on the initiative of the Superintendency of Currency of Venezuela with the approval of the holders of Petro.”
  • Who is behind the cryptocurrency – are they shady figures, or have they placed their names and pictures on the website; what is their track record and reputation; do a quick google/github research on them – they are very shady figures – president Nicolas Maduro and the Venezuelan government – branded as corrupt socialist dictatorship, and the president as a liar. It is very hard to find good words for him on the internet. Interestingly, the political opposition is not very high regarded either
  • Is there a link to the source code – sorry, closed source. How typical.
  • What the project survival relies on – the trust in the Venezuelan government’s ability to back up their claims for the Petro being backed up by oil, that also serves as collateral for Venezuela’s debt to half the planet. The prices of crude oil and possibly gold. The US not bombing Venezuela.
  • Will this project survive a cryptocurrency bubble burst and does/will it have enough of a following that needs it every day – it is not a cryptocurrency in my opinion so it has no ties with the world of cryptocurrency.

So, what do I think about “investing” in Petro

I think it is a pure gamble, with a lot more downside than potential upside. If I was an investor who would look at it as an opportunity to send money to Venezuelan people, it would be naively assuming that it will be put into good use. As an act of speculation, I think it is much more likely to turn sour. So I wouldn’t dump my money in it, but if anyone feels adventurous, don’t buy more than 1-2 tokens…

Sources:
http://infocoin.net/en/2018/01/30/why-venezuelas-new-national-cryptocurrency-el-petro-will-fail/
Foreign Exchange: Saddam Turns His Back on Greenbacks – TIME
Maduro to pitch oil-backed cryptocurrency petro to OPEC | Venezuela News | Al Jazeera
Crude Oil And Why The Correlation To The Dollar Is A Farce | Seeking Alpha
How does the price of oil affect the stock market? | Investopedia
U.S. warns investors over Venezuela’s ‘petro’ cryptocurrency
Gaddafi’s Threat To The US Petro Dollar And Why He Had To Die
Venezuela New ‘Petro’ Cryptocurrency Backed by Oil and Gold! – YouTube
Venezuela’s $5b Ethereum Based PETRO ICO Whitepaper Released! – YouTube
https://seekingalpha.com/article/4048750-problem-gold-backed-currencies
https://www.youtube.com/watch?v=i32TWIh3sCM
https://www.youtube.com/watch?v=0DTI6G8LlAQ
https://en.wikipedia.org/wiki/Petro_(cryptocurrency)

Now, I am sure I’ve made some mistakes in this post or in my research. Please, forgive me, if I have, and contact me to tell me where I went wrong. It takes about 4-5 hours of my time to do a full research on a cryptocurrency, and I try to do at least 4 per week.

 


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