As the legend goes…bitcoin was unleashed in 2009, as the financial world came crashing down.
The faceless Satoshi Nakamoto sought to create a currency that didn’t rely on trust. A currency that needed no control or influence from central powers.
That same year, Hugo Chavez stated lecturing oil producing nations about a new form of money.
It wasn’t backed by gold. We’d all been off the gold standard for decades by then.
This new currency would be backed by oil, which Venezuela had plenty of.
I doubt Chavez had cryptocurrencies in mind. But in 2017, his dream, with a technological twist, almost changed the future of money…
A tech twist for the monetarists
Have you heard of El Petro?
It was Venezuela’s solution to restore the faith…
The oil-backed crypto was going to be their trustworthy currency. It’s something Venezuela sorely needs, even today.
It also had promise to be the solution to erratic boom and bust cycles.
You see, the problem during a recession is that commodities are cheap and plentiful.
They’re cheap because no one has enough money. They’re plentiful for much the same reason, producers continue to produce while demand disappears.
An inverse problem occurs during prosperous times. Commodities become expensive and scarce.
You can see how this can all turn into a cycle…
The economy booms, prices rise, investors irrationally speculate and push prices too far. Then, as money gets sucked out of the system, prices collapse, investors become scared to spend and demand evaporates.
This boom/bust cycle can have catastrophic effects on producers. It can also be extremely damaging to an economy and the wealth of households.
During the last big crisis in 2008, Americans lost US$2.4 trillion collectively in retirement savings. According to The Atlantic, the morbid joke is America’s 401(k)s (retirement funds) were turned into 201(k)s.
So as bitcoin raged up to new highs in 2017, a room full of socialist economists, crypto fanatics and Venezuelan officials developed El Petro…
Here’s how it might’ve worked…
When oil is cheap, the central bank could issue oil-backed tokens to buy barrels of oil. This would give producers cash, even as demand for oil reduced.
Then, as oil rises the central bank could redeem these tokens by selling down their inventory of oil or El Petro and damping irrational exuberance.
The ultimate goal is to get money in the hands of producers, even when prices are low. And with that cash, producers can then pay suppliers, workers and continue to invest.
It might’ve also had the added benefit of turning a joke of a currency, the Bolivar, into something somewhat respectable…even if it was issued by a completely untrustworthy government.
Or maybe not.
‘Venezuela was starved for trusted currency, and its citizens were accustomed to mining and using cryptocurrencies. Global investors were wild for anything crypto and were buying into even obvious frauds.
‘El Petro had very weak backing — royalty and tax savings on oil that might never be extracted — but bitcoin and other cryptocurrencies had no backing at all, and their market capitalization was approaching $1 trillion.
‘Many crypto enthusiasts denounced el petro because it required trust in the Venezuelan government to honour its legal promises to allow extraction of the oil. But if el petro had gone into general use for payment of taxes and fees, for government benefits, and eventually nongovernment transactions, users wouldn’t care about the theoretical backing by oil any more than they did when currencies were backed by gold.
‘People would have accepted the currency for what it could buy today, not for its ability to get oil in the distant future.’
Right place, right time?
Of course, the El Petro had its problems.
The currency might only be useful for a few oil businesses. And that currency might only stay within the oil industry…first going to the producers, then suppliers and then bought back by the central bank.
The environment El Petro would enter was hardly stable either. Venezuela averages a civil war every five years. If the current government was issuing El Petro, who’s to say the next successors would?
But the idea — a commodity-backed currency — has been in the works for years. Almost 100 years in fact.
Even Benjamin Graham, mentor to crypto bear Warren Buffett, thought it was the remedy to shameless money printing and dampens the boom/bust cycles.
In fact, Ryan Dinse, Ryan Clarkson-Ledward and I got to talking about this very topic just yesterday — cryptocurrencies and the future of money.
I wouldn’t describe myself as a crypto bull. But I can see how it could all work…after some thorough explanation on Ryan D and Ryan CL’s part I might add.
A new currency. Maybe a digital one…backed by a commodities…not gold…but physical goods like wheat, iron ore and electricity.
Maybe the future of money won’t be exactly like this.
But I wouldn’t be surprised if something like El Petro starts to gain popularity again.
Frustration and technological changes are again pushing us towards that change.
Untrustworthy central powers…irresponsible money creation…maybe cryptos are a case of ‘right place, right time’.
And while I wouldn’t dare put my life savings in the stuff, I hope it will cause the change…one we’ve all been waiting for.
Embrace the change,
Editor, Money Morning
PS: This is why my colleagues, Sam Volkering and Ryan Dinse, have been watching cryptocurrencies too closely.
They both see it as a force for change…change to a new kind of money…maybe even a new kind of financial system.
It’s why we want to make their voices and views that much more visible to you, dear reader. We want you to understand how big changes like these might affect your life, and how you might even be able to make quick gains from it too.
Embrace the changes to come, learn how they’ll affect you. That’s the only constant in this world…
If you’re interested in finding out why Sam believes the crypto boom could last 100 years or more, check out his free report here.