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Venezuela devalues its currency by a record margin and officially introduces its own crypto currency Petro as a unit of account. There are great doubts about the effectiveness of the desperate reforms.

Venezuelan President Nicolas Maduro carried out one of the biggest currency devaluations in history over the weekend. The official exchange rate of the dollar was lowered from around 285,000 bolivar, Venezuela’s national currency, to 6 million bolivar. To alleviate the shock, the minimum wages were simultaneously raised by 3500 percent to the equivalent of 30 dollars per month. The International Monetary Fund was not involved, Maduro boasted.

Venezuela’s inflation is currently estimated by financial services provider Bloomberg at 108,000 percent annually. One million percent is expected by the end of the year, making it completely out of control.

Crypto currency and sovereign Bolivar

The new economic policy is a desperate departure from the former state and welfare economy, which the country could never afford and which weakened the economy. Gasoline prices are now expected to rise as well. Recently, petrol was subsidised to the extent that one million litres only cost one euro. This made it much cheaper than water and popular contraband. The measure should save 10 billion dollars per year.

In addition to the devaluation, the governments also want to change the currency. Five zeros are to be deleted and the name changed to “sovereign Bolivar”. Its value is also to be linked to a crypto currency. The so-called Petro is to be underlaid with crude oil and is evaluated by the government with 60 dollar or 3,600 sovereign Bolivar. The Petro is to be allowed to vary. In the future, commodity prices are to be fixed in Petro.

Much of the measures is still unclear. If one takes as a basis what Venezuela has so far published about petroleum, the government will accept petroleum on the basis of the price of a barrel (159 litres) of Venezuelan oil minus a discount. The latter corresponds to the discount at which the state itself sells petroleum, which should be at least ten percent. The value of the bolivar is then calculated from the weighted transactions of all the official exchange points in the country.

It remains to be seen how stable the value of this currency will be. Since petroleum is not a means of payment for large parts of the population, the bolivar will again be decisive for them. As long as there is still a shortage of goods, prices in new bolivares are likely to rise. With a stable Petro, this would favour the owners of Petros and disadvantage those of Bolivares. Via the Petro, the inflation import to Venezuela is directly linked to the oil price. Depending on price developments, this can slow down or accelerate inflation.

The question is what practical relevance Petro can develop. All around the start there were negative valuations. A large part of the petroleum is said to have been sold at high discounts in private placements. Petros can only be issued by the government. This is also the biggest weakness of this currency. It is neither decentralised nor subject to an independent institution. It is therefore quite possible that the government will use petroleum to finance projects because (old) bolivares are worthless until the petroleum is devalued as well.

Not worth anything: Old Bolivar

The devaluation is initially of no significance because most Venezuelans have not received any dollars at the official exchange rate for years. The prices of many goods have long been based on the black market rates. Maduro was forced to take these measures because the government ran out of money, said Moises Naim, former Venezuelan minister to the Bloomberg news agency.

Economic crisis in Venezuela : Flight to Colombia

Oil production, currently more or less the only functioning economic sector, has fallen sharply in recent years due to a lack of equipment and know-how. As a result, currency reserves have fallen and allies such as China and Russia have offered less support. Both did not want to throw money into a bottomless pit. Most foreign debt has not been serviced for some time. The arrears on bonds add up to 6.1 billion dollars.

Observers believe that the new measures could lead to a conflict between Maduro and the military, its main ally. This has sovereignty over all major economies and has so far benefited from the multiple exchange rates.