Diamonds On The Blockchain: A Sustainable Way For Everyone To Invest And Hedge Against Inflation
Several U.S. listed gold miners have shed a fifth of their market value in 2021 as the appeal has dulled due to a strengthening dollar, and a rise in bond yields has impacted the demand for the precious metal. With market risks such as the COVID-19 Delta variant spooking investors, traders, and companies, many are focused on diversifying with hard assets, as a safe store of wealth and hedge against inflation.
Enter diamonds, a forgotten natural resource with a $1.2 trillion market value — more than silver and platinum combined. Since last August, diamonds have gone up 35 percent, closely matching the S&P 500 during the same period, while gold has declined 11 percent. The challenge has always been with diamonds, can investors profitably tap into the hidden potential of this gem?
That day may have come. Diamond Standard, a New York based startup, just launched the first regulator approved diamond commodity. Its founder, Cormac Kinney, set out to solve the issues that prevented diamonds from being a productive asset — the lack of price discovery, transparency, and liquidity, and the high transaction costs. Previously, there was too much friction for investors to invest in diamonds, but it appears if that is all about to change.
With a background in trading and computer science, and innovations cited in nearly 4,000 U.S. patents, Kinney is the founder of four software startups acquired by public companies. As chronicled in a 1999 Forbes article titled “Hot Stuff,” Kinney invented heatmaps, then went on to design over 100 institutional trading systems and was among the first to teach computers to read the news for systematic trading. He used algorithmic sentiment analysis to manage funds for Tudor and Millennium. For the last seven years, prompted by his jewelry-designer wife, Kinney has focused his quantitative skills on diamonds.
“Global investors own at least 15 percent of every precious metal, which indicates a pent-up demand for diamonds, if they are liquid and transparently priced by the market. We’ve unlocked that potential by creating a regulator-approved, fungible, market traded commodity that can be transacted using a built-in blockchain token,” says Kinney.
Over the last 40 years, there have been multiple attempts to launch a diamond investment product, usually based on an “index” of wholesale values, and one fund based on only D Flawless one carat diamonds. The fund caused that particular diamond to go up 15x, while all other diamonds were left behind. All of the index products failed to get regulatory approval because the index values were not actionable and investors could not buy and sell at those values.
For the first time, Diamond Standard has made diamonds available as an asset to investors and fund managers, which is marked-to-market daily. These commodities have already been approved to settle futures being listed on the CME Globex, and options being listed on MIAX Options Exchange, and an ETF is pending SEC approval for listing on the NYSE.
So how does it work? Unlike precious metals, diamonds have variety, with multiple factors like carat weight, color, and clarity. And the value of each mix of factors is hard to predict, and often subjective. Diamond Standard created the world’s first regulator-approved, fungible diamond commodity on a coin by ensuring each coin has the same value of diamonds.
The diamonds are GIA graded and the certificates, and details of the diamond buying process are transparent, and permanently accessible to the coin owner and prospective buyers. These GIA graded diamonds are then reinspected by another lab, the International Gemological Institute (IGI), which assembles the diamonds into the coins.
Using automated market making and statistical sampling, their diamond purchasing forces the price-discovery of approximately 94 percent of the earthly yield curve of natural diamonds. These diamonds are optimized into sets, and assembled into a physical, market-traded spot commodity.
In Q1 2021, Diamond Standard Coin launched at $5,000 per coin. Investors can take delivery of the coin, but if the commodity sits safely in a custodian’s vault, it can be traded instantly and globally using a built-in blockchain token.
“Our Diamond Standard tokens are backed by an actually rare and natural resource, unlike bitcoin. It cannot be hacked, and it’s not vulnerable to the whims of ‘tech-bro’ speculation – it is the real-world market that drives diamond value,” says Kinney.
The digital token used to trade the Diamond Standard Coin in different from anything before. It is stored on a wireless computer chip sealed inside the commodity, under the diamonds. With tokenized real world assets such as gold, art, and real estate, trust is required that the asset is actually there or secure and accessible.
Owners, via an exchange for example, are actually trading the key to the Coin token. It’s essentially a vault receipt, entitling the new owner to retrieve the commodity from the vault. This creates a unique new asset. A physical commodity, which is also a blockchain based digital asset.
The Diamond Standard Coin inherits the best features of gold and bitcoin. A naturally scarce, market traded commodity, and a trustless digital asset that can be transacted instantly and globally. Many will be keen to watch this space for future applications of an asset that seamlessly travels between the familiar physical world and the emerging digital economy.
Diamond Standard purchases only ethically sourced stones and doe not incorporate lab-grown diamonds, which have been declining in price rapidly. The diamonds must meet a regulator-supervised process for sourcing, quality, and value, and the firm enforces the Kimberly process, to prohibit conflict diamonds.
To source the diamonds, it formed the Diamond Standard Exchange, in collaboration with 100 of the world’s largest diamond vendors. However, given that no substantial diamond mine has been discovered for over 20 years, the company estimates that 75 percent of all diamonds are already in the hands of consumers. Over time, Diamond Standard believes that its largest suppliers will be individuals who already own diamonds, so they created Diamond Standard Recycling, to buy back diamonds at attractive prices.
“Because we are regulated, our buying is transparent, and we force our suppliers to be ESG compliant, to adhere to fair labor practices and market rules. Beyond creating a new commodity with price transparency, we are cleaning up and modernizing the diamond supply chain,” noted Kinney.
Kinney expects diamond prices to catch up with the 400 percent in investor-driven gains of gold and silver over the 15 years since the launch of Gold and Silver ETFs. Depending on the imbalance between the demand and supply, he expects diamond prices to increase even more substantially by the time investor allocations approach the 15 percent of supply level.
Diamond Standard is forcing transparency and efficiency on a reluctant market and this will likely wash out a swathe of middlemen. Diamonds are a global asset that are in demand and up to this point in time, were simply not accessible to investors. As the pandemic lingers, and investors need the store of wealth and hedge benefits of hard assets, diamonds may start to shine a bit brighter.
This article originally appeared on forbes.com, to read the full article, click here.
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