8 minute read
Startup Sees Strong Demand To Make Diamonds an Investable Asset
DiAMoNDs ARe AN uNCoRReLATeD AND uNDeRALLoCATeD AsseT
Diamonds are a $1.2 trillion natural resource - more than silver and platinum combined. However, diamonds have always lacked the benefits of price discovery, transparency, liquidity, and low transaction fees. In market terms, there was too much friction for investors to properly be able to invest in diamonds as a commodity.
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“Diamonds have always been attractive to investors, and yet stubbornly out of reach,” explained Cormac Kinney, Founder & CEO of Diamond Standard, a fintech startup that just received regulatory approval for the world’s first and only fungible diamond commodity.
“Countless attempts were made to index diamond prices as an investment product, but the index prices were not actionable, so no one could obtain regulatory approval,” said Kinney.
The entrepreneur was ready to take on the challenge. Tapping into his knowledge of modern technology like automatic market making, wireless technology, and optical authentication, Kinney has created a breakthrough.
With innovations cited in nearly 4,000 U.S. Patents, Kinney has been the founder of four software startups acquired by public companies. He is a quant finance pioneer who invented heatmaps, designed over 100 institutional trading systems, and perfected sentiment analysis for statistical arbitrage, using it to manage over $500 million for Tudor and Millennium.
He also played his cards right in life when he first met and eventually married influential jewelry designer Mimi So in New York. Known for her iconic jewels, accessories, and a large celebrity clientele, So’s company was founded as a partnership with luxury conglomerate Richemont, which subsequently sold its interest to Mimi So.
With a new understanding of the frictions in the diamond business, Kinney focused on solving the challenge of creating a standardized diamond commodity. He knew that these factors would make diamonds an especially valuable addition to any investor portfolio.
when it comes to investing in commodities, are gold, silver or platinum the only way to go? hard assets are limited and protect against inflation because they’re not someone else’s liability. But what about producing returns when other hard assets fall?
By rich monetti
BuYiNg BRiLLiANCe ViA THe DiAMoND sTANDARD exCHANge
Kinney saw an opportunity in a trillion dollar natural resource market that was largely untapped. He came up with a way to become a market maker and launched the first electronic Diamond Standard Exchange.
“We founded Diamond Standard Exchange in collaboration with one hundred of the largest diamond vendors in the world. Every time we buy a diamond, we make a transparent bid, to force price discovery. We can't buy in secret,” said Kinney. Diamond Standard Exchange purchases only ethically sourced stones, using a regulatorapproved, automated and transparent process. For its initial commodity offering, the company placed over five million bids to purchase tens of thousands of diamonds from around the world. The diamonds that made the final cut met Diamond Standard’s high bar for ethical sourcing, quality, and value per dollar.
A BReAKTHRougH: PHYsiCAL CoiN PLus BLoCKCHAiN ToKeN
Using the diamonds purchased on its Exchange, the brilliance really starts. To make Diamond Standard Coins equivalent, the diamonds embedded inside are selected through a statistical sampling process. “Every diamond is unique, but every Diamond Standard Coin is equal. Diamond Standard pioneered a transparent and fair process, using computer science to accomplish this for the first time ever,” said Kinney.
Every coin must comprise a statistically valid sample of the primary diamond characteristics, such as carat weight, color, and clarity, for natural white diamonds. “This means that we discover, price and deliver the entire yield curve of diamonds, for the first time ever,” said Kinney. Every stone is GIA graded and has a digital certificate, always accessible by 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 Coins. GIA and IGI serve as objective third parties, allowing investors to purchase Diamond Standard Coins with confidence. Delivered as a physical coin, this regulator-approved commodity can be transacted as a token on a blockchain.
Unlike crypto assets, a Diamond Standard token is backed by a rare and valuable natural resource. A diamond cannot be hacked. It is not vulnerable to the whims of wild “tech bro” speculation, because the real-world market drives diamond value.
By building an ultra-secure coin around the diamonds – the resin, dots, chip, and QR code, Diamond Standard achieved the world’s first and only regulator-approved method to produce, deliver, and transact a fair and fungible standardized diamond commodity.
THe WoRD is ouT: DiAMoND ReTuRNs ARe BuiLDiNg
Diamond Standard recently announced a follow-on offering for its subscribers of the Diamond Standard Coin. The offering is capped at $50 million, across five series of $10 million each. The initial series is priced at $5,750 per Coin. Subsequent series will follow immediately and be priced by then-current diamond values.
In addition to preparing for spot trading on digital exchanges, Diamond Standard commodity futures are approved for listing on MGEX via CME Globex, and an ETF has applied to list on the NYSE under the ticker DIAM, which offerings are subject to regulatory approvals by the CFTC and SEC respectively.
TiMiNg is eVeRYTHiNg
Given the rise in market volatility, in part sparked by the COVID-19 pandemic and investor’s increased interest in hard assets, diamonds are seeing an uptick in popularity. In the case of diamonds, there is no more supply, which means the new demand will lead to an increase in price.
In the one year since the announcement of the Diamond Standard commodity, diamond prices have gained 31%. In the four months since the IPO of the Coin, diamonds (and the Coin) gained 15%. This stunning performance matches the S&P 500 — during one of the strongest bull markets in a generation. In the same period, gold fell by 10%.
“By investing now, before diamonds are added to the commodities index, investors have the opportunity to beat the freight train of investors that will be accessing them via alternative means,” said Kinney.
“Expect a secular phase of position building, a one-time commodity super cycle,” added Kinney.
Investors are more organized and aggressively seek returns of newly available assets, and in particular the store of wealth and low correlation benefits of diamonds. “We believe that the growth of demand will significantly outstrip the ability to organize the global supply of consumers,” said Kinney.
Fast forward one global pandemic, and the diamond industry certainly hasn’t faded from view. If anything, it has only taken on greater importance. Over the past year, there has been explosive growth in the industry as many investors continue to see diamonds as a big winner from lockdowns around the globe as access to rival luxury offerings was limited.
AVoiDiNg LAB-gRoWN DiAMoNDs
The company won’t be tapping into labgrown diamonds ever. “The price of lab grown diamonds has fallen by half over two years, and it's going to continue falling. They're not rare,” Kinney clarified, and the science is pretty easy to spot by examining the chemical structure.
The transparency also ensures that blood diamonds and synthetic diamonds aren’t among inventory, while mining companies must agree to fair labor practices and also adhere to market manipulation rules. “So in effect, we're cleaning up the entire diamond supply chain,” Kinney said.
The fact that Diamond Standard has no vested interest goes a long way too. “We don't care if diamonds go up, if they go down, our job is to be the regulated commodity assembler,” he said. “We bid on diamonds, we pay whatever it takes. The market always tells us the price. We never set the price even for our own product,” said Kinney.
CoNsuMeR suPPLY: DiAMoND sTANDARD ReCYCLiNg AND susTAiNABiLiTY
Diamond Standard’s business model has one more component that will increase market transparency. Going forward, Kinney knows not to rely solely on business vendors for sourcing all of the diamonds.
“Our largest suppliers are going to be consumers who already own diamonds. We created a company called Diamond Standard Recycling, where we buy back diamonds at fair prices,’ said Kinney.
The novelty is a win-win on both sides. “We're going to really surprise consumers when we launch later in 2021,” he said. “We’re going to pay a lot more for those old diamonds you have in a drawer, because we've unlocked the true market value,” Kinney boasted.
On the retail side, Diamond Standard has companies like Tiffany & Co. following closely. “They're very excited because we're creating pricing transparency and liquidity. Consumers buying diamonds in jewelry can now feel confident they are paying a fair price,” said Kinney.
As the market leader in buying and selling diamonds, Diamond Standard will fulfill its mission in making its brilliant commodity a liquid hard asset like gold.
“Diamond prices are artificially very low, because there never was investment demand from individuals and institutions. With our ability to support both supply and demand on a global basis, we think prices will continue to go up,” Kinney stated.
The production of the Coin and the investment offerings are regulated by the Bermuda Monetary Authority and internally audited by Deloitte.
Diamond Standard is also partnered with Brinks, a global leader in security, custody, and transportation services. Over time, this relationship is expected to provide investors and exchanges with custody options at Brinks facilities worldwide.
