|
|
Analysis: Crypto Firms Betting on Diamonds
Coin developers put their hopes in the asset class’s price stability.
Dec 11, 2018 10:56 AM
By Avi Krawitz
|
|
|
RAPAPORT... Somewhere between the volatility of cryptocurrencies and the
stability of diamond prices lies an opportunity for investors. That is, at
least, what several new initiatives to create diamond-backed crypto-coins are
betting on.
In fact, developers of these coins, or “tokens,” are
confident the asset class will offer a solution to challenges facing both the
crypto market and the diamond trade.
“Most cryptocurrencies are a poor store of value and a poor
means of exchange, giving rise to a need for a more secure alternative,”
asserts Hogi Hyun, founder and director of Singapore-based company D1 Mint,
which has developed the D1 coin.
“Diamonds are an ideal asset backing for a token, since they
are rare, have a history as a recognized store of value, and are small and
therefore easily stored and transported,” he explains.
Investing in diamonds has not always been easy for the man
on the street, he explains, given the bid-ask spread — the difference between a
reseller’s desired price and what the buyer is willing to pay. If you buy a
diamond and try to sell it to a retail store or a trader, chances are good
they’ll make an offer at a discount of 10% to 30%, according to Hyun. However,
the bid-ask spread in a cryptocurrency is usually less than 1%, he says,
meaning it’s easier to recoup your original investment.
Eli Avidar, president of Israel-based Carats.io, points out
that coins like his company’s CARAT token provide a safe and efficient means of
investing in diamonds, but without the need to purchase an actual gem or have
an in-depth grasp of the market.
Different than Bitcoin
What’s the difference between an asset-backed token and a
traditional cryptocurrency like Bitcoin? Hyun likens the former to the
once-prevalent gold standard, whereby currencies were linked to the value of
the yellow metal.
Buying a diamond-backed coin gives one ownership over a
fraction of a diamond. If you have enough coins, you can exchange it for an
actual stone: D1 and Carats.io keep an inventory of goods that underpin the
stability of their respective coins.
“For every dollar that goes into the token, there’s a dollar
that goes into an asset,” Hyun explains. “So all the money that is generated
from the sale of the token is put into buying physical diamonds.”
In contrast, Bitcoin is more like a dollar issued by a
central bank. When printing money, the bank doesn’t have to hold tons of gold,
notes Hyun; we just have to believe the dollar is worth a dollar.
Holding inventory
D1, which recently launched private sales of its token and
will soon open it to the public, has partnered with Hong Kong-based
manufacturer KGK Group, which has agreed to supply $20 million worth of
polished diamonds from Alrosa-mined rough. The cryptocurrency firm also sources
goods from Russian manufacturer Kristall and is looking to expand its supply.
At $10 a token, if D1 issues 1,000 coins, that’s $10,000 it
can use to buy, for example, a 1-carat diamond from KGK. The stone is then sent
to the Gemological Institute of America (GIA) for grading and laser
inscription, returning afterward in a tamper-proof package for storage in D1’s
vaults.
The tamper-proofing prevents the need for auditors to
re-grade the diamond when they check the inventory each quarter, Hyun explains.
“They’re not gemologists, so they audit the packaging rather than the stone.
It’s important for our investors to know, and for a third party to confirm, how
many diamonds there are in inventory, what the quality is, and the price of
each diamond.”
The narrow group of suppliers also makes it easier for D1 to
trace its diamonds. It uses a “very simple linear provenance for tracking the
stones, secured by blockchain,” according to Hyun.
Carats.io, too, has several suppliers for the diamonds that
back its token. The company, which debuted the CARAT recently on the Hotbit
digital exchange, has signed a deal to source goods through the IDEX trading
platform and intends to pen agreements with other trading platforms, Avidar
reports.
Carats.io has also developed a price index to which the
value of the coin is linked. As with D1, the goods themselves are registered in
a blockchain, allowing the diamonds to change hands securely.
A strategic partnership
Given the amount of inventory required to back the coin,
Avidar believes demand for the tokens will help expand the diamond market —
especially as the coins’ value increases along with diamond prices and demand
for the tokens. Beyond simple trading, he foresees other uses for the coins —
for instance, as security for loans.
Carats.io recently signed an agreement to that effect with
Celsius, which provides banking services for the crypto community. Under the
deal, Celsius would offer credit and accept the CARAT as collateral. Carats.io
has also partnered with a Chinese jewelry wholesaler that will now let
customers pay in CARATs.
Of course, the D1 and CARAT aren’t the only diamond-backed
currencies being marketed; other players include Hello Diamonds and CEDEX. And
while these are all still at relatively early stages, they’re coming at a time
when asset-backed tokens in general are garnering interest in the crypto space.
In an April article for the Invest in Blockchain
publication, analyst Daniel Frumkin predicted such coins could play a useful
role in the cryptocurrency market, even though the mechanisms that keep values
pegged to the underlying assets are complex and the technology still unproven.
Besides diamonds, favored backers include gold and real estate.
With the volatility of Bitcoin — which surged in value from
around $1,000 to nearly $20,000 in 2017 before plunging to $3,330 as of press
time Tuesday — diamond currencies can be appealing to the more risk-averse
crypto investor, Hyun claims. At the same time, he points to the new avenues of
demand they could open up for diamonds, as they make owning one “easier, faster
and more fun.”
This article first appeared in the December issue of Rapaport Magazine.
Image: Cryptocurrencies. (Shutterstock)
|
|
|
|
|
|
|
|
|
|
Tags:
Alrosa, Avi Krawitz, bitcoin, Blockchain, carat, CARATS.IO, CEDEX, Celsius, crypto-coins, cryptocurrency, D1, D1 Mint, Daniel Frumkin, Eli Avidar, Gemological Institute of America, GIA, Hello Diamonds, Hogi Hyun, Hong Kong, Hotbit, idex, Invest in Blockchain, Israel, KGK, KGK Group, Kristall, Rapaport News, technology
|
|
|
|
|
|
|
|
|
|
|
|
|