I fully get that many savers are looking for an alternative to stocks and bonds, which seem terribly over-valued. There are almost $16 trillion of negative-yielding bonds in the world. Despite the rise in the US 10-year bond, the yield is below the current rate of inflation. What appears to be a mostly liquidity-driven rally has lifted equity valuations to historical extremes, including what are regarded as zombie companies.
Many think that crypto can fulfill that purpose, though I am skeptical. Bitcoin and much of the crypto space is not based on anything and is the ultimate private fiat. It is a speculative vehicle, and the fact that it draws some institutional investors or even some companies does not change this fact. Bitcoin has no earnings stream that can be modeled. It has no break-up or replacement cost. There is no intrinsic value. They have no use-value the way economists understand it. Bitcoin ownership seems to reflect the disparities of wealth and power in our society. A recent article in the Financial Times cited research that concluded that 2.8% of IP addresses account for 95% of the supply. Nearly 2/3 of Bitcoin supply has not changed hands (IP addresses) in the past year, and 44% of the supply is thought to be dormant since September 2018. Nearly a third of Bitcoin supply has been in the same electronic wallet for at least three years. Hold on for dear life (HODL), indeed.
Bitcoins and cryptocurrencies are only currencies because they say they are. They do not fulfill the economists' definition of money: a means of exchange, a store of value, and a unit of account. The rapid appreciation says nothing about its moneyness or store of value. The first issue of Action Comics that featured Superman sold for 10 cents in 1938, which would be the equivalent of $2 in 2019. The Comic Buyer Guide estimated that only 50-100 original copies still exist. One with a rating of 9.0 was sold for $3.2 mln in 2014, and one with a rating of 8.0 sold for a little more than $2 mln in 2018. Yet, despite the scarcity and price appreciation, no one will confuse a comic for money.
A new asset will soon be available to investors that overcomes the short-coming of crypto. Until now, diamonds lacked standardization. Cormac Kinney and his team at Diamond Standard have solved the riddle. They have standardized natural diamonds, stepping up as the world's first market maker, forcing the industry to discover the value of millions of diamond varieties regularly. The diamonds are independently graded by the Gemological Institute of America (GIA).
A diamond coin looks a bit like a petri dish with 4.5 carats of diamonds, and importantly, a computer chip inside. That computer chip contains a blockchain token that enables authenticity, remote audit, and internet transactions.
The diamond market is estimated to be about $1.2 trillion, larger than the silver and platinum market put together. Investment accounts for around 15-20% of the already mined rhodium, palladium, platinum, and silver. Investment may account for as much as 30% of the mined gold. Until now, the lack of standardization and other challenges have kept investment at around 1% of natural diamonds.
The Diamond Standard will change this. Using cutting-edge technology to standardize and track more than 16 mln varieties of diamonds, portfolios will be able to diversify into diamonds in a way that has never been done before. The Initial Commodity Offering is next week, Feb 16th, followed by a futures contract and an ETF.
This strikes me as a significant innovation. It is not the invention of a new asset out of the ether or a computer-generated number (mined) that becomes digitized and traded. It takes what has historically been a store of value, standardizes it to allow it to trade in a fungible fashion, and uses blockchain technology to facilitate and secure. It is not crypto this or cyber that. It is a real tangible asset, actual physical diamonds, of which one can take delivery.
Disclaimer
Reviewed by Marc Chandler
on
February 09, 2021
Rating:
