It’s been a very eventful week so far in financial markets, with the headline news being the failure of Silicon Valley Bank (SVB) in the United States, with the bank shut down by regulators in California, where it was headquartered.
The bank, which was the preferred bank of large numbers of venture capital companies, start-ups, crypto-currency platforms and large-scale technology companies, had seen its share price in free-fall in recent times, with billions of dollars of depositor money fleeing.
Indeed, the failure of SVB is in many ways a simple extension of the problems seen in the technology space for much of the last year, with former market darlings crashing in price, and laying off hundreds of thousands of workers over this time period.
We explore the eventual link this can have with the pink diamond market below.
How to protect capital in periods of market stress
Times like these cause great uncertainty, where highly regulated banking institutions are failing with potential ripple effects across the economy.
Unsurprisingly, it often leads to investors reassessing their risk profile, with many likely to place a much greater emphasis on the security of the capital that they have invested across various markets, rather than the return on it.
This change in focus has been seen in financial markets already, with stock prices falling sharply on Friday, while government bonds (which are perceived as very low risk) jumped up in price enormously.
It’s also been seen in other asset classes, which are again crashing, despite advocates claiming that they are supposed safe havens. This includes speculative assets like cryptocurrencies, which we discuss in more detail below.
That crypto would crash, rather than thrive in such circumstances is no surprise, with the chart below, sourced from @CallumThomas, highlighting how highly correlated Bitcoin is to the NASDAQ.
The NASDAQ is of course a stock market index dominated by technology stocks, many of whom no doubt banked with the now defunct SVB.
Same Trade: Bitcoin vs Nasdaq
The last few days have also seen the market show a renewed appreciation for hard assets. Investors continue to gravitate towards investments that have a genuine scarcity value, and can’t be printed out of thin air, like currencies and many digital assets can.
Pink diamonds are obviously one such investment with this genuine scarcity.
Below, we highlight why we think that pink diamonds have a much better chance, relative to cryptocurrencies like Bitcoin, of not only protecting capital, but increasing investor wealth in the coming years.
Note that much of our analysis below is an effective update from an article of ours from 2021.
Pink diamonds vs Bitcoin
There are several characteristics you can use to compare pink diamonds to Bitcoin.
One of the key advantages of pink diamonds is that they exhibit a relatively smooth performance profile, with minimal volatility along the way. This is something that many of our clients at Australian Diamond Portfolio highly value.
In contrast, cryptocurrencies like Bitcoin exhibit massive price swings, and huge drawdowns of up to and in some cases more than 80%. These events destroy capital and rattle investors, with the crash from above USD $60,000 in late 2021 to sub $20,000 by January 2023 seen in the chart below.
Ecosystem and security risk
Volatility is not the only risk you face with Bitcoin, that you don’t face with pink diamonds. There is also an overall security risk that comes with investing in cryptocurrencies.
By this, we mean that the potential for the exchange you use to buy Bitcoin to be hacked, to become insolvent, or to be shut down by regulators. Or you could just lose your password, and your Bitcoin will be gone forever.
There have been several high-profile incidents in the last two years in the cryptocurrency space, from the collapse of Genesis, FTX, TerraUSD and Coin to name but a few, that attest to this risk.
Even if they didn’t involve Bitcoin directly, the ripple effects certainly did, helping cause the Bitcoin price to crash by 70% from its all-time high, with the cryptocurrency ecosystem remaining highly uncertain and risky today.
Pink diamonds by contrast are physical items. They can be stored in a high security vault with much more reputable institutions for a very modest fee, giving investors a peace of mind that no cryptocurrency can match in this regard.
When we refer to specialisation, we refer to the ability of investors to outperform the market itself. The stock market, the real estate market, and the pink diamond market offer this.
As an example, pink diamonds have strongly outperformed not just “regular” colourless diamonds, but other types of coloured diamonds like yellow diamonds over the last 15 years.
At Australian Diamond Portfolio, we pride ourselves on helping clients achieve the maximum possible return from this asset class, selecting diamonds that have come from a carefully curated list that offer the best return potential.
Bitcoin doesn’t offer this, as the price is homogenous.
Bitcoin can typically be traded 24/7, though in periods of market turmoil, it’s not uncommon for cryptocurrency exchanges to shut down.
Pink diamonds by contrast typically have a longer divestment process, in order to find the right buyer at the right price.
This is not a major issue for most pink diamond investors though, as they are typically only allocating part of their portfolio to pink diamonds, leaving adequate money in bank accounts and the share-market etc.
Natural vs Engineered Scarcity
Both Bitcoin and pink diamonds are scarce. Bitcoin is limited to just 21 million coins, whilst pink diamonds are geological freaks of nature, and incredibly rare at the best of times. The closure of the Argyle Mine in Western Australia in late 2020 reduced annual production of pink diamonds by roughly 90%, meaning that the pink diamond market is now dominated by trade in pre-existing pink diamonds.
The key difference is that pink diamonds are scarce by nature. Bitcoin is scarce because humans so far chose to make it that way .
Moving forward, it will be a lot easier to change the supply of Bitcoin than it ever will be to change the supply of pink diamonds.
One of the beauties of the pink diamond market is its multiple sources of demand. One of these is clearly the potential for prices to rise, and for them to be profitable investments. However, they are also bought as diversification tools, as discrete forms of wealth, as family heirlooms, and as displays of wealth, given how beautiful they are.
These diverse demand drivers highlight why pink diamonds will endure in one way, shape, or form, irrespective of the economic environment we find ourselves in.
It remains far too early to say that about Bitcoin, and other cryptocurrencies. The only reason 99% of people are interested in Bitcoin is because the price might go up. Given its now off by some 70% since its late 2021 highs, interest in it has crashed. We can’t even be sure it will be around 10 years from now.
The above reasons demonstrate why we think pink diamonds have a far more certain future, and why they remain the obvious choice for investors looking to protect and build wealth in the current environment.
As always, we hope you’ve enjoyed this week’s edition of “In the Loupe” and we look forward to any questions or comments you may have.