13 May

Pink diamonds deliver while crypto crashes!

In just over six weeks, we’ll hit the half way point for the calendar year 2022.

So far, it’s been an incredibly disappointing one for investors in traditional assets, with equity markets down, property prices starting to weaken, and traditional safe havens like bonds having their worst year on record, having fallen by approximately 10%.

Cash also remains ‘dead money’ given how low interest rates are, and the fact that inflation is at multi-decade highs, while even new asset classes like cryptocurrencies are in free fall (more on this below).

While the team at Australian Diamond Portfolio never like to see anyone lose money on any particular investment, we can’t help but be proud that we’ve helped so many Australians not just protect but indeed grow their wealth through this difficult period, with hard assets like pink diamonds really coming to the fore this year.

We expect this will remain the case for some time to come, as we discuss below.

Cryptocurrencies fall apart

One could argue that in the last decade, no asset class has captured more attention, or generated more interest than cryptocurrencies, most notably Bitcoin.

Marketed as a form of ‘digital gold’, cryptocurrencies have repeatedly soared then crashed, with a very small cohort of speculators in this market making huge amounts of money, which of course encourages others to follow suit.

As we’ve discussed in these updates previously, while we are not anti-cryptocurrencies per se (we aren’t anti any asset for that matter), we have always seen them as highly volatile speculations, rather than bedrock safe haven assets that investors can rely on over the long-run.

Ultimately, our scepticism about these assets, and the industry that has been built around them comes down to a simple question: what is the real use case for them, how valuable is that use case, and how sustainable are the returns?

We’ve never gained comfort that any particular cryptocurrency has a hugely valuable use case (which is not to say that they are all worthless), while the performance returns touted by many cryptocurrency bulls were never going to be sustained in our view, as no asset can realistically be expected to grow at 200% per annum for ever.

In the last few months, our scepticism toward this sector appears to have been vindicated, with Bitcoin, and the majority of crypto assets plunging in value. Indeed, since November of 2021, Bitcoin has fallen by almost 60%, from an all-time high close to USD $68,000 per coin, to less than USD $30,000 today.

As per the chart below, it’s crashed by just over 20% in the last five days alone.

Market summary of Bitcoin in the last 5 days

It’s even worse for companies operating in the cryptocurrency space, with shares in cryptocurrency exchange Coinbase now down by more than 80% from their all-time highs.

Market summary of Coinbase in the last year

Note that the recent crash in cryptocurrency prices has occurred despite the “financialization” of Bitcoin, with ETFs and other investment products designed to track the Bitcoin price now widely available in the markets.

Those products were meant to push prices even higher. Instead, they look like they’ve marked the top of the market.

It’s also worth noting that this crash in cryptocurrency prices has occurred despite;

  • Cost of living pressures surging higher, with the latest inflation figures in the United States showing inflation is above 8%, and
  • A major crash in equity markets, with the S&P 500 and NASDAQ down by almost 20%, and more than 30% respectively in the last few months.

This is particularly relevant given Bitcoin and other cryptocurrencies are often sold as ‘safe haven’ assets which help diversify a portfolio.

If they are more volatile than equities, crash when equity prices are falling, and fall while inflation is surging, are they really a safe haven? We’d argue that they are not – or at least have not proved themselves to be at this stage.

Given this reality, it’s more important than ever that investors do their due diligence before committing capital to this asset class.

It is also why, if investors are looking for genuine safe havens, they should look at hard assets that are genuinely scarce, and that have a history of delivering outperformance, inflation protection, and portfolio stability when it’s needed most!

That’s where pink diamonds come in.

The case for pink diamonds grows stronger

While most investors obsess over the daily price changes they observe in their portfolio, the next few years will be dominated by a number of bigger picture issues, which we always try to tie our educational updates back too.

These issues include:

  • Inflation may not stay above 8% like it is today, but it almost certainly won’t go back to the sub 2% level most investors got used to in the decade leading into the COVID-19 outbreak. It will be a real problem going forward.
  • Interest rates may increase a little bit in the next year or so,  but they’ll likely remain below the rate of inflation between now and the mid 2030s at the earliest. Cash is no longer king!
  • Economic indicators like unemployment rates and yield curves suggest a global economic slowdown is already occurring, while a global recession is very likely to occur in the next 12-18 months.
  • Traditional investments like shares and bonds may well lose money in real terms in the next decade, given how expensive they remain today.
  • New asset classes like cryptocurrencies remain far too volatile, and are far too risky to trust as genuine safe havens in the current environment.

Against this backdrop, the case for pink diamonds remains as strong as ever, especially when one considers that:

  • They are genuinely scarce given their supply constraints.
  • They are highly desired by investors globally.
  • They are in a bull market, when most other assets are not.
  • They offer inflation protection.
  • They don’t suffer from daily volatility.
  • They have a history of helping diversify a portfolio.

If adding a pink diamond to your investment portfolio is something you’d like to explore, the team at Australian Diamond Portfolio would be more than happy to assist.

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.


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