The most high-profile event in financial markets last week was the NASDAQ listing of crypto-currency exchange Coinbase, which caused peak exuberance in the Bitcoin community, with the price of the world’s most famous cryptocurrency surging to more than USD $60,000 per coin.
Whilst those who are hyper-bullish on Bitcoin proclaimed that the Coinbase listing was the beginning of a new era for cryptocurrencies, and were busy rushing out ever higher price predictions, risk conscious investors were seeing it as a potential bubble warning sign, as it is the kind of market activity that often coincides with multi-year tops in an asset class.
So far, the risk conscious investors look like they may be right, with the screenshot below, taken from a pro-trading screen over the weekend, showing the price of Bitcoin at just over $56,000, having fallen almost 10% in a matter of hours.
It got worse in the hours that followed, with the cryptocurrency falling down toward USD $50,000 at one point, a decline of roughly 20% in the space of one day.
This frenzied activity marks the perfect time in our Investment Series to focus on a comparison between Bitcoin, and cryptocurrencies more generally, and our asset class of choice, pink diamonds.
Pink Diamonds vs. Bitcoin
Below, we list several characteristics by which one can, and indeed should compare pink diamonds to Bitcoin, both of which have been very profitable investments.
For reasons you will see, whilst we are not anti-Bitcoin, we think pink diamonds remain a far more sensible choice for astute investors looking to protect and build wealth in the decade ahead.
The one area where do see assets like Bitcoin as having an advantage over pink diamonds is from a liquidity perspective, as Bitcoin can typically be bought/sold 24/7, unlike pink diamonds, which have a divestment process that can take up to 3 months.
This is not a major issue for most astute 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.
As we have often mentioned in updates to our client base at Australian Diamond Portfolio, one of the advantages of pink diamonds is that they exhibit a relatively smooth performance profile, with minimal volatility along the way.
By contrast, cryptocurrencies like Bitcoin exhibit massive price swings, and huge drawdowns of up to and in some cases more than 80%, which can be seen in the chart below. These events destroy capital and rattle investors.
Bitcoin: Historical Drawdowns (2010-2018)
Volatility, and the chance that the asset could go to zero in value, is not the only risk you face with Bitcoin, that you don’t face with pink diamonds. Broader than that there is an overall security risk that comes with investing in cryptocurrencies.
By this, we mean 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.
Pink diamonds by contrast are physical items. They can be stored in a high security vault for a very modest fee, giving investors a peace of mind that no cryptocurrency can match in this regard.
By specialisation, we refer to the ability of investors to outperform the market itself, through astute investments within the particular asset class we are referring too. The stock market, the real estate market, and the diamond market offer this.
As an example, pink diamonds have strongly outperformed not just regular diamonds, but other types of coloured diamonds like yellow diamonds over the last 15 years.
At Australian Diamond Portfolio, we pride ourselves on helping our clients achieve the maximum possible return from this asset class, selecting diamonds that have come from a carefully curated list that we see as offering the best return potential.
Bitcoin doesn’t offer this potential, as the price is homogenous.
Natural vs Engineered Scarcity
Both bitcoin and pink diamonds are scarce, with Bitcoin currently limited to just 21 million coins, whilst pink diamonds are geological freaks of nature, with the closure of the Argyle Diamond Mine in Western Australia reducing annual output by up to 90% going forward.
There is a key difference between the scarcity of the two assets though. Pink diamonds are scarce by nature. Bitcoin is scarce by human design and engineering. There is also no limit to the amount of Bitcoin that cryptocurrency exchanges can theoretically sell to their clients.
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.
Pink diamonds have multiple sources of demand. One of those is clearly as profitable investments, but they are also bought as discrete forms of wealth, as family heirlooms, and as displays of wealth, given how beautiful they are.
This diverse range of demand drivers indicate that demand for pink diamonds will endure in one shape or form, irrespective of the economic environment we find ourselves in.
It is too early to say that about Bitcoin, and other cryptocurrencies. Whilst they have a niche role as mechanisms to facilitate payments, the only reason 99% of people are interested in Bitcoin is because the price might go up.
When prices next crash, and market history tells us that is pretty much a certainty at some point, then interest in Bitcoin and demand will plummet.
That won’t happen to pink diamonds.
Pink Diamonds in the News
This week we came across a great article published on investing.news.com. Titled; “Argyle Diamond Mine Closure: The End of a Sparkling Era”, it focused on the huge scale of production at Argyle over the past thirty years, and how nearly 900 million carats of rough diamonds were produced there.
Of these, only the tiniest fraction were coloured, with pink diamonds comfortably outperforming all other categories of diamonds over the past decade.
The article also discussed the outlook for the sector, and why reduced supply, coupled with rising demand is likely to see prices continue to increase in the years to come.
As always, we hope you’ve enjoyed this week’s edition of “In the Loupe” and look forward to any questions or comments you may have.