Asset-backed crypto investment is on the rise, integrating blockchain technology with tangible assets. Token-backed commodities for assets like gold and silver are already in the crypto space. Some of the gold-backed tokens are Digix Gold Token (DGX) and Pax Gold (PAX).
An example of a silver-backed coin is CannDollar Silver Token (CDAG). Currently, startups are exploring the possibility of establishing tokens for less conventional commodities like diamonds.
What Makes Diamond Investment Risky?
Diamonds lack a few critical elements of an asset for real investment. One key factor is that it is tough to resell a diamond. Edward Jay Epstein, an investigative journalist, once said that it is challenging to sell individual diamonds at a profit, including those held over long periods. Jay also pointed out that even large diamonds sell at significant losses.
According to Jon Deane, former commodity trading director of JP Morgan, buying diamonds on the retail market yields an instant loss. Instant loss occurs because, at the retail point, intermediaries have already gotten a share of the profit.
Another critical element that diamonds lack is fungibility. It is the degree to which stone can be interchanged with another. In attempts of turning diamonds into real invest-able products, there was the creation of funds. Individuals traded diamonds as fungible groups instead of individual stones.
However, the method did not work because it did not make a large and efficient market for diamonds’ fair valuation. Deane pointed out that due to the shortage of fungibility, the appraiser’s subjective whim determines the value of diamond funds.
Tokenization- Will It Save Diamond in the Markets?
Blockchain pioneers have faith that tokenization might be the solution to the non-profitable diamond investment. On 15th of July, 2020, a report revealed that Icecap, a company founded by Jacque Voorhes, incorporated diamonds in the Ethereum blockchain.
Icecap offers a non-fungible token (NFTs) to stand in for diamonds on the OpenSea marketplace. The tokenization of diamond brings the solution to the market’s current problem preventing retail investors from selling diamonds with a steep discount. Diamond retail investors cannot sell diamonds with a steep discount because there is no secondary market.
As per Jacque Voorhes, problems faced in retail diamond selling creates a 7.92 EUR billion market. However, Jacque also points out that the diamond market will start small. Despite that, it will contain both cryptocurrency millionaires and early adopters.