“When we achieve certain standards and everyone starts singing off the same song sheet, productivity just explodes.” - Michael Saylor
Welcome to Episode 78 of Special Situation Investing.
I recently listened to the sixteen hour, multi-episode series with Michael Saylor on the What is Money Show. I’m happy to report the sixteen hours was not wasted as the series was well worth the invested time. In fact, when my cohost heard I had only just now listened to it, his reply was: “What are we going to do with you?” So yeah, we both highly recommend the series.
For those who don’t know, Michael Saylor is the CEO of MicroStrategy, a computer software company. But over the past few years he’s become better known as one of the most zealous proponents of bitcoin.
Given its sixteen hour time span, the Saylor Series of course covers about every imaginable topic related to bitcoin — its history, its use case, its advantages and disadvantages — but the discussion also covers a mind-blowing amount of history, economics, and psychology, among a host of other diverse topics.
A reoccurring theme in the early episodes was the concept of standardization. Saylor argued, and illustrated with historical examples, how standardization was often an advantage that allowed one civilization, people group, or company to beat out their competition and prosper. A memorable example was that of chariots in the Roman Empire. Saylor points to how the Roman chariots had a standard width which allowed for swifter travel over Roman roads since, as ruts inevitably developed, every chariot’s wheels fit into the ruts minimizing breakdowns. Interestingly, over time, the same logic was applied to transport vehicles of all sorts and the dimension became so pervasive that it’s the standard width of railroad tracks today — four feet, eight and a halve inches.
All that to say, thinking about standardization and how it can lead to success led me to dive into a company that I’ve had on my list to research for a while. Thus the topic of today’s episode is Diamond Standard Ltd.
The age-old problem
To understand Diamond Standard, it’ll be helpful to first discuss the problem the company is solving and thus why it’s is relevant and perhaps even revolutionary. It’s not that hard to guess, because it’s all in the name, the company is bringing standardization to diamonds.
For those of us who have bought a diamond, likely in the form of jewelry, we are keenly award of the uniqueness of each and every diamond and how that uniqueness can cause consternation and confusion when looking for the perfect diamond. Diamonds vary by cut, color, clarity, and carrot. Just like our finger prints, no two diamonds are the same.
This lack of uniformity, also known as lack of fungibility, has prevented diamonds from being a major asset class for investors. Think about it, how can an asset be traded, bought or sold with confidence without fungibility. As such diamonds have never been able to be marked-to-market, or have price discovery, or the necessary liquidity to be a serious asset class contender on the same stage as precious metals and other commodities. In short, until recently, it’s been extremely hard and inefficient for investors to allocate to diamonds.
This problem of fungibility is what Diamond Standard solves and thus makes investment in diamonds for the masses finally possible.
In an interview on RealVision, Diamond Standard’s CEO, Cormac Kinney, describes the genesis for the company this way:
I was a trader and my wife is a jewelry trader and, partly through osmosis, I learned a lot about diamonds, mainly because she was always telling me how frustrating that market is and how her clients know that after they buy a diamond from her they’re going to lose half the value and that when she buys diamonds there’s no price transparency.
I became very interested when I learned how big of a market it is, which is about $1.2 trillion. Which makes diamonds more valuable than silver, platinum, palladium, and rhodium combined. But diamonds were never fungible and I realized that was what was limiting them from having price transparency, liquidity and any use by investors because they could never mark diamonds to market.
So I think my whole career brought me to Diamond Standard, starting with optimization, statistical arbitrage, automated market making, and more recently, blockchain. Those technologies combine to make the diamond standard commodity possible. Basically it’s a physical commodity that contains an optimized sample of diamonds such that every commodity is equivalent whether we make them today or in thirty years.
Cormac Kinney has been called a genius and has a resume to support it. His bio on the Diamond Standard website states the following:
With innovations cited in nearly 4,000 U.S. Patents, Cormac has been the founder of four software startups acquired by public companies. He is a quant finance pioneer who invented heatmaps, designed over 100 institutional trading systems, and perfected sentiment analysis for statistical arbitrage, using it to manage over $500 million for Tudor and Millennium. Most recently, he built a business social network integrated into premium news publications, which was acquired by News Corp.
And now he’s tackling the diamond market.
Creating the Diamond Standard
To solve the diamond fungibility problem, Diamond Standard uses proprietary technology that is the product of Kinney’s experience with optimization, statistical arbitrage, automated market making, and blockchain. We fully admit that it took a while to get a good grasp on Diamond Standard’s process as it’s a very unique, creative and innovative system. But here’s our best shot at an explanation.
Kinney’s company creates a physical diamond commodity that can be bought and taken into physical custody in the form of a “coin” or a “bar.” Each coin is a statistically equal sample of natural polished diamonds enclosed in transparent resin in the shape of a coin. Bars are a sampling of diamonds worth 10x that of a coin and shaped as a bar. The diamonds used in the coins and bars are chosen with a publicly disclosed mathematical process that selects sets of diamonds adding up to the same geological scarcity of color, carat weight, and clarity. This process establishes the Diamond Standard.
The company purchases the loose diamonds for its coins and bars by making millions of bids on the Diamond Standard Exchange. The bids for the diamonds are raised until supply and demand sets the price and the company is able to buy a statistically valid sample of diamonds equal to its standard. This process both allows Diamond Standard to be a first market-maker for diamonds and establishes the price for the company’s coins and bars.
So as it stands, it appears that Cormac Kinney and Diamond Standard have solved the age-old problem of diamond fungibility, opening access for investors to a hard asset class previously inaccessible.
So now we ask, why is it advantageous that diamonds are now an accessible asset class?
The unique opportunity in diamonds
Well, as you can imagine, the Dimond Standard website lists reasons why owning diamonds could be a good investment in the current environment. Even when taking the obvious bias into account, the reasons are compelling.
It’s not very often that a new asset class becomes available for investment. Getting an early mover advantage in an emerging asset class could prove fortuitous.
Diamonds are a hard asset 600x more value dense than gold and as such could perform well in inflationary times.
Because the majority of the diamond market is driven by jewelry demand, diamonds are currently uncorrelated to other frequently traded assets.
The traditional lack of standardization has caused diamonds to be underrepresented in the majority of investment portfolios. As compared precious metals where investors hold 30% of the gold market, 19% of the silver market, 17% of the platinum market, and 15% of the palladium market, investors currently only hold about 1% of the available diamonds.
The bullish thesis for diamonds was given further credence by Murray Stahl in two recent reports he wrote within the last six months. Stahl ends the first of the two reports — titled Diamonds as an Investment — by highlighting the declining global supply of diamonds which reinforces an already strong investment bull case. He writes:
The diamond asset class is developing very rapidly. However, it is very unlike ordinary asset classes like securities, in which creation can be infinite – which is to say, if a certain kind of ‘paper’ is appealing to the public, issuers can and will produce, with virtual immediacy, as great a quantity of it as the market will bear. The global production of rough diamonds is in decline, and probably in inexorable decline.
An investable asset class is in the process of being created and, moreover, with an asset manifesting declining production supply. According to Statista, rough diamond production was 177 million carats in 2005 and 116 million carats in 2021. The most alluring returns from an asset class occur before it actually becomes an investable asset class.
How to invest
With regard to how to invest in this opportunity, as evidenced by the lack of a ticker symbol in the title of this episode, Diamond Standard is not a publicly traded company and thus can’t be invested in directly. But the company does offer a number of ways for investors to allocate to diamonds with more avenues coming in the near future.
The physical commodity
The first method is buying the Diamond Standard Coin or Bar. These can be bought directly from the company’s website. Customers can decide whether they want to take physical delivery, which if chosen, Diamond Standard will send the commodity direct to your mail address via insured mail. The benefits of physical custody are that it comes with no custody fees and it can be stored under the bed mattress but this option does incur applicable state sales tax. Currently about 5% of customers choose to take this option.
If customers choose not to take physical delivery, the other option is custody delivery where the commodity will be stored in a Brinks vault in Delaware. This option allows customers to take advantage of Delaware’s zero state sales tax but the cost is an annual custody fee of $36. Also because each bar and coin contains a wireless chip and is associated with a unique blockchain token, another advantage of custody delivery is the ability to remotely audit the commodity and the ability to instantaneously trade the commodity of the Diamond Standard Spot market.
The Diamond Standard Spot Market can also be used to buy the commodities directly peer-to-peer.
The Fund
The Diamond Standard Fund is an investment vehicle for accredited investors requiring a minimum investment of $100,000. Sponsored by Diamond Standard & Horizon Kinetics, the Fund acquires and holds Diamond Standard Commodities enabling investors to gain exposure to the Diamond Standard Commodity via an un-listed, closed-end, at-the-market-fund with periodic subscriptions.
Upcoming products
Diamond Standard is working on making three more regulator-approved investment products.
he first, Dimond Standard futures, have been approved to list on the MGEX exchange via the CME Globex Platform, pending CFTC approval. The second, Diamond Standard Options, have been approved to list on the MIAX options exchange, pending CFTC approval. And lastly, the Dimond Standard ETF will be listed on the NYSE, pending SEC approval. In recent interview, Cormac Kinney has stated that all three products are close to being finalized, and he gave an estimated timeframe for the ETF of early next year.
While not a special situation in the generally accepted sense of the term i.e. a spin-offs, merger, or other corporate action, we do believe Diamond Standard offers a unique opportunity for investors looking to invest in a hard asset class in its embryonic stage.
With that we’ve wrapped up another Episode of Special Situation Investing. Please consider supporting our work by becoming one of our free Substack subscribers. Doing so will also allow you to view our weekly list of favorite podcast and reads that we share at the end of every episode write-up. And a big thank you to those of you listening to the show via the Fountain app and sending us bitcoin boosts via that platform. All your recent support has been very encouraging. Thank you.
And that concludes Episode 78 of Special Situation Investing. Thank you for listening and reading and we’ll see you all next week with another episode.
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Diamond Standard Ltd