New Tech for an Emerging Asset Class: Diamonds

Posted by:
April 8, 2020

Asset Classes 101

Investments in an asset class tend to behave similarly to each other as market conditions change. For example, gold tends to go up in price in response to bad news for the economy.  So do silver and platinum, although they never track each other exactly.

It is part of many investors' strategies to diversify across asset classes to mitigate swings in one asset class by "counter-cyclic" behavior in others.  So, for example, they may seek long-term growth through stocks, but mitigate volatility in their overall portfolio by also owning bonds and gold.

However, it isn't enough for value fluctuation to just be countercyclical for a type of investment to be attractive as an asset class. Other requirements include:

  • Recognized as intrinsically valuable. Dust bunnies would fail on this count; ounces of gold and Picasso paintings would not.
  • Durable. Ice sculptures and winning pies at the state fair lose out here. They melt and rot, respectively. Gold is good, though.
  • Market liquidity. This means that it's easy to either buy and sell the investment quickly, with little cost overhead, and that the price for buying and selling is almost the same at any given time. High-volume stocks? Yes. Gold? Also yes.

Diamonds as an Asset Class?

So, how do certified polished diamonds stack up?

  • Recognized as intrinsically valuable. Oh yes. Diamonds are a paragon of inanimate beauty.  They are extremely rare, and have sold at ridiculously high prices relative to their utility for centuries.
  • Durable. Natural diamonds take millions of years to form deep in Earth's mantle. If archaeologists are looking at our civilization a million years from now, our diamonds will probably be perfectly preserved.
  • Market liquidity. Oops.

Market Liquidity for Diamonds

Diamonds as investments are traditionally the purview of those wealthy enough to hire their own diamond expert, and who can exercise extreme patience in either buying or selling. And, pity the consumer who thinks the stone in her ring is a store of value that can be recovered at will.

But, let's ask the question: what would a liquid global marketplace for certified, polished, natural diamonds really look like? Well, it would be easy to buy or sell a diamond quickly, with little cost overhead, and the buy and sell price for an equivalent stones would be almost the same at any given time.  And, these prices would be transparently set by the balance of supply and demand in the market -- not by price lists, and not by the people running the market.

These qualities have been long been achieved in equity and commodity markets by using a market technology called the Continuous Double Auction, or CDA. There is a separate CDA for each stock and commodity. Within a CDA, all willing sellers post the asking price at which they're currently willing to sell; all willing buyers bid the price at which they are currently willing to buy. Overlapping bids and asks become transactions; non-overlapping bids and asks define and stabilize the market price.

But, a bid in a CDA isn't for a specific share of stock or ounce of gold, and they don't have to be: every seller's thing being sold through the same CDA is identical, or at least interchangeable for purposes of trade, to every other seller's.

And, that's why a CDA can't be used for certified polished diamonds: every diamond is unique. You could try having a CDA for just the most perfect round 1-carat stones, but by the time you've eliminated enough variation to make them truly interchangeable for purposes of trade, you would have eliminated 99+% of the diamonds in the real market.

Yet, Liquid Diamonds (the company I formed with my amazing co-founder, Kashyap Mehta) exists to provide the price discovery, liquidity, and fairness of a CDA to the wholesale global certified diamond market.  We use our very own, patented, variation of a CDA that we call a UCDA, where "U" stands for "Universal", meaning it can be used to buy or sell in markets of anything, not just markets of identical/interchangeable things.

A UCDA works by letting a buyer create a "demand" representing a purchase they want to make. From that demand, they may find and bid on all alternatives acceptable to them, at the same time, at different prices.  A demand also express the limits of what the buyer wants to buy, either in terms of count, or budget, or both. (E.g. "I'll buy up to 10 of these alternatives, provided my total cost doesn't exceed $50,000.")

Every seller can see the alternatives his prospective buyers are also bidding on, and at what prices. This puts the sellers of the alternatives each buyer has chosen into open competition for that buyer's business. The buyer has expressed what he wants, and how he values his alternatives, through his demand. The aggregate of these expressions by buyers reveal the true current demand in the current market -- something that has never happened before.

Other buyers are doing the same thing, and they can see each others' bids, too.  This puts all the buyers who would be willing to buy a stone into open competition with each other.

I can go on about the UCDA, and in future writings, I will. For now, let me just say that we have built this online marketplace (see, and over the course of a year+ private beta have 320K certified diamonds for sale, and 1000's of bids outstanding, at any given time.  We are creating a truly liquid global market for certified polished diamonds. It's time for you to join us.