Hedging in the Stock Market: Is the Colored Coin Better than the Physically-Backed Diamond Index?

Abstract

The present paper examines the potential utilization of diamond-connected cryptocurrencies as one novel means to acquire long or short positions in tangible diamonds. We evaluate the equity risk hedging capability of two popular colored coins associated with diamonds, namely PinkCoin and CaratCoin. PinkCoin is chosen over CaratCoin for further analysis due to its extensive transaction data, allowing for a comparison with a benchmark diamond price aggregate. Our results suggest incorporating such tokens in portfolios enables protection against swings in the equity market, particularly during periods of market decline. Moreover, these assets have the attribute of augmenting portfolio diversification within a conventional mean-variance frontier framework. The reconciliation of colored coins’ accessibility and price fluctuations with the safe-haven characteristic of diamonds has resulted in unique diversification benefits comparable to those associated with trading natural gemstones. Although the conclusion above holds significant appeal for investors who favor the inclusion of diamonds in their investment portfolios, it harbors concerns regarding liquidity and the assurance of genuineness.