Accepted 16^th May, 2022

Xiang Gao¹, Kees G. Koedijk², Hua Wang^3* and Zhan Wang<sup>1

1</sup>Research Center of Finance, Shanghai Business School in Shanghai, China
²Banking and Finance at School of Economics, Utrecht University in Utrecht, the Netherlands; and CEPR in London, U.K.
³Financial Innovation and FinTech Research Center, Shenzhen Technology University in Shenzhen, China.

Diamond as an asset class stands out in hedging risk for equity positions. However, such merit is difficult to realize due to the lack of efficient markets. This article hence explores the possibility of using diamond-backed coins to obtain exposure to actual diamonds. In specific, the authors measure the hedging performance of the two most prominent cryptocurrencies linked to diamonds and choose PinkCoin with the longest trading data span to compare with a benchmark diamond price aggregate. The authors find that these coins can indeed safeguard portfolios against equity market fluctuations, especially in market downturns. Moreover, they display the characteristic of enhancing portfolio diversification in a standard mean-variance frontier setup. Cryptocurrency’s high exchangeability and volatility have been reconciled with diamond’s safe-haven feature, thus creating unique diversification benefits that can match actions of trading physical gemstones. This implication is of great interest to investors who prefer diamonds to be an addition to their portfolios but worry about liquidity and authenticity.

Key words: Diamond price index, cryptocurrency, diamond-backed coin, equity market portfolio, hedging.