Sabine MelicharHamburg-based Finexity AG has just tokenized its first diamond. A “Fancy Pink.” Tim Janssen, Head of Blockchain at Finexity, explains that the company opted for a single-carat stone for the premiere: “We are entering the market with a new asset class. With a high-profile stone, the financing volume is correspondingly large. For us as a young platform, it would be hard to raise that much money.” The start-up could have saved itself the misgivings. The funding goal of 57,500 euros was reached within a few hours.
Only 13.4 percent own diamonds
A recent survey reinforced Finexity’s plan to tokenize diamonds. The company had conducted it among its investors in April. The results are surprising:
- Only 13.4 percent of respondents own diamonds as a store of value
- More than 50 percent would specifically consider a direct investment
- Almost 35 percent are open to an investment in principle
- More than 90 percent are “perhaps” or “definitely” open to an investment in diamond tokens.
Where can I find diamond tokens?
The question arises for the retail investor in America, England and also all over the world: Where do I buy diamond tokens? The first port of call for interested investors is, for example, the Finexity marketplace. Access to all deposited information and to the forecast yield is only granted to those who have previously registered on the platform. The products are listed there and provided with standardized information. In addition to historical performance, this includes the costs of initial financing as well as risk and consumer information documents.
What you as an investor should always keep in mind with promised returns: You are relying on the financing decision of the respective investment platform – with all opportunities and risks. Historical performance or forecasts are not a reliable indicator of future performance.
Four reasons to buy tokens
Retail investors can buy diamond tokens starting at €500 through the Finexity platform. According to Finexity’s Tim Janssen, in doing so, they bypass four problems that investments in illiquid tangible assets classically entail:
- Diamonds are capital intensive as an investment. When tokenized, they are accessible to small budgets.
- Private investors lack the expertise to assess a diamond investment and keep track of the risks. Acquiring the relevant knowledge yourself is very costly. Finexity provides all the information – appraisals, certificates and expert opinion on the material asset – on the product page for registered users.
- With individual investments in high-priced tangible assets such as diamonds, investors tie up capital more long-term and are less flexible. When they buy diamond tokens, they can put those tokens up for sale on the Finexity secondary market and earn returns.
- With tokenized tangible assets such as diamonds, real estate tokenziation or Fine Wine, investors can spread their money across different investments and diversify their portfolio in a targeted way. This reduces the risk of a total loss.
Diamond tokens can be put up for sale in the secondary market when the market reaches a peak or you need money.
Tim Janssen, Head of Blockchain, Finexity AG
The return on a diamond token investment
The projected total return of the diamond token is derived from the projected performance of the stone. For the Fancy Pink, this is an average of six percent per year for a planned investment period of six years (see table). Investors can realize this interest rate if they sell their diamond tokens via the secondary market or if Finexity sells the diamond. But beware: the stated interest rate is always based on forecasts. It is a prediction of future appreciation based on historical performance. It is not a guaranteed fixed interest rate
Real yield example
Selling price Fancy Pink Diamond, July 2021 | 108 761 |
Redemption and debenture principal | 74 500 |
Repatriation of Finexity AG capital | 500 |
Equity share of proceeds from sale | 225 |
Performance fee | 6 707 |
Investor capital gain after 6 years (2027) | 26 829 |
Projected payout | 136,01% |
Ø projected total return p.a. | 6% |
Sale of tokens in the secondary market
Blockchain technology makes it possible to transmit token transactions from one wallet to another. “This creates a secondary market that works like an over-the-counter trading venue,” says Tim Janssen. Investors would thus be able to buy and sell diamond tokens regardless of the contract term. The value of the tokens would be adjusted based on actual performance. “When we have collected more historical data in two years, we can commission a new expert appraisal. Token owners will then be free to offer their shares accordingly at a higher price on the secondary market.”
Sell stone and realize the return
As with a stock, investors can then decide whether to buy in order to realize a good return when they later sell the diamond with appreciation. “Very different asset classes can be traded in the secondary market. This increases flexibility. As a retail investor, you can now not only invest proportionally in a diamond. You can also put your digital shares up for sale again when you think the market has peaked or you need money.”
Every investment has risk
Buying diamond tokens, like any investment, carries various risks. Unlike a painting, which can be destroyed, the risk of total loss with a diamond is more theoretical. However, the value of a gemstone and thus the return on sale is highly dependent on supply and demand.
Trading under liability roof
finances projects via tokenized debt securities. These are digital securities. Therefore, according to the German Banking Act (KWG), a permit from the Federal Financial Supervisory Authority is required. As a start-up, Finexity does not have its own BaFin license. Instead, the company brokers investments under a so-called "liability umbrella". A company licensed under the German Banking Act (KWG) - in Finexity's case Effecta GmbH - assumes liability. The liability umbrella checks each product in advance and releases it for brokerage. Investors can contact the liability umbrella directly in the event of liability.
Colored diamonds: rare and valuable
Naturally occurring colored diamonds are very rare. This makes them particularly valuable. According to the non-profit Gemstone and Jewelry Institute GIA, only one in 10,000 diamonds has a so-called "fancy color." This occurs during the formation process: diamonds form in the earth's mantle under extreme heat and pressure conditions. If they capture foreign particles during crystallization, these cause structural irregularities in the chemical process - and color. Nitrogen, for example, makes the diamond yellow. Boron provides a blue coloration. In black diamonds, many impurities come together. With fancy color diamonds, the more intense the hue, the higher the value. Fancy Colors are very popular. However, in recent years, there have been few finds. This suggests that the value of Fancy Diamond tokens will increase.
Naturally occurring colored diamonds are very rare. This makes them particularly valuable. According to the non-profit Gemstone and Jewelry Institute How does tokenization work?
Tim Janssen, Head of Blockchain at Finexity explains how tokenization of a diamond specifically works.
- Set funding target
The platform sets a funding target for each stone. In the case of Fancy Pink, for example, this was 57,500 euros. Investors now have to raise this amount for tokenization to work.
- Transfer to the inventory
Once the financing is complete, the diamond becomes the property of the special purpose entity. Let’s assume that the money comes from a group of 50 investors. Then each of these investors receives 1 digital share (token) of the Fancy Pink Diamond for 1 euro.
- Posting to the blockchain wallet
After that, Finexity posts each investor’s number of purchased digital shares to his blockchain wallet (wallet). This represents his investment. So, if an investor has invested 500 euros, he will receive 500 digital shares of Fancy Pink Diamond tokens. This is accurately logged via the blockchain.
FAQ – Frequently Asked Questions
The Finexity platform has already tokenized two diamonds. The funding has been completed. If current investors want to sell their digital shares, they can buy diamond tokens on the secondary market. In the future, there will be more tokenized diamonds on the Finexity marketplace. As a retail investor, you can then get in on the investment from €500.
Colored diamonds are very rare in nature. Pink varieties in particular are a rarity – especially since the largest, producing mine is now closed. Diamond tokens of “fancy pinks” are therefore valued higher. However, there is always the risk that a new deposit will be discovered. That would cause prices to fall.
No investment is without risk. The risk of a total loss is rather theoretical with a diamond. However, a new mine would increase the supply and cause the prices to collapse. However, when you buy tangible assets like diamond tokens, you have less volatility in return.
