Danger foreseen is half avoided: why downside is important for investors and how D1 ensures it

Investors are often scared of investing in cryptocurrencies. Most crypto assets are highly volatile, there are little or no fundamental factors to measure, and the sector in general is considered risky and highly unpredictable. Most people don’t like losing their money and prefer buying into stuff that guarantees limited potential losses. That is why we want to elaborate on downside protection and explain how D1 Coin provides it.

Setting definitions

What is downside? Investopedia defines downside protection as a tool or techniques that allows to prevent a decrease in the value of the investment. Most popular downside protection methods involve a combination of derivatives to balance investor’s long bet with a counter short one; for example, buying a stock and simultaneously paying for an option to sell it at a fixed price below the current market value.

But what are the reasons for downside risk per se? Let us study a couple of cases before we move on, and refresh some basics of investment analysis first of all.

The company’s market value (aka capitalization) is a product of its share price and number of shares. A sum of the company’s market capitalization and its net debt is called enterprise value (EV). Investors assume that, if the company ceases to exist at this particular moment, its assets are to be divided between the creditors and equity holders. This is why indebted corporations tend to have lower valuations.

From time to time we may observe a case when organization possesses a cash pile on accounts that exceeds its market value. This company has negative enterprise value. Situations of this type are not as rare as you may guess: this very moment Fintel market watchdog reports on over a dozen of negative EV public companies. The most common reason is as follows: investors can’t have their hands on what they own.

Classic financial markets

How do investors fight for their value? For years and decades investors who are called active funds, or shortly activists, are fighting with different CEOs and CFOs for their right to access corporations’ intrinsic value via dividends, buybacks, spin-offs or business splits. You may (or may not) have heard about cases like Valeant or Adobe and names like Carl Icahn. If you haven’t, have a quick look at this recap by Business Insider.

One name you know for sure is Edward Lewis. Correct, the Pretty Woman key character, real gentleman, as it turned out, and a real knockout:

— So what do you do with the companies once you buy them?

— I sell them.

— Here, let me do that. You sell them.

— Well, l… don’t sell the whole company; I break it up into pieces… and then I sell that off; it’s worth more than the whole.

— So it’s sort of like, um, stealing cars and selling ’em for the parts, right ?

— Yeah, sort of. But legal.

Well, outside the movie screen shareholders seldom have access to assets they own. Every time they call for action is heard, every time the activists gather their forces and blow the horns of war, the management raises the bridge and closes all embrasures.

Governments and countries

Another good example are currencies. No need to remind you that there is no actual matching collateral behind any of the currencies that are in circulation these days. Good old days when state bills emission was in full connection with the central bank’s gold (or silver) deposits are long gone.

The stronger country you have, the stronger currency you emit. Or, going one step further, the more bills of trust you treasury can issue without damaging their market value. Money holders are incapable of actually changing them into any underlying asset; there were multiple court attempts to call for central banks’ obligations and actually physically receive some of their reserves (like, Perry versus United States in 1935) but as of today such efforts would be completely obsolete.

So, coming back to downside risks, investor always carries as much risk as the market dictates with this particular asset, depending on the potential panic attacks of other investors, predictability of managements and governments and other multiple factors.

Now, this could be and probably has to be tolerated with state bills of trust (currencies). Asset backed securities are a completely different story. In many cases the paper you own moves in no correlation with the collateral, and this can be troubling. Exempli gratia, depositary receipts. Technically, those are securities issued by custodian banks. There is a fixed number of securities (let’s say, shares) behind each of them. But since they are traded on a different market, have different buyers and sellers and don’t interfere with the original market in any form, their pricing is completely separate.

How can investor get protection?

Now, is there a way to limit the downside? There is. Traditional commodity markets have developed a large system of physical storages to support, for example, metal storage certificates, like London Metal Exchange. However, some segments that are extremely attractive for investors, have remained secluded from such, till now.

One of them is diamonds market which D1 Coin has opened to an unlimited number of investors. With this instrument, your savings or investments are secured from downside. Let us explain how it works. Say, you’ve invested $1,000 in D1 Coin and gained 1,000 tokens in return [check token sale price] that all in total represent 1 carat of real diamonds. As a token holder, you don’t normally exchange your tokens into diamonds unless there’s an urgent need to do so. And if at certain moment such a need actually appears, like if there’s a meltdown in the market and the coin drops, let’s say, from $10 to $1, you can actually obtain a material backing of the tokens you hold.

Can a move of this magnitude really happen if the coin is listed at an exchange? Highly unlikely, but it can. However, in case of D1 Coins, exchange rate for stored diamonds remains fixed, and your 1,000 tokens can still be exchanged for 1 carat of diamonds, nevertheless the tokens’ dollar price has dropped.

Does this mean that dollar price doesn’t have anything to do with it, as the coin’s attached to one thousandth of a carat? Exactly. You exchange your 1,000 tokens for 1 carat of diamond and simply take it home.

Is there an explanation on the D1 website? Yes. There’s a scheme of diamond purchase presented, please feel free to study it [insert link]. When diamonds are being mined, the miners set a certain prime cost for diamond recovery, including salaries they pay, then add a roughly 100% margin to it. After that gems get to the next step, gem cutters, who add only 3–5% to the diamond price.

Do D1 Coin customers purchase tokens of the diamonds that have already been cut? Yes. D1 gets them directly from the cutters who don’t normally sell diamonds for private parties, as they submit them to the jewelers who add another 100% to the price of a diamond. Summing up, D1 purchases diamonds and then sells them for token holders at the same wholesale price. Thus, with D1 Coin you avoid unnecessary intermediary spendings.

Looks like it’s a perfect entry to the market that’s been almost secluded before? Yes. It turns out that having exchanged your tokens for a diamond you can sell it at a price lower than the market’s one, but equal to the one you’ve bought them at. So, no matter what, your maximum loss will not exceed 10–20%. Quite a protection from any liquidity catastrophe!

Well, that isn’t exactly something a traditional investor would want, is it, especially considering the fact that diamond purchase among private parties is limited?

We have said a bit about investment potential of precious metals and stones already and will be giving you more important details and research estimates but the matter we wanted to discuss today is saving your money and ensuring your returns, or limiting the downside potential.

Thank you all for joining us today! We barely were able to scratch the surface with our brief overview, so be prepared for an amazing adventure in your research. If you enjoyed the article, don’t forget to leave a clap!

For more information and exciting updates, make sure to follow us on Facebook and Twitter. We will also be releasing more great articles here on Medium and through our email newsletter found at https://d1coin.io/.

About the D1 project:

D1 aims to be one of the top asset-backed crypto tokens accessible by everyone, backed by the valuable and rare investment-grade natural polished diamonds.

Investors from the ultra-rich to the retirement-minded can purchase and trade these coins with the peace of mind knowing that each holds the value of 1/1000th of a carat of hand selected quality polished diamonds.