I think of submarines submerging, or rocks and shipwrecks being submerged. Because people either free dive or scuba dive to get below the surface, I would suggest sticking with "dived" here. So, to answer your question, no... I don't believe they are interchangeable in normal speech, no matter what their dictionary definitions.
In this sentence, the context makes it clear that you were swimming under water. If you said "we were diving yesterday," the listener/reader wouldn't know whether you were swimming under water or practicing triple gainers from the three-meter board at the public swimming pool.
Both of your sentences are understandable, but neither is natural. In addition, note the difference between "see" and "watch." Generally speaking, "watch" involves observing movement. Although coral does grow, it's normally not perceptible motion.
And, "coral" generally would be used in the singular unless it's plain that you're differentiating between types of coral.
Unfortunately, these are the kinds of nuances that you won't pick up from a dictionary.