Is a domain name worth something if it’s just traded amongst investors with limited potential value to an end user?
Three letter .com domain names are very popular right now, with prices increasing significantly over the past year.
Much of the demand comes from domain traders in China. China itself is experiencing a bubble in tech stocks that rivals (or surpasses) the NASDAQ 15 years ago…perhaps including the ensuing bust.
Will the value of three letter .com domains face a similar fate to other assets that have rapidly increased in value? Or is there underlying value in these domain names that will cause them to continue to appreciate?
Let’s take a step back.
Even before Chinese buyers showed up, three letter .com domains were very popular and liquid for trading. They were popular, in party, because a combination of three letters matches a number of companies’ brand acronyms. A short and simple domain matching your acronym is worth a lot, e.g. DNW.com for Domain Name Wire.
I struggle to determine if the current run up in prices is tied to this value (short domains that match brands). Many of the three letter domains commanding top dollar these days are based on a different set of letters that work for the Chinese but are less likely to match acronyms or stand for anything.
So what value do these domains have? Certainly, any short domain — even if it doesn’t stand for anything — has value. But how much value do they have if the odds are low that an end user will ever come along and try to purchase the domain name?
China is past the bubble, it’s already burst with $2.8 trillion (TRILLION) dollars in stock loss. http://www.bloomberg.com/news/articles/2015-07-09/who-blew-up-china-s-stock-bubble-
But for those that gambled at the Shanghai SE, domains became an investment.
These ‘QZJ’ (triple-junk) combos were always priced at almost 50% of the price of LLL .com’s that did not include them. The Chinese capital accumulated via the stock market created a trend; these domains, however, never left the hands of investors/domainers/resellers.
Expect a correction, which will have a two-fold effect, IMO: Significant loss in the value of “pinyin” LLL .com’s and mass availability at sales. It should also, in theory, bring the price of quality letters higher.
The theory stated by some well known domain brokers that if the China Real Estate market takes the same kind of hit it’s stock market has it will not affect the LLL domains is nonsense. Nothing more than talking their book. LLL names will correct in a big way-at which time they could become a very good value.
Nat Cohen says
Good questions. There was no doubt a spike in values of certain 3-letter combos favored by Chinese investors over the past year. It wasn’t clear that there were end-user buyers supporting that surge in pricing, or whether it was primarily speculation fueled buying similar to what was going on in the Chinese stock market.
Overall though the value of 3-letter dot-com domains is on a solid footing. There have been dozens of publicly reported sales of 3-letter dot-com domains at six-figure valuations primarily to end-user buyers. I am also aware of dozens more six-figure sales of 3-letter dot-com domains to end-users that have not been publicly reported. Of course, we have recently seen two million dollar sales of 3-letter dot-com domains with BTC.com and QNB.com.
It is now clear that 3-letter dot-com domains deliver six-figures in value (or more) to certain end-users, and that end-users recognize this and are willing to make six-figure investments in acquiring 3-letter dot-com domains. These end-user purchases support investor valuations somewhere in the five-figures depending on the investor’s tolerance for risk and expectations of resale.
So while the trend line of 3-letter values may have seen a spike and then dip depending on whether speculation grew overheated in China, the overall trend line has been solidly up. There wasn’t even much of a drop-off in valuations during the 2008-2009 financial crises when the stock market tanked.
The US stock market has seen its shares of highs and lows and continues to trend upward. The Chinese stock market will likely do the same. Overall the emergence of the Chinese market has been good for dot-com values, as Chinese companies also seem to prefer the dot-com extension. I believe that we are just at the beginning of demand from China for short dot-com domains and that this speculative wave marks this first wave.
Whether the drop in the Chinese stock market is good or bad for domain values is not clear. If it leads to forced selling of domains to raise cash, that would depress values. But if Chinese investors see domains as a safer, more reliable investment than stocks that could lead to more depend for domains as an investment asset class.
Andrew Allemann says
I agree with you, Nat. I think the most valuable three letter domains are those that are likely to be highly coveted by an end user.
No worries, Andrew, DNW .com is a great name 😀
michael berkens says
I have found that those that heavily invest into domain names do just that and don’t heavily invest into the stock market, so I’m not sure that the two equate unless the stock market loss turns into a global monetary crisis as we saw back here a few years ago.
If you are investing for the long haul, the stock market in China will recover too.
We have went from a stock market that was the worst since the great depression economy to a all time high
Personally my level of spam from China for LLL.com has not dropped off any.
Some of the biggest three letter sales have come from end users like two letter .com’s, if a company needs a name they need a name, which is the underlying value of for both LL.com and LLL.com
Bubbles form when speculators enter and jack up the prices beyond anything fundamentally justifiable. It doesn’t matter if it’s stocks, tulips, bitcoin, domains or homes. So, yes, I expect this bubble too shall burst. Or maybe correction is the more apt term.
I agree with @Berkens about domain investments – often people are investing in domains as an alternative to the stock market, real estate, or other investments.
There is some inter-dependency on the liquidity and health of the other investments. When there is abundance in wealth, we see some money enter into domains as investments, and sometimes at higher prices, but the overall market for domains has trended to be resilient.
Domain investment is a hedge against downturns elsewhere.
and (plug) Come to http://domainfest.asia to get more direct information and meetings with the Chinese market.
Ivan Rasskazov says
Nate and Michael raise some great points. I actually took a look at five periods of significant negative equity volatility how they affected public domain sales. I did not find any meaningful correlation. I think domains are not yet connected enough to the global investment universe to suffer or benefit greatly from those trends.
Having said that, if Chinese markets continue to suffer that will eventually temper Chinese demand. It may even create buying opportunities in cases where recent Chinese buyers will need to find liquidity and sell. Long term picture should remain fine for now.
We may also see global and prolonged equity prices and RE prices correction, yet a large influx of new global money to buy LL.coms, LLL.coms, and one-word .coms. The cool thing about top-tier .coms is that they are not correlated to other investment options, so they offer a very interesting hedge. Another cool thing about them is that there is demand from various countries, so they also offer currencies risk hedge.
If 1% of 1% of global cash invested in stocks and RE were to go into top-tier .coms, prices will increase 10-fold just based on limited supply.
Joseph Peterson says
This China-fueled short-domain market makes for an interesting discussion. I’ve written about it extensively here at DNW. So I hope nobody minds if I link 2 other in-house articles to this conversation.
( A ) Today (Thursday) Andrew published a piece in which I analyzed how China-related domain sales were immediately affected by the downturn in the Chinese stock market that began mid-June:
After crunching the numbers, I found some other pricing trends that began earlier in 2015. And regarding more recent Chinese market volatility, I made some predictions. Global wholesale domainers will act like shock absorbers or capacitors, smoothing out short-term fluctuations in the Chinese / retail market. That doesn’t mean that prices won’t decline, but any decline would appear much later and be cushioned by distance, ignorance, global economic health, and habit.
(B) Last April, I wrote about LLL.com domains as “tokens” versus property:
My point was that value can be imaginary but real and stable nevertheless. Look at paper money or gold. These items are mainly seen as receptacles of (mostly constant) financial value. That idea is divorced from any intrinsic usefulness. As long as enough people agree that my $20 bill is worth 20 dollars, then it’s true. Likewise, as long as enough people agree that QMZ.com is worth whatever arbitrary amount plus or minus whatever margin of uncertainty, then that also is true.
LLL.com domains are sometimes traded with future end users in mind. In that case, they’re seen as property that can be used by someone else. But at the same time, these days LLL.com domains are mostly traded as tokens – receptacles for some fairly permanent monetary storage. They can also appreciate. But many investors buy up these short domains in the same way as they would buy up bills in a stable foreign currency. That’s without reference to the item’s utility as property. Instead, it’s a token value.
The market for these short domains is of 2 minds. In certain circumstances, they’re seen as property to be used by future websites. In most circumstances, they’re regarded like bonds or bills or bullion. When the value of a given LLL.com as a token exceeds its usefulness as a website’s brand name, then that domain has “crossed over” in a sense.
Maybe there is a bubble. But just because value is imaginary doesn’t mean that it’s unreal. Shared delusions mean consensus. Gold would be a bubble if people were rational. But we won’t all wake up from that dream and simultaneously regard gold in the same way as we regard a mud brick. As long as most people continue thinking in the old way, then value remains fairly constant as a self-fulfilling prophecy.
Domainer Extraordinaire says
The title is a silly question. They have always had real value. You realized this when you purchased dnw.com as an end user, not a reseller.
Glad you asked this question, but I think the recent rise in LLLL.com is more concerning. There are far more end users with 3 words in their name than 4.
LLL.com might be inflated but I can still rationalize their investment potential. LLLL.com on the other hand – I have a very hard time justifying the high cost of many of them.
Perhaps I am just ignorant to the value of LLLL.com – but the recent rise seems very much tied to investor speculation and I wouldn’t be surprised to see a drastic correction.
well estibot says my LLL>com is worth 250k lol. just 6 months ago it said it was worth 120k. anways, i think LLL.com values might fluctuate a bit especially when new investors come on the scene but i don’t see them ever really going down. i keep a handful of domains i call my ‘retirement fund’ that i plan on holding for a very long time. these are first name .coms, one word .coms and my one LLL.com and a few quality LLLL.com’s. i wish i had more LLL.com’s but it looks like i waited too long to buy…but i think these kinds of domains will always be moving up in value in the long term.