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When the bubble bursts…

What will drive the long-term value of short domain names?

I’m ecstatic that Chinese buyers are snapping up short domain names. It’s great for the resale market, it’s great for registries (new and old) that are suddenly selling lots of registrations, and it’s great for the registrars.

But I also give pause. After all, there are basically two things that give a domain name value: traffic and resale potential.

Some of these short domain names get traffic. But not hundreds of thousands of them do. And domain traffic isn’t worth what it once was.

That leaves resale potential as the main underpinning value of short domain names. Resale value can only be driven by the domainer-to-domainer market for so long. Ultimately, it has to depend on end users willing to pay a premium. We’ve learned this lesson from history.

There aren’t many end users willing to fork over 6 figures for a three letter .com. Even if a company is willing to pay $150,000, you’d have to sell a lot of domains you bought for $50,000 in order to cover your inventory.

Perhaps domain names are a store of value for people in China. Perhaps they are used to move money around. This is reasonable in the short term, but I question how this will work in the long run.

Domain name investor Sahar Sarid posted a comment on Facebook this morning, opining that the number of new listings of “long short” names will ultimately hurt that market, but shorter names will continue to hold value as long as many are held off the market:

How domain bubbles burst? It isn’t because the market is flooded by new owners wanting to unload but it happens when new listings that comes in the same pace we see today (expired or not) don’t attract buyers anymore. It happens because people either stop believing in the commodity or moving their dollars to other categories. It will happen on most of the 6N+ domains. 5N still have a great chance to get to the $ 10K per domain level in next year or two mostly for the fact that many are help by few who smartly won’t inflate the market with inventory and place them slowly into the market. That won’t be the case with 6N or 7N and other categories as the registrations aren’t controlled by few and everyone is already looking to cash out. Market will be flooded therefore won’t be able to sustain price. IMHO.

Do a relatively small number of people hold all of the 100,000 five number .com domain names? If so, will they artificially constrain supply in order to prop up prices?

That might work for a market in which one entity controls nearly all of the inventory, like with diamonds. But even the OPEC cartel for oil splintered. There are too many owners with different goals and time horizons.

Those that have been in the domain name industry for just a few years remember there was a run on four letter domain names for a while, followed by a steep drop.

Ultimately, fundamentals must underpin any tradeable asset.

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  1. Domainer Extraordinaire says

    >>Some of these short domain names get traffic.

    From my experience all 3 letter .coms have good traffic. Not the case for .crap.

  2. Joseph Peterson says

    Many domainers aren’t willing to think about bubbles bursting. Prices can only go up. The asset class’s boundary will only be extended further and further to embrace 10,000 times as much inventory.

    Back in April, just 7 months ago, when floor prices on LLL.com’s were 1/3 what they are today, I wrote a few pages considering whether short domains would come to be exchanged not as property but as abstract currency. I said:

    “Right now the market can’t quite make up its mind whether such domains should be bound by their value as property, something to be put to use by websites, or whether they’re better off being traded like tulip bulbs one owns but never touches. Maybe gravity will apply; maybe it won’t, and LLL.com prices will float up and away like balloons set free.”

    That happened. Prices forgot gravity and floated up and away. In the minds of domain traders, value is no longer tied to end users. Not only that, but this opinion of mine that short domains would be traded as tokens, cash receptacles, or “chips”, became mainstream. It’s even thrown in my face (as something I’m ignorant of) by some who believe this bull market must continue.

    Whether property or tokens, these assets have seen an unsustainable rate of growth. Just too fast. People are buying up this stuff at full price on the assumption that such growth will continue both upward (in price) and outward (in terms of the asset class’s boundary).

    Very rapid appreciation driven by speculators is bound to overshoot the mark. Then price will take a downturn. The faster the appreciation, the higher the peak price will be above real value, and the sharper the decline. The writing is on the wall.

    The second annual appreciation slows below 17.65%, then the average person who buys at this year’s floor price to sell at next year’s floor price … must sell at a loss. Some owners have short-term outlooks; and we’ll see them divesting simply to get cash flow. As they pour their supply onto the market, prices will come down. Seeing prices drop and fearing the worst, sellers will undercut one another in order to dump their domains before prices decline even further. Those who hold out for yesterday’s full price will realize their assets are now as liquid as peanut butter.

    I don’t know when that will happen or how severe it will be. But that’s how it will play out. Probably the newest domain categories will be the most hard hit. In a market downturn, long strings and less familiar TLDs won’t be scooped up by buyers in the way LLL.com’s and NNNN.com’s would be. To some extent, investors will cushion the fall. But not everywhere. They won’t absorb everything at every asking price.

  3. Jeff Schneider says

    The media talks of a domain name bubble. The real Bubble below some domainers radar, are the new GTLD sector, The .COM Asset Class remains stable. JAS 11/9/15

    Gratefully, Jeff Schneider (Contact Group) (Metal Tiger) (Former Rockefeller IBEC Marketing Ananalyst/Strategist) (Licensed CBOE Commodity Hedge Strategist)http://wwwUseBiz.com

    • Jeff Schneider says

      The Domaining Industries pricing mechanisms are Google-Centric in nature and thereby are strictly fiction based Models. Anyone who bases their purchases on the current Model are ignorant of the .COM Assets reality based potential Valuations. JAS 11/5/15

      Gratefully, Jeff Schneider (Contact Group) (Metal Tiger) (Former Rockefeller IBEC Marketing Analyst/Strategist) (Licensed CBOE Commodity Hedge Strategist)http://wwwUseBiz.com

  4. Spencer says

    what happens if the Yuan devalues? what happens if there is a an ecnomic reset? domains are better than paper money and that reality is now coming to the fore. Lotta room to run in this bubble cuz the whole world is one big bubble.

  5. Andrea Paladini says

    We have already mentioned this many months ago, but … repetita iuvant 🙂
    As other assets, domains with a market with very few or no end users actively involved are basically illiquid (even more than OTC stocks …) and easy to manipulate … a word to the wise …

  6. Barry Felds says

    Are Chinese buyers really buying all these names?
    Who registered these big blocks of numeric domains in recent months?

    I would like to see some analysis, breakdown and segmentation of the various combinations (LL, LLL, LLLL, 2N – 6N) to actually see if there has been a ‘significant’ movement of these domains to Chinese domiciled owners and accounts over the last 12 months. Further to this, the same analysis would need to be done on monthly basis to see if there is any trend forming.

    Until some quantitative data is provided, rather than qualitative data and gut feel, then I don’t think that anyone can truly say with certainty that the demand and market is been driven by Chinese buyers. I have seen only one analysis of the LL.com breakdown of Chinese –v – Others owners.

    Yes, some Chinese domain investors have bought domains. Are they really driving the market or is it non-Chinese buyers who are driving the short letter and numeric domain market up…

  7. Krishna says

    Strange things are happening in domain world.

    It is time for people like me to just watch and learn from the events that are unfolding in front of my eyes so rapidly..

    Interesting times… But don’t want to involve in this without understanding.

    • Drive-by Poster says

      I’m getting a lot of action/interest in a few LLLL.com I have that have one or two Q in them… a couple of months ago someone offered $88, today I have an offer of $1800 and a few other bidders. Part of me thinks “take the $1800 and run, you have maybe six more domains like this”. I sold one for $350 a few weeks ago– it was the first time someone offered me “real money” for such a domain and I just bit. $1800 would be my second, I’d still have a handful left, including two I’m attached to.

      If you were me, would you bite?

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