The Big Short – How To Prepare For A Falling Market

This post is a litle special, as it is a little over one year since GGRG.com launched (1st of May 2015). And boy, a lot of things have changed under the sun since we launched. But our first anniversary should not be your priority, because, if you are reading my blog, chances are you have invested in what we call “liquid domains” and your mind is wandering what is happening in the market. As some people say, the bubble has burst. The first parallel that comes to mind is the movie “The Big Short“, and particularly this scene where Ryan Gosling explains how the market is doomed to crash (pay special attention to the Chinese guy):

But this is not a movie and many people are actually losing money. While many analogies can be drawn, the domain market is fundamentally different from the American housing market in 2008. The secondary domain market is a relatively small industry, with approximately one billion USD per year. No one can go to Morgan Stanley (which by the way, owns MS.com) and ask for a “domain credit default swap“, although that would be an interesting idea. The triple A house bonds represent the primest properties with little market volatility, while The B bonds could be the riskier properties just like the four letter .xyz or .top. Ah, and the credit rating agencies of our industry are the popular blogs.

Lately I am receiving several emails from folks who invested during the boom phase and find themselves at a loss. Rather then replying to individual emails, I will sum my thoughts in this post. The smartest comment I have heard regarding the Chinese market came from Nat Cohen, one of the smartest and most respected investor, which can be rephrased in this way: “A market held only by investors is not sustainable”. I know that many theories were circulating about domain names being liquidity vehicles, but it seems to me that these theories were drawn from elaborate interpretations rather than from reality. Domains are an alternative investment to bitcoins, NOT the new bitcoins.

I asked this specific question in March during my trip to China, and while many agreed that there are not many investment options available to Chinese citiziens, they all laughed when I asked them if domain names were used to store liquidity. The only purpose of investing a domain name is to realize a profit, assuming that one day someone will come along and pay a higher price for it. This is true in the US, Europe and China. And while in China there is indeed a new generation of startups and unicorns in the making, which will need short and numeric premium domain names, there is a vast gap from there to believe that stocking up domains like 8778.xyz or 7635401.com is a shrewd investment.

So, what to do moving forward? Here is how I would reason. In terms of buying, I would still not look at the current prices as attractive, especially for Chinese Premium names. Rather, I’d go back to the basics: “Would an end user pay significantly more for this domain than an investor?” If the answer is yes, than you are probably looking at a decent investment. I would definitely keep all the domains that hold high end user potential, especialy the ones made of Western Premium letters. For example, if you look up the history, it is very rare to see a Western Premium 3 letters selling for less than $20k, while it is very common to see 3 letter combinations like xvw.com selling for less than $5k.

The primest domains like LL and NN, will probably witness lower volatility as they have historicaly sold for 7 digits to end users. If you hold a large portfolio of LLLL with vowels, since they trade between $250 and $400, I think it is still a sound investment and the portfolio can easily pay for itself (cover the renewals) and generate consistent cashflow as a result of end user sales. End users would happily pay $5k to $10k for a four letter .com. What if you hold Chips? From what I am observing, I don’t believe Chips have a higher chance to sell to an end user than a regular LLLL, but they are priced at 3 to 5 times the value, and therefore are a much worse investment if you are holding up for the long term.

One last thing if you are travelling this month. If you are attending Domaining Europe, I will be participating in 2 panels, the European Industry Leaders, with great folks such asYancy Naughton and Michele Neylon, and the China Goldrush (the name of the panel is quite ironic) with Max Sun. Most of the conference’s panels are boring and full of commercial messages, but if you want to have a coffee or drink, just let me know and I would be happy to meet. We will also be in Paris this weekend attending the Leade.rs conference hosted by the legendary founder of Le Web Loic Le Meur – if you are in Paris and want to grab coffee around the George V area, just shoot me a quick email.