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The theme of Domain Names as an investment asset class was covered at length in the opening presentation at Epik DevCon last month.  It also led to some good discussions, offline and online.  What I think many Domain Investors don’t fully comprehend is the notion of a “tipping point”, i.e. when suddenly, a generation of institutional investors wake up to the unbeatable combination of attributes that make the Domain Name Asset Class so darned interesting to investors.

As Alternative Investments go, Premium Domain Names are a lot like Rare Earth Metals
A good case study of a “tipping point” in asset pricing can be found in what happened in Q3 2010 to the prices of Rare Earth Metals.  I am not talking about Precious Metals like Gold and Silver, which have also rocketed higher. I am talking about things you may well have never even heard of like Lanthanum, Cerium, Neodymium, Praseodymium and Samarium .  Prices exploded 250 to 600% during July to September 2010.  Here is a representative price chart:

And while you may not have read about this blatant sign of price inflation in USA Today, ZeroHedge.com did a nice piece on it earlier today which you can read here.  The point here is that investors identified an inefficient market where there is finite supply and then secured a large enough market position to presumably cause (1) a wave of short-covering, and (2) a follow-on wave of speculation. I expect we will see a lot more of this type of price spike in the months ahead as investors move cash off of the sidelines ahead of what appears to be imminent Quantitative Easing 2.0.

Dollars are seeking alternative investment vehicles
At Epik we have been making the case for some time why Domains are better than Dollars.   We said it in November 2009, February 2010, and more recently.   Quality domains, — like precious metals — are rare. Back in November, Gold was $1,000 an ounce (now ~$1320). Silver was $16 an ounce (now $22).  If this is a reasonable indication of the decline in purchasing power of the US Dollar — as well as paper currencies in general — it is reasonable to infer that we are at a tipping point for other alternative assets.

The tension around wealth preservation is building. Consider the FDIC’s announcement on September 27 of extending unlimited coverage on checking deposits as if increasing from $100K to $250K was not enough.  Personally, I don’t think there is much question that the FDIC will make good on insured deposits. The question is how much will your Dollars  be worth when they do? The same logic applies to other national insurance programs that stand behind bank deposits.

Is there a safe Paper Currency?
Many people use DXY as an indicator of dollar value. I would argue that DXY is a lousy indicator of currency value. Why? DXY compares paper currencies to other paper currencies. If all major central banks are in a competitive process of debasing their currencies, the relative value of the currencies will not move decisively.  What moves instead is the absolute purchasing power. And for this we have commodities against which to measure the trend.  Precious and Rare Metals are as good a benchmark as any.

So, my conclusion is that although we do need Paper Currency as a medium of exchange to manage the household budget, the case for Paper currency as a store of wealth is rapidly weakening. Retail banks are lobbying the consumer to put cash on deposit at a time when the consumer should be seriously considering the opposite. And while quality domains are not a perfect hedge — there is no such thing — Domains have much to offer as a store of wealth as well as a prospective source of yield and capital gain.

Asset Allocation – How much exposure to the Domain Name Asset Class?
By no means would I recommend to someone put all of their liquid net worth into Domain Names.  However, somewhere between 10% and 50% makes sense so long as no single domain holding is more than 5% of that total allocation. I would say, consult your investment advisor, but they would almost certainly just give you a blank stare and offer you a lovely mutual fund or 1% interest-bearing money market fund.  That would be your clue that it is time to get a different investment advisor.


Comments (5)

  • Leonard Britt
    Twitter:

    October 4, 2010, 11:25 pm

    The number of .Net & .Org domain sales at SEDO (domain market proxy) in 2010 will be more than twice 2007 levels while .COM domain sales will exceed 2007 levels by probably 60% or more. Where is the S&P500 trading in 2010 compared to 2007? How do real estate prices in Florida and California compare to 2007? However, ~45K domain sales at SEDO in 2010 still pales in comparison to the ~16 million or so listed in SEDO’s marketplace. The market is growing but mainstream acceptance of aftermarket domain acquisitions still appears to be distant.

    Reply
  • David J Castello

    October 5, 2010, 12:55 am

    Excellent article, Rob.

    Reply
  • TJ

    October 5, 2010, 8:32 am

    The problem I see is domains do not have an accepted industry standard valuation. There isn’t an established way to value domains across the domain playing field. What is worth $7500 to one party is worth $500 to 99% of other individuals.

    If, on the other hand, there was an established way to value domains – similar to real estate, ie REITS – then a closed end fund could be easily established and valued daily. Without the established value for most domains, domains can’t enter the capital market space and trade like currencies; physical real estate; stocks; commodities; bonds; mutual funds.

    Reply
  • Bert G.

    October 5, 2010, 8:37 am

    Great out-of-the-box thinking, I love it. I guess a lot of us are already doing this to some extent within their (online) businesses, but it actually makes perfect sense to implement it in personal portfolios too…

    “Liked” with a smile. ;-)

    Reply
  • Jeff Edelman

    October 5, 2010, 9:25 am

    I very much look forward to the day that domains will be accepted as an asset class, and I fully expect that day to come. But it won’t come until there is more of an accepted formula for what a domain is worth. Epik and Estibot are two examples of companies that are attempting to do this based on search volume and the value of a click off of the domain, so that’s a big step in the right direction. But until there is more of a consensus on value, no good, fluid domain marketplace will be possible. Right now, you could get two experts in the field to put extremely different valuations on the same domain, and I mean really extreme. That needs to change.

    Reply

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