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Impact of Falling Chinese Stock Market on Domain Names

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There is quite a bit of instability in the world markets right now. Outside of the US, one of the biggest markets for domain names during the past several years has been China. The Chinese stock market has grown at a tremendous rate, and similarly, the value of Chinese-favored domain names like short numeric and acronym .com domain names have grown as well.

Gone are the days when the worst 3 letter .com domain names would sell for $3,000 +/-. Now it’s more like a $10-15,000 floor for any 3 letter .com domain names, regardless of the letters. Short numeric domain names are selling for more than I’ve ever seen them. To me, it seems that investors have been paying more for many of these domain names than end user buyers are willing to pay.

I have been reading reports about the Chinese stock and financial markets falling of late. I reached out to several industry brokers to see how they think the domain market will be impacted if the Chinese stock market falls. Specifically, I asked about the “impact a major correction in the Chinese stock markets might have on domain names being sold to Chinese buyers (primarily short 2-4 letter and 2-4 number domain names).”

Several domain brokers from some of the most successful domain brokerages replied to my query, and their replies are below. I also invite you to share your thoughts in the comment section.

Andrew Rosener, Media Options:

If anyone knew exactly how the correction in the Chinese stock markets would impact the domain market they would be extraordinarily wealthy and have no need to comment in this blog! The fact is that neither the domain market nor the stock market has ever seen such volatility or trading volume ever before in history. Never. We can not look to history to predict the outcome. It’s unprecedented. Ultimately, the unwinding of the stock market could go both ways for domain names. On the one hand, Chinese investors have been consistently making well above average returns from their stock investments over the last years. This has made many investors very wealthy and that new wealth is going to need a place to invest. Chinese real estate is also in the midst of a bubble and controls have been put in place to prevent that bubble from getting bigger, limiting the number of investment properties investors can buy. That leaves mostly alternative investments such as art, wine & domain names, just to name a few. This could in essence drive the domain market to new heights, specifically the domains which are attractive to Chinese investors such as 2-4 letters & 2-5 numbers.

On the other hand, it seems that central banks will begin unwinding the cheap and easy capital policies that have been in place since as early as 2008 when the global financial crisis started. That includes increasing interest rates which may in fact make cash deposits more attractive as a safe haven for one’s capital. In the event that investors feel more confident than at present in holding cash longer term, or more specifically, if cash looks more attractive or at least safer than domain investments, then we could see a significant flight of Chinese domain investors from the market and the “floor” prices which people have become so accustomed to over the last year or so could drop out.

What I think is important in one’s analysis is the underlying factors that have driven investors into the domain market in the first place. Over the last few years, many of the new breed of “startups” in China, the Unicorns as they are called in Silicon Valley, have looked beyond Chinese borders to other markets in order to further their rapid growth. Companies like Ten Cent, Alibaba, 500Wan & others. In order to reach these markets they needed a name, specifically a domain name, that was universal. A domain name that would not alienate their Chinese customers but would appeal to the Western world as well. These short domains fit the bill unlike any other possible domain name. Coincidentally, these short domains also fit in with the global trend towards a mobile internet. As I have said since many many years, there is no faster way to get someone on your website from a mobile device (or otherwise) than a 2 letter .com! 3 key strokes (there is a .com now on most mobile device touch screens) and done! Not even an app can beat that! There continues to be an exponential increase in the number of startups coming online, coinciding with the exponential increase in the number of consumers coming online. This trend will continue and as it does, the demand for these short domain names will also continue.

As happens in any market correction, panic ensues. With panic comes bad decisions. People will panic and they will run for cover. People will sell cheap. Investors will stand on the side lines paralyzed by fear. Fear of losing money. Fear of making the wrong decision. Fear of fear itself. The few well heeled and informed investors will be there taking advantage of the panic and buying up the good names at cheap prices. The rich will get richer.

Dave Evanson, Senior Broker and Lijuan Wang, Broker – China, Sedo:

We expect prices of 2-4 letter and 2-4 number domains to maintain values and even grow slowly despite the current Chinese Stock market correction. Importantly, the Chinese government supports a strategy or even a mandate dubbed “Internet Plus” signaling China’s increasing emphasis on the Internet including domain names. We believe many Chinese investors will disproportionately reallocate funds from stocks to domains. Also of note is a recent slowdown in the appreciation rate of pricing of 2-4 letter and 2-4 number domain names but we attribute this predominately to sellers opportunistically saturating the market based on recent impressive price increases. As with anything else, it comes down to basic supply and demand curves although global, government and policy issues are complicating projections and analyses.

Jeffrey Gabriel, Domain Name Sales:

The Chinese market, and their culture has always interested me. Long before three letters, or numbered domains took off. Statistics, human nature, and history are also three subjects I am always trying to learn more about as well. Here are some interesting facts:

1. The Chinese have used more concrete in the last 3 years than the US used in the entire 20th century.
2. In a 2 week span 2.8M new investors invested in the Chinese Financial Markets in March. 2/3 of these investors never attended or graduated from high school.

Sounds similar to the US Housing Bubble with first time home buyers, and unqualified buyers owning homes they could not afford. Sprinkle Greece on top of this and we have a recipe for disaster.

How many 2,3,4 letter or numbered domains are there that are interesting to Chinese investors looking for alternatives? Not many. Basic economic tells me that only a few investors can drive the market up, or down. I would advise my clients who own these types of domains to sell, and I would urge buyers looking to invest to patiently wait. We might not be at the height of the market, but it is coming. Like the housing market, beach front property, aka category killing domains will not get hurt value wise.

The funniest part of this entire exercise I probably would have said the same thing last year. This market never ceases to amaze me.

John Daly, NameConnect.com:

If you have been reading recent news global investors were preparing for a downturn in the Chinese market. This is not the first nosedive the index has seen, Chinese investors over the last twenty years have lost big time due to volatility and have come to treat the stock market as a side investment or hobby. This is shown in their investment style, they are prone to short term trades (a whopping 65% of investors trade once a month) which indicates more speculation rather than long term planning which then lends to instability.

There will be a short term hold on buying but once there is a sign of recovery purchasing of domains will come back full throttle. In part the reason you see so much interest coming from China is due to their seeking of alternate external investments, many do not trust the stock market to put a large enough portion of savings there. At least this is what I gather from reading reports and speaking with people in China.

Ryan Colby, Outcome Brokerage:

In September of 2013, I tweeted that I thought valuations in short, 2 – 4 letter and 2 – 4 numeric domains were hitting a top. As it turns out, that run up never stopped. Domains in this category have continued to skyrocket right alongside the hyper growth of the Chinese economy. Valuations in China are now higher than those in the U.S. at the peak of the dot com bubble. In fact, the average Chinese technology stock now has a P/E ratio 41% ABOVE that of U.S. peers in 2000.

Like Chinese equities, it seems that numeric domains have experienced the same parabolic rise. Unlike stocks and commodities which are backed by hard assets and easier to place a value on, domain valuations are primarily subjective in nature. This means that their value is pegged from the buyer, not the seller. In business, and in life, everything has a cyclical nature to it. While I’m not a market forecaster, I do know that not all assets continue to rise in the same direction forever and that is also true for domain names. The most concerning part of the current Chinese bubble is that a very high percentage of the traders are using a substantial amount of leveraged margin which is never a good thing.

The age old wisdom of buy low and sell high vs. buy high and sell higher (or to the next idiot) is still applicable. I believe a correction in the Chinese markets could bring prices down below the levels we saw in late 2013.

Hobi Michalec, Domain Holdings:

Domains have proven themselves to be a reliable form of investment. When one form of investment dries up, i.e. the stock market, real estate, etc. Investors immediately shift to another.

Very recently (Past few days/week) NNN.com and NNNN.com domains are seeing a quick spike in value. Investors are shifting from one form of speculative investing (stocks) to another.

Taking from events in the recent past, domains, particularly numeric are a constantly appreciating asset. In most other forms of investment there are not such a finite number of assets. Assuming an immediate value drop will happen is operating with the assumption that you can just “make” more domains. (for sake of argument I’m referring to only .com)

These assets are few enough that I believe the current Owners will, as in the past just maintain possession of the domains which will ultimately help to keep their value consistent. This is to say that they are not able to sell them.

However, these assets are more in demand now than they were in the past.

2, 3, and 4 letter domains are similar but a bit different than numeric. The most apparent is there international appeal. Whereas numeric domains have a primary focus in China, alpa domains have global market ability and potential.

While there is significantly more supply for these type of domains there are many more consumers. I feel this helps to equalize it a bit. Obviously, some are much more valuable than others. Certain domains are sold solely on a liquidity basis deriving from a pattern in the domain or some other aspect. For example, VVV.com has virtually no meaning. However, a same character, three letter .com domain is exceptionally rare. As such it commands a unique price.

The numeric domains and alpha domain market carry many correlations.

In summary, I feel that the market will, at worst, become stagnant but not lose their value. I think we will see an overall increase in value with a focus on domains that are regarded as premium within China. Understand though that every domain is different and the market and value predictions for each domain is going to be also be different.

Giuseppe Graziano, GGRG.com:

As I am writing this today, the Shanghai composite index has already lost approximately 20% of its value within 2 trading days. That is one of the biggest losses of the second largest stock market in Asia that we have ever witnessed. At the same time, the Shenzhen composite index (similar to the Nasdaq’s – as it lists the youngest and hottest Chinese companies), lost almost 28% of its value from its peak of the 12th of June. How will this affect the prices if you own any liquid domains?

Looking at the history, the increase in demand for liquid domains by Chinese investors started in the beginning of 2014 – when the Shanghai composite index woke up after two years of bouncing around the 2,000 base points support, to rally in just 12 months up to 4,000 base points (10th April 2015). The index continued to go up until it reached the 5,000 base points on the 12th June. This trajectory is astonishingly close to what we have seen for the evaluation of liquid domains.

In the US, we know that the domain aftermarket is heavily influenced by the economy and the stock indexes, so much that, over time, the IDNX (an index that tracks the secondary market for domain names), has shown a very close correlation with the NASDAQ.
The reason for that is simple – the demand for premium domains is driven by tech companies and domain investors, who are parties more likely to pursue less conservative forms of investments.

On the other hand, in China, the demand for premium domains is more linked to wealth protection/portfolio diversification, just like investing in collectibles. A large percentage of the biggest Chinese Domain investors consider domains just a side investment and not as their main business. For most of them, liquid domains are considered almost a virtual currency – that can be easily traded, put under privacy, and, an important benefit, offers profits that are seldom taxed.

During the gambling crackdown of 2014 in Macau – Asia’s largest gaming hub, cash reserves simply migrated, and, curiously enough, Las Vegas’ revenues for “Chinese-friendly” games like baccarat almost doubled, as reported by one of my favorite financial blogs. If the same principle applies, the profits taken off the stocks table might have a good chance to be reinvested in different avenues – domain names being one of them.

Therefore, in case the 20% drop of the Shanghai Stock index is purely a correction (read: profit-taking), we are likely to see an increase in demand especially for the most premium assets like LL, NN and high-value NNN. If the Chinese stock market instead extends its fall over the next months, the demand for the lower tier (read: more accessible) assets like NNNNN, LLLL, 3C, etc, might be affected negatively because a lot of first-time investors could have less cash available.

For what I observed on the market over the past few days, there has been a slight uptick in bids from Chinese investors, and it does not look like there is any panic selling. For whoever is interested, I provide regular updates about the after-market on my weekly ggrg.com newsletter.


About The Author: Elliot Silver is an Internet entrepreneur and publisher of DomainInvesting.com. Elliot is also the founder and President of Top Notch Domains, LLC, a company that has sold seven figures worth of domain names in the last five years. Please read the DomainInvesting.com Terms of Use page for additional information about the publisher, website comment policy, disclosures, and conflicts of interest.


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Comments (25)

    Vincent Jacques

    Nice one here Elliot, with a number of perspectives! Thanks

    July 1st, 2015 at 10:17 am

    Mike

    Stocks can easily drop 20% a day, but not domain names. We will see more investors to switch part of their portfolios from stocks to domain names, which will lead to increase of the price of short and/or quality keyword .com names.

    July 1st, 2015 at 10:48 am

    Freind

    It would have been a little more refreshing to get the perspective of Chinese brokers on this one. Nevertheless, a good read.

    July 1st, 2015 at 10:57 am

      Elliot Silver

      I don’t have any Chinese domain broker contacts, although the comment from Sedo was from Dave Evanson and Lijuan Wang, who is from China.

      July 1st, 2015 at 11:03 am

    Andy Booth

    Top article Elliot. Will be interesting to look back on this a year from today. I personally think that of course some will panic and cash in on their domain investments, which might see a slight price correction to the detriment, but the smart, influential portfolio holders will ride out the storm which ultimately sees their values continue to increase. I’m referring mainly to the names in shorter supply (LL, LLL, NN, NNN). I don’t think LLLL will be much affected as they’re accessible to most.

    July 1st, 2015 at 11:25 am

      Mike

      Andy, what is your current valuation of LL and NN names and what you believe to see in 12 months or so?

      In reply to Andy Booth | July 1st, 2015 at 11:30 am

      Andy Booth

      Well it does obviously depend on the combos. LL and NN names are a bit trickier. I think well-documented end user sales (in the millions obviously) give them a sharp jolt as a whole, but we have heard of fewer recently. That could be partly why the values seem to have stagnated. There’s obviously not many investors who can play this game. My feeling is that these shorter domains will probably continue to remain stable at current value (let’s say $500k for a typical LL, $800k for an NN), but that’s not to say something won’t happen that pushes them closer to $1m as a floor. I personally think they have started to find their feet though, and can’t really foresee a meteoric rise in the short-term (a 12 month period).

      In reply to Mike | July 1st, 2015 at 12:19 pm

      Mike

      Andy, since LL and NN end user sales (in the millions obviously) have mostly undisclosed sales prices, what should push a wholesale floor above $1m then?

      In reply to Andy Booth | July 1st, 2015 at 12:34 pm

    Jeff

    Maybe George Hong or 4.cn can comment.

    Be interesting read

    July 1st, 2015 at 11:29 am

    Andy Booth

    A sudden influx of wealthy Chinese investors looking for ways to launder big sums of money.

    July 1st, 2015 at 12:42 pm

    Andy Booth

    It would take a large demand of LL in the high six figures (which their doesn’t appear to be right now) to push LL into the seven figures as a wholesale price. Can’t really see it anytime soon.

    July 1st, 2015 at 12:44 pm

    RaTHeaD

    this is too long for me to read. if it comes out in book form please send me the abridged version as i generally like your stuff.

    July 1st, 2015 at 1:08 pm

    Shane Cultra

    Rathead,

    Here you go: “Don’t know how valuations will fare, went up a lot this year, China is huge”

    What I think wasn’t touched on the Chinese need for outside investments. The government regulates what Chinese citizens can put their extra income into. They are only allowed a certain amount of extra property. Thus the giant cities that lay empty because each person has purchased one extra investment property. They are screaming for places to put their money. THAT is why the Chinese market has run up so much. In general there is more extra money in China and they want to put it into something. Many have put that extra money into domains. They feel domains are going to be a good investment. Has that changed? I don’t think so. The market dropping may take out some of the extra cash that is flowing into domains but my feeling is this is a much bigger overall influx than just the market rising. The rise was a result of the extra cash. I don’t think it created it. China will continue to grow and spend. Maybe not at the same rates but I don’t feel like it will stop any time soon. Its hard to stop billions of people that were recently given disposable income. Just my opinion

    July 1st, 2015 at 1:24 pm

    Friend

    This is actually one of the best blog posts of the year, one many of us will remember for a long time.

    July 1st, 2015 at 1:42 pm

    BullS

    Firstly, my apology for being wrong on my soccer prediction -I predicted USA 2, Germany 1 but I guess you all know the outcome. She missed the penalty because she was winking at me.
    Next- USA 100 and whoever is 0
    Mentally and psychologically USA is on top of the world.

    “Inside the mind of the Chinese”
    Well, we all know the stock market in China is manipulated by the govt. Anybody who does business in China will tell you this SIMPLE piece of advice- STAY AWAY.

    Those rich Chinese have already bought all the houses in California, Dallas, Houston, Vancouver, Seattle and what next?

    Domains- in order for Chinese business to expand GLOBALLY, they need domains and even have to set up branches in USA.
    AliBaba servers are in China and the govt has already have their hands on their data.

    My 4L domains which were bought dirt cheap 5 yrs ago are hot hot hot now.

    Go USA!!

    July 1st, 2015 at 2:56 pm

    Paul Kapschock

    Elliot,

    Great blog post and idea behind the article!

    Thank you brokers for their analysis….very impressive.

    Happy 4th of July to all.

    July 1st, 2015 at 4:53 pm

    Spencer

    WHAT IF

    The period we are entering is not cyclical but structural in scope?

    Something on the order of the Great Depression or WW3?

    Ya know…we all are kinda due for it as we get something BIG every 80 years [Revolutionary War, Civil War, WWII].

    Headlines seem really really bleak of late. :(

    Not to say domains cant do well in that environment.

    July 1st, 2015 at 7:01 pm

    Zee Wilson

    Out of curiosity gentlemen, what are your thoughts on the new (2014) Chinese character extension .在线 (dot online)? Considering that China’s government purchased over 10,000 .在线 domain names, do you think this IDN would be a fitting competitor to .com domains wanted by Chinese investors? Or would .com still dominate the market for China to invest in?

    July 4th, 2015 at 1:20 pm

    SoFreeDomains

    The rise and fall of stock and financial markets are natural phenomena and I hope the Chinese are able to get back on track.

    July 5th, 2015 at 11:19 am

    Xavier Lemay

    What will happend when the government will restrict .com in China?

    Worthless Numeric .com? Or will the value rise t’ill the restriction starting point?

    July 5th, 2015 at 6:11 pm

    Joseph Peterson

    Tracking NameJet and GoDaddy auctions in high volume as I’ve been doing for the past year plus, I’ve observed a noticeable relaxation of Chinese buyer activity in the past few weeks.

    Where the wholesale market is concerned, that deceleration or reticence has been more apparent at the high end – say, $2k – $100k. It is surely no coincidence that I went from covering a $62k Chinese sale immediately before stocks plummeted to writing about English-language domains in a lower price range.

    At lower price points – $50 – $2000 – China-favored domains continue selling. Chinese buyers and bidders remain active there, it seems. And prices continue to be higher in these categories than they were several months ago. In large part, that may be due to newly established habits of non-Chinese domainers, who are buying and bidding more aggressively these days for China-focused inventory than ever before.

    Honestly, I would expect some time lag before a downward correction appears in this lower-price-range merchandise. Why?

    Because non-Chinese bidders haven’t absorbed the news about the Chinese stock market. Their wholesale speculation won’t face a changed retail reality (assuming retail conditions do alter) for weeks or months. Domainers outside China continue bidding and buying partly out of inertia, based on domainer gossip and thumb rules. After all, they’ve been watching many high sales so far in 2015 and heard a lot about this market segment from bullish individuals; so their perception will not stop on a dime.

    Chinese investors capable of spending very large amounts on domains will tend to belong to the very wealthy class that pays closest attention to the stock market. Whatever their reaction is, I would expect it to filter down into the group of lower-budget Chinese investors. That would be gradual.

    Those buyers haven’t disappeared by any means. Last week, the top expired domain sale I reported still went to China. But that $62k sale of a month ago probably would not have been a $62k sale today.

    So far, I haven’t crunched the numbers. It would be interesting to see what they actually show. Personally I am barely invested in Chinese domain assets at all – neither as an owner nor as a seller’s broker. But I may offer up some conclusions elsewhere.

    July 5th, 2015 at 8:15 pm

      Xavier Lemay

      Joseph,
      Thank you for sharing this with us!

      My biggest fear is the Government of China. What if they add some restrictions to the .com?

      What are your thought on this?

      Regards,
      Xavier.xyz

      In reply to Joseph Peterson | July 5th, 2015 at 8:42 pm

      Joseph Peterson

      Knowing as little as I do about the Chinese government, I put little faith in my predictions where regulations in China are concerned. Here I’d defer to Simon Cousins of Allegravita, who has commented on that topic in detail at DomainIncite (I believe) or else at DNW.

      Barring .COM abruptly would be quite draconian, given the number of important Chinese websites relying upon it. Domestic e-commerce and global supply chains might be disrupted, and I doubt the Chinese regulators could be oblivious to that.

      In reply to Xavier Lemay | July 5th, 2015 at 9:22 pm

    Ruben

    Agree: “it seems that investors have been paying more for many of these domain names than end user buyers are willing to pay”…

    July 6th, 2015 at 7:46 am

    Joseph Peterson

    If anybody is interested in the relationship between a Chinese stock market in decline and Chinese domain prices, then you’ll find some hard numbers in what I published today.

    July 9th, 2015 at 6:01 pm

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