Sunday, May 22, 2011

Bitcoins, Gold, and Short Domains

For those of you who have been following the spark of interest in Bitcoins, here is an interesting take. The folks over at Launch make the following predictions regarding Bitcoins:

Let’s Make Some Predictions
We are 100% certain that governments will start banning bitcoins in the next 12 to 18 months. Additionally, we’re certain bitcoins will soar in value and a crush of folks will flood the system and start using them.

Currently there are 6M coins at $6.70 each for a total economy of about $40M. Bitcoin speculation and hoarding will also cause a massive spike in bitcoin value. For example, if 10M people find out about bitcoins in the next year and want to buy $100 worth, $1B will be infused into the bitcoin economy.

These are some bold predictions! Although I would not be incredibly surprised if they came true.

But looking at the comments on the article, some excellent points are made. Lets say Bitcoins do go parabolic in a speculative frenzy, like silver (SLV) recently did. Parabolic rises almost always end with very severe crashes, Bitcoins aren't going to rise in value parabolically for ever. For one, as some of the comments point out, one of the primary values of a currency is "price stability." The more Bitcoins rise parabolically, the less value they have as a currency and the more they would appear to resemble tulips or other classic speculative frenzies.

Bitcoins share some similarities with cash and some with monetary commodities like gold. They can be used in transactions like cash, and like gold they can be "mined" to produce more of them, although there apparently there is a fixed limit on how many and how frequently Bitcoins can be "mined" or "generated" digitally. So the supply of Bitcoins is even more fixed than gold.

Anyways, what does any of this have to do with short domains? Well, there was a speculative frenzy around short domains in 2008, with the buyout (four letter .com domains), and the attempted buyouts of a whole host of other short domains for which there is a fixed supply. After domains were all registered, prices shot up parabolically and at one point were trading at $60 minimum for the four ugliest letters you could imagine.

Needless to say, as most speculative frenzies do, the market crashed.'s dropped in price by at least 1/3 and other short domain types that had been "bought out", such as's (five digit .com domains), ultimately fell in value so that the buyouts were not sustained as people decided it was not worth paying the fee to re-register their domains.

Interestingly, though, the market crash was not a total collapse.'s remain completely bought out, more are ending up in the hands of "end users", companies or individuals that buy domains from the domainers that hold these domains for resale, and prices for resale have been steadily rising since they crashed in 2008. As for's, there were more than 15,000/100,000 available in 2008 before the buyout began in earnest, and most of the domains bought out were not re-registered in 2009. However, in the last few years, many Chinese domainers have been slowly but steadily snapping up these domains. There are now less than 1% of domains left, and if current registration trends continue, it seems they will be bought out at some point in the next year or so as well.

Unlike Bitcoins and gold, they aren't making any more or domains. So in a sense domains are a wiser investment. Also, they have more real uses (nearly 50% of domains can be used as US zip code domains, and Chinese sites frequently use numeric domains, and many other uses are possible). As more and more people in other countries, not only China, go online and look for domains, demand will likely put increasing pressure on prices for short domains.

On the other hand, there are two problems with domains that don't exist for gold and Bitcoins. One is registration fees that must be paid every year. For's that sell for a $500+ minimum it is not really a problem to pay a $8/year registration fee, especially when your domain receives some revenue from traffic and the value of's has been rising much faster than the annual registration fee. But for a lower-quality or, the registration fees make it more difficult to justify investing in these short domains. If you don't make enough from (1) large "end-user" sales to cover the annual registration fees, (2) traffic, or (3) rises in reseller prices, the registration fees can end up destroying your hopes for your domain investments.

The second is that while they aren't making any more's, they are making more extensions, and if you can't find your, you might be able to find the same number in .us, .pro, .net, .in, .uk, .biz, and on and on... Might not be as pretty as the .com, but paying $8 might be better than dealing with an exorbitant "end user" price quoted by a domain reseller. Also, there's always the "" example, where the version was probably way too expensive, and yet the spelled out version still went on to become a very successful domain.

But in the end, .com is king, as evidenced by registration data and the continued use of prime .com domains even in foreign countries that have their own extensions. Plus, even if someone does go and use another extension, if you own, you are probably still making $$$ from all the type-in traffic you get from people who are trying to find the more famous site.

The continued support for prices of's and the continued registration of's shows that the speculative frenzy of 2008 may have ended badly for a lot of domainers, but the underlying fundamentals for short domains are still there. Here's to a slow, steady rise in registration, use, and values for short domains. Speculative frenzies always end badly, as they probably will for the last bagholders to get in to the Bitcoin frenzy, but it looks like we might be finally on a path for reasonable, sustained growth in the prices of these very useful short domains.