Categorized | Brainstorming

Will Domains Always Remain Risk Assets?

Posted on 15 April 2016 by Andrei

As the 2007-2008 Global Financial Crisis (aka The Great Recession) taught us, domains are currently risk assets. In other words, if the economy crashes, domains will crash too.

Will things always stay this way?

To answer this question, we need to understand some basic human psychology.

An economic crash such as the 07-08 one makes people scared. What do us humans tend to do when we’re scared? Well, we run to safety.

But the thing is, “safety” is a relative term… what is safety anyway?

After the Great Recession, people abandoned stocks/real estate/domains/etc. and moved towards strong government bonds. Such as US Treasuries, German government bonds and so on.

This is what they perceived as “safe” at that point in time.

Will this happen again once the next crisis hits?

Well, it might but at one point or another, government bonds might lose their luster.

In other words: maybe after the next global financial crisis, maybe after the one after that, people might no longer have confidence in government bonds.


Well, let’s take one step further and think about it.

Let’s start by referring to the big economic crisis which occurred prior to the 2007-2008 one… in other words, let’s refer to the Dot Com Bubble of 1997-2002.

Once that bubble burst, the Federal Reserve had to use some serious ammunition to revive the economy, taking interest rates all the way down to 1%. Extremely low.

The years passed, growth resumed and gradually, interest rates climbed back to 4%-5%. In other words, central banks gradually re-built their ammunition stockpile.

Then the 2007-2008 crisis came and more ammunition than for the Dot Com Bubble was required. This time, interest rates went all the way to 0% AND money was pumped into the system through multiple rounds of Quantitative Easing, up to a maximum of $85 billion per month. To put things in perspective, more money was pumped into the system in one year than was created throughout the entire history of the United States prior to the crisis. And make no mistake, the Federal Reserve wasn’t the only central bank with aggressive policies. The central bank of Japan for example was even more aggressive relative to its GDP than the Federal Reserve, the European Central Bank did the same (just the terminology changed: LTRO, OMT, etc.)… everyone did it.

In other words, a LOT of ammunition was required on a worldwide basis.

Everyone did it.

However, the troubling thing is something different. After the Dot Com Bubble burst and interest rates were lowered to 1%, they gradually went up to 4%-5%.

Yet after the Great Recession of 2007-2008, the same thing didn’t happen. On the contrary. Here we are, 8 or so years after the crisis and the Federal Reserve barely managed to increase rates one time, a very small 0.25% increase which isn’t exactly spectacular. Other central banks are in even worse shape. Not only did they not re-build their ammunition stockpile, they had to recently use up even more ammunition. The Japanese central bank took rates BELOW ZERO recently. The European Central Bank did this too and they started an aggressive easing program which surpasses the Fed’s $85 billion per month record.

My question to you is this: what will happen after the next crisis hits?

As far as I can see, there’s little to no ammunition left.

The Federal Reserve may be in bad shape but it’s in better shape than everyone else. At least they’re no longer pumping money into the system (they stopped their Quantitative Easing program last year) and had one measly rate increase. So technically, after the next crisis, they can take rates slightly negative and start a QE program again… at least there’s something there.

But the Japanese central bank? Or the European one?

What could they do if another crisis were to start? Rates are already negative and they’re already pumping billions upon billions into the system each month. In theory, they too could take rates even more negative and pump even more money into the system but they can only take this strategy so far.

If interest rates are at let’s say -0.3%, the average depositor probably won’t go through the trouble of taking money out of the bank.

If however they drop to -1% per year, some depositors might. Let’s say, I don’t know, 2 out of 100 depositors might pull their money out.

If they drop to -2% per year, maybe 7 out of 100 depositors might do it.

At -3%, perhaps let’s say 15% and in such a scenario, I don’t think the financial system would withstand the shock.

The same way with pumping money into the system.

At one point or another, the market might lose confidence in the ability of governments and central banks to keep things under control.

I don’t know when this will happen but simple logic tells us that it might.

If it does, investors might no longer consider bonds safe and instead, move to other asset classes.

As hard as it may seem in this current deflationary environment, inflation could actually become a big problem, with people scrambling to buy for example assets such as real estate, precious metals (and this coming from someone who is definitely NOT a gold bug), art… and yes, perhaps even domain names.

What I’m trying to say is that if central banks aren’t careful, people might lose confidence in them at one point or another.

Should that happen, investors will no longer consider bonds and currency as safe as they’ve considered them so far and something else will replace them as “safe haven” assets.

In such a scenario, domains might no longer represent risk assets.

Now again, these are just assumptions but you do have to admit that there is some sound logic behind them.

Lowering interest rates and pumping money into the system can work once, twice, three times, four times and so on. But they cannot work indefinitely. I hope central banks understand this and don’t complacently consider their current weapons foolproof because they’re not. Confidence is at the heart of human economic action and if that confidence is lost, getting it back would be an uphill battle… to put it mildly 🙂

4 Comments For This Post

  1. Tauseef Says:

    Good article but still I think most of the people will continue their trust with government assets (worst scenario) because domain names is a new concept to most of the people. Also, the trademark issues with the names is an added risk. In domain market there is still a room for plenty of players. Those who loses confidence on Govt stocks might go for another investing opportunity and not necessarily domain names. DN could be the last choice.

  2. Andrei Says:

    @Tauseef: I agree 100% that even if confidence in bonds/cash were to be lost, most people would not choose domains.

    The good news however is that since our industry is so small, all it takes is a small awareness uptick and the results would be huge.

    There are currently 7 billion people on this planet.

    Do 1% invest in domains? Definitely not, as this would mean we had 70 million domainers… we definitely don’t 🙂

    Do 1 in 1,000 people invest in domains? Definitely not, we don’t have 7 million domainers.

    Do 1 in 10,000 people invest in domains? Nope, we don’t have 700,000 domainers.

    Do 1 in 100,000 people invest in domains? I don’t think so, I doubt we have 70,000 active domainers.

    My best guess is that maybe we have half that many domainers, let’s say 1 out of 200,000 people.

    Therefore, all it takes is again, one small awareness shift.

    Maybe the confidence loss would make 2 out of 200,000 people decide to invest in domains instead of just 1 out of 200,000. Maybe 3 or 5 or 10 out of 200,000. That would definitely be a reasonable expectation and even such a seemingly small increase would have dramatic effects on domain values IMO.

  3. leonard britt Says:

    Curious as to your view of a potential US dollar crisis and how that might affect domain values. The US government has a sizable debt level relative to GDP. I have seen currency devaluations in Latin American countries and the economic disruption which results. Could we see a similar crisis in the US?

  4. Andrei Says:

    @Leonard: a US dollar crisis would be a bullish scenario for pretty much all assets, including domains.

    The US does indeed have a sizable debt to gdp ratio, slightly over 100% but on the other hand, the dollar is the world’s reserve currency and this means the US can “get away” with a lot more things than a more fragile country. The stronger a country is, the more it can get away with. Japan has a debt to GDP ratio of over 200% yet still hasn’t even come close to facing inflation problems.

    Back when Argentina defaulted for example, they had a debt to GDP ratio of considerably less than 100%; around 60 percent if memory serves me well. Yet their currency still took a nosedive because the confidence was gone.

    At the end of the day, it all boils down to confidence in my opinion.

    To address your final question: could we see a crisis similar to the Latin America ones in the US?

    Well, nothing is impossible but I for one am afraid of something else. I am afraid not of a crisis limited to one country or a couple of countries but all of them, I’m terrified of a scenario which results in a *worldwide* loss of confidence in bonds/currencies.

    In such a scenario, the US might actually be the last domino to fall (my best guess would be that things would unfold something along the lines of: a loss of confidence in emerging market currencies, then a loss of confidence in the Euro and Yen and only then a loss of confidence in the USD; the USD might actually do very well initially due to the “safe haven” bid). The best alternative in a sea of awful choices, if you will 🙂