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Part 2 – How China’s Looming Debt Crisis Will Impact Domains

Part 2 – How China’s Looming Debt Crisis Will Impact Domains

This is the second article in the series on China. Click here for part 1.

Off the back of all of the China debt crisis, what’s going on in the domain industry? For the past year many western domain investors have been scratching their heads as they tried to work out why the Chinese were buying up all of the 4 letter/number domains.

Escrow.com

Other than a few reasons which were largely due to mysticism and numerology there was no sustainable underpinning of the value of many of these domains. In short, it was spectulation run mad that rapidly pushed up the prices.

Despite the underlying values being questionable there has been a rush by many western domain speculators to register short character domains. The total goal was to then sell these domains to Chinese investors for inflated prices. While some people have made money, many are in the process of losing their shirt as the giant global ponzi scheme comes crashing down.

I recently spoke with a Chinese investor that has over $50m to invest in domains and she indicated that they are putting just about everything on hold to see what’s happening with the market. The domain industry has just experienced a bubble fuelled by cheap money that was looking for another asset class to invest into. The rule of thumb for bubbles is to get in and get out really fast so if you're holding any of these domains then it may be a long time (if ever) before you see a return.

As an example, a number of months ago I sold a whole lot of 4 letter dotcom domains to a Chinese buyer. I recently checked the market and you couldn’t get half the price for those domains now.

I have been upfront in saying that while the cheap money is available then in my opinion sell. It’s not often that you get opportunities like the one that has just past.

What’s really interesting is that many of the Chinese registrars are the companies that are moving massive numbers of the new gTLDs. As an example, registrar west.cn has sold 27.3% of the .xyz domains (1.13m). Congratulations should be made to Daniel Negari and his team as they really tapped into the Chinese market as a place to sell the .xyz brand in a big way.

Likewise, .CLUB has managed to sell over 60% of its domains to Chinese investors. It’s clear why Collin, Jeff and the team have been clocking up the frequent milers to China and back! Like a number of the other new gTLD registries they seized upon the boom time in China as a way to move their stock. It was a fantastic move!

The question that needs to be addressed is what will happen to the new gTLD market in a Chinese bust? Clearly renewals will evaporate from domain speculators and new registrations will return to much more modest levels. But is this really a bad thing?

What the Chinese boom has done for a number of the new gTLD registries like .CLUB and .XYZ is provide a massive injection of capital at a time when they most needed it. A Chinese bust will not be catastrophic for these companies as they've also been focusing their efforts in other parts of the world and in particular end users.

In the next article in the series I will go through what I think is a good domain strategy in the event of a Chinese economic collapse.

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Michael Gilmour has been in business for over 32 years and has both a BSC in Electronics and Computer Science and an MBA. He was the former vice-chairman of the Internet Industry Association in Australia and is in demand as a speaker at Internet conferences the world over. He has also recently published his first science fiction book, Battleframe.

Michael is passionate about working with online entrepreneurs to help them navigate their new ventures around the many pitfalls that all businesses face. Due to demands on his time, Michael may be contacted by clicking here for limited consulting assignments.

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Comments

Guest - JP on 15 April 2016
China's debt is nothing compares to US

I wouldnt worry too much about China's debt. Check out this debt vs GDP heatmap. US is on fire, always has been, always will be until it collapses which seems like never wil so what's the big deal for China. https://en.m.wikipedia.org/wiki/Debt-to-GDP_ratio

I wouldnt worry too much about China's debt. Check out this debt vs GDP heatmap. US is on fire, always has been, always will be until it collapses which seems like never wil so what's the big deal for China. https://en.m.wikipedia.org/wiki/Debt-to-GDP_ratio
mgilmour on 15 April 2016
RE:China's debt is nothing compares to US

That's a really good chart but only shows government debt to GDP as a ratio. China has the majority of its debt is held by state owned corporations and this debt is not part of the chart. If all of China's debt was taken into account then it would be on fire!
The one saving grace for the US is that it is the worlds default currency....which means it can effectively print money to pay for the debt. The problem with this is that eventually the dollar is devalued and then another range of issues occur.

That's a really good chart but only shows government debt to GDP as a ratio. China has the majority of its debt is held by state owned corporations and this debt is not part of the chart. If all of China's debt was taken into account then it would be on fire! The one saving grace for the US is that it is the worlds default currency....which means it can effectively print money to pay for the debt. The problem with this is that eventually the dollar is devalued and then another range of issues occur.
Guest - Joseph Peterson on 16 April 2016

Yep. That's about the long and short of it.

After the first categories to experience upward price motion in the 2015 Chinese surge – e.g. LLLL.com CHIPs, 4-letter .NET CHIPs, etc. – began their decline in December, Chinese speculators have turned to a variety of lesser asset classes.

They're trying to recreate the magic in .PET, .RED, .SITE, .CLUB, .WANG, .TOP – anywhere they can push for artificial scarcity and drive up floor prices. So we've seen 4L, 5N, and 6N strings registered at a record pace – 100,000 or more in a single suffix in a single day.

But it's futile. Registries are selling these as cheap as 50 cents apiece, yet in a year's time the renewal will be 10-20 times higher. There are simply too many scattered categories for us to see enough appreciation to make this sustainable. During the initial 2015 surge, traders were fixated on just a few extensions – primarily .COM. That obsessive focus drove the hype, which drove the growth, which drove more hype, which drove more growth, etc.

At this stage, 1 large bubble has been deflating for 4 months. And as it collapses, many smaller bubbles are springing up around it. They'll fizzle out too.

Underneath this speculative frenzy, which I described as an "inadvertent crowd-sourced pyramid scheme", there is a real Chinese domain market. I'm afraid all this price volatility (as well as the emphasis on trading rather than usage) will leave a sour taste. And that will ultimately hold China's domain industry back.

In the West, there has been an influx of cash. But there has also been a derangement of priorities. nTLD registries threw a steak into a feeding frenzy, encouraging domainers to forget about end-user outreach. That will hold back meaningful adoption. I can't blame the registries for cashing in; but if cashing in was their priority, then that will prove quite short-sighted.

Yep. That's about the long and short of it. After the first categories to experience upward price motion in the 2015 Chinese surge – e.g. LLLL.com CHIPs, 4-letter .NET CHIPs, etc. – began their decline in December, Chinese speculators have turned to a variety of lesser asset classes. They're trying to recreate the magic in .PET, .RED, .SITE, .CLUB, .WANG, .TOP – anywhere they can push for artificial scarcity and drive up floor prices. So we've seen 4L, 5N, and 6N strings registered at a record pace – 100,000 or more in a single suffix in a single day. But it's futile. Registries are selling these as cheap as 50 cents apiece, yet in a year's time the renewal will be 10-20 times higher. There are simply too many scattered categories for us to see enough appreciation to make this sustainable. During the initial 2015 surge, traders were fixated on just a few extensions – primarily .COM. That obsessive focus drove the hype, which drove the growth, which drove more hype, which drove more growth, etc. At this stage, 1 large bubble has been deflating for 4 months. And as it collapses, many smaller bubbles are springing up around it. They'll fizzle out too. Underneath this speculative frenzy, which I described as an "inadvertent crowd-sourced pyramid scheme", there is a real Chinese domain market. I'm afraid all this price volatility (as well as the emphasis on trading rather than usage) will leave a sour taste. And that will ultimately hold China's domain industry back. In the West, there has been an influx of cash. But there has also been a derangement of priorities. nTLD registries threw a steak into a feeding frenzy, encouraging domainers to forget about end-user outreach. That will hold back meaningful adoption. I can't blame the registries for cashing in; but if cashing in was their priority, then that will prove quite short-sighted.
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