What are the financial problems in domain name investment?

Since the birth of the internet over 30 years ago, domain name registration initially stemmed from applications, interests, and collections. Nowadays, it primarily revolves around pure investment considerations. Since it involves investment, financial issues inevitably come into play. So, what are the financial aspects of domain names? Here are five common ones to explore together.

1. Borrowing Money to Buy Domain Names

In the early days of domain name trading, it was a straightforward transaction between buyers and sellers, typically involving a simple exchange of money for the domain. As the value of domain names increased, buyers might find themselves unable to afford the seller's asking price but still compelled to make the purchase for various reasons. This is where borrowing comes into play. Borrowing to buy domain names typically occurs when the potential appreciation of the domain's value significantly outweighs the cost of borrowing. During this period, it's worth mentioning a domain investor known as "Lei Zhu," who essentially treated "borrowing to buy rice, selling rice at a premium, using profits to repay the loan, and retaining the remaining profits" as a business. In just a few years, he accumulated substantial capital using this model.

2. Domain Name Financing

Many domain investors adopt the mentality of "chopping hands" after buying rice with their profits. Their mentality can be summed up as "buy, buy, buy," often resembling an addiction. When they reach a certain portfolio size, what should they do? Selling rice is often harder than buying it, which is the typical state of domain investors. However, they hold on to the belief that "holding onto rice is preserving wealth" and are reluctant to sell at lower prices. Life goes on, so what's the solution? Domain name financing. Several platforms allow domain owners to use their domains as collateral for loans. To be honest, these loans are considered "high-interest loans," with monthly interest rates typically around 2%, equivalent to an annualized interest rate of 24%. This rate is higher than the approximately 14% annualized interest rate offered by internet finance platforms. Domain investors are left with little choice but to participate, but how long can this "drinking poison to quench one's thirst" model last? That's a matter of speculation.

The situations described above are relatively straightforward, but the following scenarios can be rather intricate.

3. Bulk Domain Names

The profit in domain name trading is simple: "buy low, sell high." Those who can obtain domains at the lowest registration cost will have the lowest costs, and in the same market conditions, they will make the most profit. In unfavorable market conditions, they may survive longer. If the official price from a registrar is $55, and I manage to get it at $50, I have a profit of $5 when I resell it. If I invest in 100 of them, my profit becomes 5 x 100. Now, what if I invest in a million of them? It becomes 5 x 1,000,000. If, through my connections and promotion, I can turn that $5 price difference into $50 or even $500, well, the profit becomes unimaginable. Just thinking about it brings joy. The bulk domain registration events in the first half of 2015 saw the emergence of non-mainstream extensions that had been around for years but never gained market recognition. What used to be "short domains are easy to remember" turned into "big players are calling the shots; everyone, join in!" The market soared. However, domain names are ultimately driven by their applications and meanings. Domain names without terminal application market support experienced a cliff-like drop in prices after the roller-coaster ride of increases. Suddenly, people realized that the big players who had initially promoted this type of domain had already cashed out. Some went on overseas vacations, some got married, some started families, and some bought villas. Only the unlucky ones were left "holding onto rice to preserve wealth." Some accused, "Foreign new extensions are coming to China to deceive money," while others criticized, "Certain big players are manipulating prices with their mouths, engaging in pyramid schemes." In 2015, it was probably the craziest year for domain markets since their inception, with the largest influx of capital.

4. Domain Name Funds

Domain name funds are a variation of bulk registration and trading mentioned above, but with larger capital investments. They have evolved from individual big players into modern corporate entities. The approach remains the same: select domain extensions, invest capital, promote and inflate prices, and then sell. However, their influence is more significant, and the profits are greater. In the second half of 2015, a phrase widely circulated among domain investors was "domain speculation depends on aligning with the right team." This is the reason behind it.

5. Domain Name Securitization

It's unclear why this term has gained popularity, but after consulting with several financial experts, there are a few basic possibilities for domain name securitization. Firstly, registrars may securitize the funds for domain name renewals in the next year. Secondly, large domain name intermediaries may securitize the fees for their services in the next year. However, with the market's sharp rise in 2015 and subsequent crash in 2016, both of these aspects have significant uncertainties. It's unlikely that any securities firm would be willing to take on such projects. There may be capable individuals in the domain name industry, but we can only hope and wait to see. It's possible that this is another instance of big players trying to deceive.

In the field of domain name investment, financial issues play a crucial role. From domain selection, purchase, holding, to eventual monetization, financial strategies directly impact investors' returns. To succeed in the domain name market and achieve returns, investors need to carefully plan their finances, understand market trends, and employ effective financial tools and strategies.