Does IDNX spoil the sales pitch to investors? — A response.

IDNX is an excellent benchmark for the domain industry and investors endorse more transparency.

Last week, I had the pleasure of announcing that my Internet Domain Name Index (IDNX) was added to Bloomberg and Reuters. I received support and a lot of positive feedback from the domain community. The overall sentiment is that this is a great step forward in terms of visibility and transparency in the market for virtual space. Nevertheless, some reputable industry heavyweights also voiced concerns, which I would like to address.

Concern 1: “IDNX is based on too small a dataset to be representative”.

The data used by IDNX are one of its core strengths. It is the only index for domains that is exclusively based on market data. In fact, it relies on more than 200,000 real transactions. Real sales are much more reliable than opinions or estimates, since a buyer and a seller not only agreed on a price but also made the trade happen. An opinion only talks the talk—a sale also walks the walk.

IDNX is also very transparent with regards to the underlying data. Unlike many other projects, you really know what you’re getting. The database includes a broad variety of TLDs which represent the distribution of TLDs in the market fairly well. Admittedly, it draws only from sales at Sedo.com, but no other marketplace can currently offer a higher number and a better variety of domain trades. Nevertheless, I am open to and looking for other reliable data sources to have a broader foundation.

Furthermore, I agree that very expensive domains do not occur in the data very frequently, which could indeed mean that the high-end segment of the market is not well represented in the index. But neither are the millions of low quality domains that never get sold. You can compare it to a house price index that is geared towards the bulk of single-family homes: it does not focus on villas, palaces, deserted shacks, but it is nonetheless representative of the market as a whole. The only way to improve this representation would be adding more data on these high-end sales, and estimating the share of domains that will never be sold and that only bloat renewal fees. Asking people for their opinions about price changes of individual domains is not a solution.

IDNX does not calculate average prices but tracks changes in sales prices for individual domains. So returns are not artificially depressed by having the bulk of transactions in the mid- and lower price range. Admittedly, if high value domains rose faster and fell faster in value than mid- and low-priced domains, IDNX would not be a close benchmark for this subset of domain. But as long as the high value sales remain unpublished, nobody can track their prices in a more reliable fashion.

Concern 2: “IDNX makes domain investments look bad”.

Another line of criticism suggests that IDNX discredits domains, showing them as a bad investment with low returns, high risk, and a strong correlation to other asset classes. This perception is dead wrong.

IDNX shows that domains have a solid economic foundation. They are not part of a “new economy” where fortunes can be made without hard work and substantial risk-taking. I trust the majority of domain investors share this perception of the market.

The high correlation of IDNX with other financial indices is also a good sign, since it documents that both real and virtual economy are driven by similar fundamental factors. Common sense and economic reasoning suggest that domains are not detached from the economy in general. Denying a link might sound appealing in a pitch to investors, but the numbers tell a different story. Despite the substantial correlation to other economic sectors, domains still offer a great diversifying potential. Just do the math: even with positive correlations, the overall efficiency of an investment portfolio will increase if domains are included in the asset mix.

Does IDNX suggest that buyers should walk away from domains and search for other investment opportunities? Not at all. For the skilled investor, domain markets offer rich opportunities to prove their adeptness at picking and pricing their assets. With experience, the availability of solid numbers on which to base a judgment, development skills, and a handy bit of luck, money can be made. We will see many more people grow wealthy through domain trading. On the other hand, it is not an alchemist economy that provides money for nothing. The same critical distance that makes us question any of the “make 10K a week from home” job offers in your inbox should be applied to too-good-to-be-true online investment promises.

IDNX increases transparency and accountability

Summing it up: IDNX is a good benchmark for large domain portfolio holders and for the market in general. It is based on a well-documented methodology and good data. It is not only transparent but brings transparency and accountability to the industry. Snake-oil sellers, beware.

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