Domain Names And Bitcoins: The Pricing Conundrum

What is a domain name worth? The most popular answer also happens to be the correct answer: a domain name is worth whatever a buyer is willing to pay for it. But why is this a special case worth discussing?

1. Domain names are unique. There is one, and only one . in the world. In a lot of ways, it works like real estate. If you are lucky enough to find a buyer who very badly needs the name, he will pay you whatever he can afford for that name - there is really no other way to put a price tag to the domain name.

2. In many ways, the supply of domain names is limited (this is probably changing btw) - there are only so many 3 letter .coms, 4 letter .nets and so on.

Add 1 and 2, you have a skewed supply demand scenario - which is why you see these eye-popping dollar amounts paid for domain names. Sometimes. The key lesson? Domain names are not commodities, so the normal rules of pricing, based on supply and demand, fail miserably in price discovery.

Let us move over to Bitcoins. What do we have there?

1. They are not unique - they are, in fact, a commodity.
2. Supply, however, is limited. There can only be 21 million Bitcoins in the world. Ever.

So we have a partially skewed supply demand scenario - which is why we see such high volatility in Bitcoin prices. The market might not fail in price discovery here - it just needs to go through a couple of hype-panic cycles to get the pricing right. Because, unlike domain names, each bitcoin is not unique, and hence the market (the forces of supply and demand) will discover a price for a bitcoin sometime soon. Ignore the gyrations until that happens - or participate in it if you think you can get it right!

You might want to also look at Bitcoin’s Rise: What If It Is Not A Bubble?