The idea that inflation represents a threat isn’t exactly all that popular at this point in time, for the simple reason that those who warned against it since the Great Recession have been proven wrong time and time again. However, it is vital to point out that in the world of macroeconomics, it oftentimes takes quite a bit longer than experts had envisioned for mega-trends to start manifesting themselves. As such, it makes sense to borrow a Sam Ewing quote and frame our discussion by stating that inflation “is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair” or in other words, the debate warrants a multi-generational approach.

To reformulate, the monetary system keeps chugging along not because money doesn’t lose purchasing power (it most definitely does) but rather because it doesn’t tend to lose purchasing power quickly. If we take a step back and try to see the proverbial big picture, it is difficult not to come to the conclusion that (to transition to the title of this article) a million dollars isn’t what it once was.

How Much is a Million Dollars (Really) Worth?

It’s all… well, relative.

As such:

  • When it comes to short-term fluctuations, they are more than manageable. As an example, $1,021,000 “2019 dollars” would be worth $1,000,000 “2018 dollars” or to put it differently, someone who kept one million dollars under the proverbial mattress in 2018 would need an extra $21,000 in 2019 to account for the purchasing power loss that came as a result of the decision in question
  • Moving on to a mid-term perspective, what would have happened if someone held $1,000,000 for ten years rather than just one? Let’s just say that the costs associated with keeping one million dollars under the mattress from 2009 until 2019 start being problematic, with an extra $222,002.51 being required in 2019 to match the purchasing power one million dollars provided in 2009
  • Long-term speaking, however, the situation is no longer in “problematic” territory but becomes downright tragic. If we switch from a ten-year perspective to one hundred years and assume that perhaps a family business had $1,000,000 in reserves back in 1919 that it simply tucked away until 2019, the family business in question would need an extra $14,023,838.58 to reach 1919’s purchasing power (over 14 times the amount in question, to put it differently)

As can be seen, the most conservative of savers tend to be punished ruthlessly for holding cash in the long run. Therefore, as Warren Buffett points out, those who embrace this strategy should feel anything but comfortable because they are essentially holding on to something that is guaranteed to go down in value down the road.

In stark contrast, the exact same principle tends to be valid when it comes to anything that can be considered investment-grade, with study after study confirming that savvy investors tend to be rewarded not just by keeping up with inflation but actually from a wealth enhancement (rather than strictly wealth preservation) perspective as well.

How?

Through a wide range of mechanisms, for example returns, the most obvious “suspect” in this respect. All we need to do is take a look at Vanguard’s portfolio allocation models (which track data from 1926 up until the present) and right off the bat, we notice that the average inflation rate for this period was just north of 3%… the number to beat, if you will.

And investors have done just that when it comes to bonds as well as shares:

  • Bond investors have been able to generate an average return in the 5.5% region, with 1982 being the best year (32.6%) and 1969 the worst (-8.1%)
  • Stock investors have done roughly two times better, with an average return of 10.2%. The best year was 1933 (54.2%), whereas 1931 was the worst (-43.1%)

Needless to say, risk tolerance differs a fair bit from one investor or another, so it is understandable that some market participants have chosen to be more conservative by opting for bonds rather than shares, simply because a loss of 43.1% would be unpalatable. This article by no means has encouraging reckless risk-taking as its main goal but rather making it clear that sitting on cash and cash equivalents represents a major mistake. As such, yes, bond investors for example lost 8.1% during their worst year but made 5.5% on average, which most definitely beats a guaranteed average loss in the 3% per year zone that proverbially hoarding cash would have led to. Fair enough?

The list of benefits associated with long-term investing does not end here and as peculiar as it may seem to the untrained eye, there are even advantages on the tax front. In the United States, the tax code makes a clear distinction between short-term and long-term capital gains, with those who for example trade for a living (thereby buying and selling frequently) being taxed considerably more than those who buy and hold for multiple years (capital losses, however, are treated the same). If we take a look at neighboring Canada, there isn’t a clearly defined legislative distinction but still, someone who trades very actively risks determining the taxman to see this as a business activity that needs to be taxed at the personal marginal tax rate. While there is always a fair degree of nuance involved and tax implications vary from jurisdiction to jurisdiction, let’s just say it isn’t all that difficult to come across example of instances where long-term holders are rewarded o the tax front.

All in all, it should be fairly obvious that “hoarding” cash and cash equivalents, while perfectly acceptable when it comes to reasonably short timeframes, represents a slow-motion train wreck in the long run. Simply put, it is ultimately all a matter of coming to terms with the fact that while proverbially sitting on cash for a year or two so as to clear your mind and think things through with respect to capital allocation is perfectly fine, doing so for an extended period of time represents a purchasing power death sentence.

What are the implications for digital assets such as domain names?

It ultimately all depends on the reason(s) behind domain name acquisitions, with three broad categories being relatively easily identifiable:

  • Acquiring the primary domain name of a business or project, for example the domain which will be used for the main website, a website around which the entire online activity of the business/project in question will revolve
  • Acquiring secondary domain names for a project or business, for example domains which will be used for various marketing campaigns
  • Acquiring a domain name for investment purposes rather with a specific practical need in mind, just like with any other asset class

When it comes to category number one, the primary issue becomes one of survival rather than simply purchasing power preservation. Yes, a valid argument could be made that failing to acquire the optimal domain name right from the beginning will most likely lead to the same company having to pay more for it down the road (once the mistake becomes apparent) but the elephant in the room is represented by the damage a sub-optimal domain choice does right from the beginning. The most (in)famous example to that effect dates back all the way to 2012, when the then-CEO of Overstock admitted to investors that going with the confusing O.co domain (with .co being the ccTLD of Colombia) was a bad call and claiming that roughly eight out of thirteen individuals who were trying to reach their website via direct navigation landed on O.com (a 61% traffic loss to the .com version, although a source for this data was never provided).

Moving on to the second category, a sub-optimal domain name can and does do damage in the exact same manner, but at least that damage pertains to secondary websites directly and only indirectly to the main business. In terms of mindset, the name of the game is understanding that when going with excellent investment-grade domain names for secondary projects, the following binary approach makes sense:

  • On the one hand, an investment-grade domain tends to not only preserve its value but actually become more valuable as time passes (in the mid to long-term, at least, with short-term fluctuations brought about by a liquidity crunch being definitely possible as well as cyclical in nature) and as such, it can be sold if and when a secondary project has run its course so as to at the very least recoup the investment but preferably also book a reasonable profit. In stark contrast, mediocre secondary domain choices inevitably end up in the proverbial ash heap of internet history
  • While in use, it has become a bit of a quasi-axiomatic statement that a solid domain name enables projects to generate better results when it comes to anything marketing-related: it improves clickthrough rates compared to less memorable options, it provides a credibility boost that will result in improved conversion rates and the list could go on and on

Finally, one acquires domain names for investment purposes not because it would cost more to do so later on for purchasing power loss-related reasons (because we are not dealing with a mandatory purchase, in other words the domain acquisition is not required for the well-functioning of a main and/or secondary project) but precisely because they enable investors to not just protect/preserve said purchasing power but actually enhance it. At this point in time, domain names as an asset class are still new enough that only the more technologically sophisticated and risk-tolerant investors are embracing them but once again for a binary set of reasons, this is changing:

  • On the knowledge-related barriers to entry front, the process of investing in domain names is becoming more and more straightforward, with this asset class thereby becoming increasingly attractive to those who had written it off for technological literacy-related reasons in the past
  • At the same time, domain names are becoming increasingly attractive in light of the fact that savers have fewer and fewer reasonable capital allocation choices in front of them, in a world where ultra-low interest rates are here to stay and valuations of “traditional” assets such as shares are diverging from the realm of reason

To conclude, the following tongue-in-cheek statement is in order (the inverse of John F. Kennedy’s iconic statement, if you will): ask not what you can do for your one million dollars so as to preserve purchasing power, ask what your one million dollars can do for you. The same John F. Kennedy mentioned that the Chinese use two brush strokes so as to write the word “crisis” and while one brush does indeed stand for danger, the other stands for opportunity.

We live in turbulent times where savers are systematically punished and this trend is unlikely to end anytime soon, from companies that are left with increasingly difficult capital allocation choices to retirees who have been promised financial security and have received anything but. While it is understandable why many market participants have chosen to embrace despair with respect to what they consider to be inevitable purchasing power erosion, others have chosen to be proactive and therefore on a constant lookout for assets that enable them to always be one step ahead wealth management-wise.

For the reasons outlined throughout this article and many more, domain names as an asset class represent just that. From real-world business use cases to the strictly investment dimension, time will prove that they deserve a place in the overwhelming majority of portfolios. While stubbornly maintaining disproportionately high exposure to cash and cash equivalents is nothing short of a death sentence (leaving the safety net dimension aside, hence the “disproportionately high” nuance), the world starts looking less and less grim when investors become willing to embrace opportunities that aren’t yet in the spotlight mainstream-speaking. While they do involve venturing outside one’s intellectual comfort zone, the mid to long-term results can and most likely will be asymmetrically in your favor.