Will Crowdfunding Survive a Market Meltdown?

Investors have been taken for a wild ride over the last two weeks as stocks have dipped and rallied following major shake-ups in the Chinese market. After massive sell-offs early on, Wall Street reported its biggest two-day gain since 2009 but it's not all good news. According to Societe Generale, this burst of volatility has all the earmarks of a bear market.

Crowdfunding, while still very new, is becoming a relative safe haven for those who want to insulate themselves against market risk. Here is why:

Investor yields outpace what banks are offering

In the previous economic downturn, the (very new) crowdfunding industry as a whole was able to capitalize on the impact of the recession. Peer-to-peer lenders like Lending Club and Prosper saw three to four times the number of loan originations during this period as traditional banks put the brakes on lending.

As yields on savings products plunged, investors turned their attention to crowdfunding platforms to fill the gap for funding created by the banks. Loans were generating returns of 6% or higher while banks were paying out 1% or less in interest. At the same time, stocks were on a steady downward spiral with the S&P 500 losing a third of its value in 2008 alone. 

Hyper-targeted investing shields investors from the whims of the market

Crowdfunding is advantageous to investors because it offers more flexibility in terms of where they're putting their money. They can safeguard against certain types of financial instruments, loans or even geographic regions that will be hit hardest by economic downturns. In the case of real estate crowdfunding, platforms like RealtyShares will thrive if things turn south because investors are afforded great specificity in their investments. It's possible for individuals to zero in on specific localities that offer the greatest potential for beating the market.

For instance, as crude oil continues to shed value, real estate futures in Texas are very uncertain. If housing sales begin to slow down as a result, investors could face some serious financial fallout. Platforms like RealtyShares offer a level of specificity and diligence that you simply won't find with a REIT, allowing you to avoid certain regions and invest in others.

Borrowers are less likely to face obstacles on crowdfunding platforms

Borrowers also feel the punch as banks and other financial institutions begin to tighten their lending standards, creating a credit crunch. That creates a trickle-down effect which seeps into most every loan type. Peer-to-peer lenders and crowdfunding platforms offer a unique value proposition that mitigates some of this borrower risk.

While banks may be reluctant to lend during a downturn, borrowers may face fewer obstacles in securing the funding they need through crowdfunding or peer-to-peer lending platforms where investors may have fewer reservations. “The crowd” is comprised of thousands of individual investors, all of whom have different risk and investment preference profiles and unlike banks, does not take a one size fits all approach to financing. That could prove to be very important if the current market conditions continue down a bearish path.

In Summary

If the recent volatility is an indication of a larger market correction that's yet to come, crowdfunding platforms have the potential to emerge as a relatively safe bet for investors and borrowers. While it's impossible to predict the next twists and turns the market will take, the crowdfunding industry may be uniquely positioned to weather the storm.    

Have an opinion? Email me at [email protected]. I’d love to hear your thoughts on crowdfunding and the economy.