Think about that time you bought a stock with high hopes of making a profit, only to watch painfully as prices dropped. Or when you tied your money in a stock that didn’t make any significant profit for years. Maybe you’ve even watched as the price of your stock goes up, only for it to dip without warning.
While the stock market can be a good place to get some quick and high returns, market volatility is real. Today, many investors are abandoning traditional stocks and bonds in favor of more diversified, high-return, and low-volatile alternative investments. These include real estate, commodities like oil and gold, among others.
Yet, the extremely high value of alternative assets is a hindrance for most average investors. Crowdfunding platforms are, however, changing the narrative. The Yieldstreet crowdfunding platform, for example, enables the average investor to access alternative investments once only available to the very wealthy. With an investment as little as $1,000 you can be part of an alternative crowdfunding project.
What Is Investment Crowdfunding Anyway?
Crowdfunding involves raising money from the public (crowd) to fund a business venture or project.
There are four types of crowdfunding.
The first is donation funding where you give money to a charity project without any return.
Second, there is reward-based crowdfunding, where you get (non-monetary) rewards for contributing to a project.
Thirdly, there’s equity crowdfunding. Here, you get to own a share of the project(s) you fund and a monetary return.
Finally, we have debt crowdfunding. Here, you earn interest from funding a debt. You also get your principal amount at the end of a project.
The rate and period of return and minimum investment amount vary from platform to platform.
The Risks and Rewards of Investment Crowdfunding
78% of crowdfunding projects exceed their goal. Going by the statistics, crowdfunding can prove irresistible to many investors. Here are some of the reasons why:
- You can finally access high-return projects that were once available to just a few accredited investors
Crowdfunding platforms are more inclusive, some even allowing for minimum investments as low as $500.
Since crowdfunding mostly involves investing in SMEs (small and medium-sized enterprises), the risks are high but so are the returns. Returns from 8% and even up to double-digit figures are not uncommon for crowdfunding investors.
- You get to choose your project
Crowdfunding allows you to decide which projects to put your money into, giving you more control and flexibility.
All the same, going with the crowd isn’t all rosy. Here are some drawbacks to expect:
- High-risk projects
Most businesses that opt for crowdfunding financing are usually in their early stages, presenting a higher risk of failure.
Not all crowdfunding platforms are well-run or even legitimate. Carefully research the platform before investing.
- Sometimes you can’t move your money around
Some platforms will require you to commit to a particular period of investment, say five years. If at any time during that period your investment is performing poorly or you get better opportunities, you are stuck.
What to Consider When Investing Through Crowdfunding
Crowdfunding, like all investments, carries risks. But there are some things you can do to reduce those risks.
- Choose platforms that do thorough due diligence on projects
Most crowdfunding platforms will do the work for you, presenting only businesses that are likely to be profitable.
Some of the best projects will have a low correlation to the stock market, impressive past revenues, and a low Loan to Value (LTV) ratio.
- Keep investment fees down
Investment fees eat into your profits. Most platforms charge between 1%-2% annual management fees on your investment amount. Compare different platforms to save on fees.
- Consider the opportunity for early redemptions
Sometimes you may need to take out your capital before the stipulated time. Choose a platform that allows you to make early withdrawals (although this may come with some costs).
- Opt for asset-backed loans
If you are investing in debt, go for crowdfunding platforms that hold on to collateral from borrowers. In case the borrower defaults, the platform will sell the asset to pay you back.
Is Crowdfunding a Good Investment?
Crowdfunding investment can potentially earn you much higher returns than a volatile stock market investment.
While investing in early-stage businesses is risky, you have control over some risks. You can reduce the likelihood of losses in crowdfunding by choosing reputable crowdfunding platforms that conduct due diligence on projects. It’s also good to go for platforms that allow you to redeem your investment. When investing in debt crowdfunding, choose asset-backed loans.
Remember to invest what you can afford to lose since no investment is 100% guaranteed to succeed.
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