As China-US Relations Sour, Could The Revamp Of P2P Lending Serve As An Alternative Investment Vehicle?

The following post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga.

As tensions escalate between China and the US, some investors are looking for alternative investments to offset bearish trends. Markets have yet to recover from the fallout of COVID-19, and a Reuters report suggests China is frustrated with accusations from Washington over the origins of the virus. While the chances of physical confrontation are low, the risk of an escalated trade war between the US and its largest exporter is very real indeed.

In the wake of the Reuters report on May 7th, the Dow Jones Industrial Average DIA dropped 1.5 percent and the S&P 500 SPY fell 1.1 percent. Asia suffered most, with drops as high as 4.5 percent in Hong Kong’s Hang Seng. Markets did close on some meager gains, especially in technology. With all the saber-rattling going on, the short-term outlook remains bleak – even safe-haven assets like gold aren’t immune to such seismic stress.

Investors are shoring up precarious portfolios with alternative investments. One of the most popular in China and the US is peer-to-peer (P2P) lending. Combined, the two superpowers own 95 percent of the global $15 billion P2P lending market. But despite its popularity, shares in the largest P2P lending platforms in each country have lost about half their value over the last few months.

LendingClub Corp LC dropped from $12.96 in January to $7.26 on May 5 and Yiren Digital Ltd YRD fell from $6.30 to $3.70 in the same period. Is this symptomatic of the wider market climate or is something deeper at play?

Traditional P2P lending platforms assess the creditworthiness of borrowers, and in some cases, will maintain a fund to offset borrower defaults, but neither guarantee the return of your principal and interest. A handful of platforms require collateral, but it is usually illiquid – like property – which takes years to sell.

As employment rates decline, borrowers struggle to repay, and without liquid collateral to cover defaults, investor losses run high. It would seem, therefore, conventional P2P lending has a collateral problem. But what if a new class of lender fixed this problem – could P2P lending deliver consistent returns despite the sparring of its two biggest enthusiasts?

A new generation of secured P2P lending platforms believe the answer lies in the $250 billion cryptocurrency market. Volatile yet liquid, cryptocurrency could serve as collateral as it’s readily sold should borrowers default. Conversely, it gives cryptocurrency investors affordable leverage to trade events such as the upcoming Bitcoin halving without the need for credit checks. With overcollateralization offsetting volatility concerns, crypto-backed lending could offer dependable returns when conventional markets fail.

Crypto-backed lending could therefore bolster a diversified investment strategy and a soft entry to cryptocurrency markets. While the best returns are typically in fixed-term loans, investors could also earn a passive income on idle funds (such as USD or stablecoins) deposited in a lending pool, with the advantage of anytime withdrawals.

The benefits of crypto-backed lending are symbolic of the rapidly changing world of fintech. While the US and China wage verbal warfare, investors seeking refuge could also serve as challengers at war with the status quo.

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The preceding post was written and/or published as a collaboration between Benzinga’s in-house sponsored content team and a financial partner of Benzinga. Although the piece is not and should not be construed as editorial content, the sponsored content team works to ensure that any and all information contained within is true and accurate to the best of their knowledge and research. This content is for informational purposes only and not intended to be investing advice.