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For crypto bank Silvergate Capital Corp. (NYSE:SI), the past few weeks have been nothing short of a nightmare.

FTX, one of the world’s largest cryptocurrency exchanges, went bankrupt in November amid allegations of insolvency at leading publication CoinDesk. The bankruptcy of the cryptocurrency exchange is hitting several companies very hard, and Silvergate Capital is no exception.

Silvergate said its exposure to FTX is minimal and total deposits from this area are “less than 10%”. The company is fully compliant with all applicable digital asset regulations. It has never had any ongoing cryptocurrency-related loans or investments, nor does it act as a custodian for any of the bank’s bitcoin-backed SEN leveraged loans.

However, the stock suffered badly, with its value dropping more than 50% in just one month.

FTX Scandal Won't Sink Crypto Bank Silvergate Capital

FTX Scandal Won’t Sink Crypto Bank Silvergate Capital

The next few quarters could be painful, but I think Silvergate will come out of this even stronger. It has proven time and time again that it is a solid institution, so I have confidence in its ability to weather this storm. The stock is now trading near its 52-week low, providing value-oriented investors with the perfect opportunity to pounce.

Concerns are valid but exaggerated

The bankruptcy of FTX highlights the unstable nature of the crypto space. For bears, this is one more reason not to get involved in space. Even though the relationship between FTX and Silvergate Capital is limited, investors are still punishing the stock. The bankruptcy of FTX is a reminder that the crypto space is still in its infancy and there are still a lot of risks associated with investing.

However, there is an argument that the company is being treated unfairly. The bank still has strong fundamentals and a Tier 1 leverage ratio, which was 10.10% in June. This places it among the best banks in the United States by this metric.

The Tier 1 leverage ratio is a key measure used by financial institutions to assess their financial stability. The ratio provides insight into the overall financial strength of a bank by measuring the amount of Tier 1 capital it has against its assets. But the Tier 1 leverage ratio is the ratio of a bank’s Tier 1 capital to its average total assets. Tier 1 capital consists of equity and other high-quality instruments, such as certain loans. A higher Tier 1 leverage ratio indicates that a bank is better able to absorb losses without compromising its solvency.

According to the latest Federal Reserve bank stress test, Silvergate is doing better than most banks in the country when it comes to financial health. It maintains its score even with the FTX scandal and numerous bad loans. For this reason, the Tier 1 leverage ratio is an important tool for regulators and investors when assessing the health of a financial institution.

Limited exposure to FTX

Silvergate is an FDIC, Federal Reserve and California DFI approved bank. Even though it focuses on cryptocurrency, it has strong regulatory oversight. The company was one of the first banks to provide services to the cryptocurrency industry and has continued to play an important role in its development. The bank offers a range of services to its customers, including checking and savings accounts, loans and lines of credit. Silvergate is a leader in developing innovative payment solutions for the cryptocurrency industry.

The company also operates the Silvergate Exchange Network, or SEN, a platform that allows users to buy and sell cryptocurrencies using its banking infrastructure. Silvergate is the only regulated bank in the world to develop a network like this, which means it has a first-mover advantage. It had 1,677 customers using the SEN at the end of the third quarter and just over $12 billion in deposits.

Silvergate is a unique company because it does not charge customers a fee for using its platform. Instead, he benefits when clients make large deposits on which he pays no interest. Deposits are perfect for Silvergate for bonds or loans. This way, the company can earn money from the interest rate spread. Deposits are a key part of Silvergate’s business. It also issues loans against bitcoin, a product called SEN Leverage. Overall, Silvergate is a well-run company that has found a way to generate revenue and profit without charging fees to its customers. This rare business model is arguably one that should be applauded.

Notably, like most exchanges in the crypto market, FTX is a client of Silvergate. The bankruptcy of the exchange gives investors and potential clients plenty of reason to worry about the outstanding amount of SEN’s loan portfolio. However, as we discussed, exposure is limited. A mid-quarter update from the company confirmed that total deposits had shrunk to around $9.8 billion, including around $1.2 billion from FTX, which was built over time.

Silvergate’s lack of exposure to FTX and its use of secured loans give the bank little reason to believe it will incur loan losses. Additionally, the bank does not have an official lending relationship with FTX. It requires its borrowers to put aside enough bitcoin collateral to cover their full loan amount and, in some cases, more. Customers’ access to bitcoins is limited; Silvergate can liquidate the fund whenever it wishes and without having to consult them. He also said in his latest update that he hasn’t liquidated any funds yet, which should reassure jittery shareholders.

Carry

Silvergate is a cryptocurrency exchange that allows users to buy and sell digital assets. It is one of the few exchanges that is not very exposed to the bankruptcy of FTX, which has troubled several other companies in the space.

Despite this, Silvergate’s market value has taken a hit as investors have become more cautious about the future of the crypto industry. As a result, this could be a great opportunity for those looking to buy stocks at a discount and earn high returns in the future.

This article first appeared on GuruFocus.



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