The FTX scandal will not sink the capital of Crypto Bank Silvergate

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

FTX, one of the largest cryptocurrency exchanges in the world, went bankrupt in November amid allegations of insolvency by major publication CoinDesk. The failure of the cryptocurrency exchange is hitting several companies 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. He has never had any outstanding cryptocurrency-related loans or investments, nor does he serve as custodian for any of the bank’s bitcoin-backed SEN leveraged loans.

However, there has been a lot of pain for the stock, with the value falling more than 50% in just one month.

The FTX scandal will not sink the capital of Crypto Bank Silvergate

The next few quarters could be painful, but I believe Silvergate will come out even stronger. It has repeatedly proven itself to be a solid institution, so I have confidence in its ability to weather this storm. The stock is now trading near its 52-week low, giving value investors the perfect opportunity to pounce.

The concerns are valid but exaggerated

FTX’s failure highlights the fickle nature of the crypto space. For bears, it’s another reason not to get involved in space. While FTX’s relationship with Silvergate Capital is limited, investors are still punishing the stock. The failure of FTX reminds us that the crypto space is still in its infancy and there are still many risks associated with investing in it.

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

Tier 1 leverage ratio is a key metric used by financial institutions to assess their financial stability. The report provides a snapshot of a bank’s overall financial strength by measuring how much Tier 1 capital it has relative to its assets. But the Tier 1 leverage ratio is a bank’s Tier 1 capital ratio to its average total assets. Tier 1 capital consists of shares and other high-quality instruments, such as some 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 on financial health. It maintains its score even with the FTX scandal and many bad debts. 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. While it focuses on cryptocurrency, it has strong regulatory oversight. The company was one of the first banks to service 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 has been 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 SEN at the end of the third quarter and just over $12 billion in deposits.

Silvergate is unique because it does not charge customers for using its platform. Instead, it benefits when customers bring in large deposits on which they pay no interest. Deposits are great for Silvergate to use for bonds or loans. In this way, the company can earn money through the interest rate spread. Warehouses 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 business that has found a way to generate revenue and earnings without charging fees to its customers. This rare business model is probably one that should be applauded.

Notably, like most exchanges in the cryptocurrency market, FTX is a client of Silvergate. The trading platform’s bankruptcy gives investors and prospective clients plenty of cause for concern regarding SEN’s outstanding loan portfolio. However, as we’ve discussed, exposure is limited. A mid-quarter update from the company confirmed that total deposits were down to about $9.8 billion, including about $1.2 billion from FTX, which has been building up 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. Also, the bank has no official lending relationship with FTX. It causes its borrowers to set aside enough bitcoin collateral to cover the full amount of their loan, and in some cases even more. Access to customers’ bitcoins is limited; Silvergate can liquidate the fund whenever it wants and without having to consult them. It also said in its most recent update that it has not yet liquidated any funds, which should give nervous shareholders some peace of mind.

Take away

Silvergate is a cryptocurrency exchange that allows users to buy and sell digital assets. It is one of the few exchanges that is not highly exposed to the FTX bankruptcy, which has caused difficulties for 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 cryptocurrency industry. As a result, this could be a great opportunity for those looking to buy the stock at a discount and achieve high returns in the future.

This article first appeared on GuruFocus.

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