Throughout this cold crypto winter, Silvergate Capital has been one company to benefit from market volatility, but shares in the NASDAQ-listed crypto bank have hit a rough patch one week on from its positive second-quarter earnings.
After rallying 20% following the better-than-expected July 19 results, SI has since drawn back by 3% in Monday’s pre-market trade.
Year to date, the company’s market capitalisation has taken a 42% hit, compared to a 25% decline for the wider NASDAQ index.
That might sound bad, but in the same period, Coinbase has lost 72% of its market value, while other crypto-exposed companies including MicroStrategy, Marathon Digital Holdings and Riot Blockchain have all fallen between 50% and 70%.
Second quarter shifts into gear
The company announced a 40% increase in net income for the second quarter, concurrent with a 43% uptick in earnings per share (EPS), although shareholder equity did fall by 8% due to an increase in liabilities.
Chief executive officer Alan Lane attributed Silvergate’s comparatively good performance in a period which has seen many high-profile, crypto-exposed companies falter anf fall to “sticking to what the bank knows best and by not chasing FOMO (fear of missing out)”.
Bitcoin lending “is some of the best lending we’ve ever done,” Lane said in a CoinDesk interview, while simultaneously warning that “the crypto sector may still experience a few areas of pain for some exchanges and crypto funds over the next few quarters”.
But that hasn’t deterred Silvergate’s strategy, and the bank shows no indication of moving away from its bullish Bitcoin lending strategy.
Hedging against volatility
As a Federal Deposit Insurance Corporation (FDIC)-insured financial institution, Silvergate likely employs stricter collateralisation requirements compared to its unregulated competitors, while Securities Exchange Commission (SEC) filings state that “we do not practice rehypothecation, meaning our custodial partners do not lend out our customers’ bitcoin”.
In June, rumour circulated that Silvergate was poised to flex muscles by imposing a margin call on MicroStrategy Incorporated.
MicroStrategy has a $205 million BTC collateralized loan with Silvergate Bank. If BTC drops below $21K, Saylor's company will be forced to hand over uncollateralized BTC to answer any potential margin call. https://t.co/NmWaqunQfr
— Amy Castor (@ahcastor) June 13, 2022
MicroStrategy — the world’s largest corporate holder of Bitcoin headed by Michael Saylor — took out a US$205mln Bitcoin-secured loan in June to further increase its holdings of the digital asset.
Despite the rumours, no margin call was actioned.
What next?
Earlier in the year, Silvergate purchased the intellectual property and other assets relating to Meta’s abandoned Diem stablecoin project.
The deal was inked well before the collapse of Terra Labs crushed public confidence in stablecoin technology.
But once again, despite adverse market conditions, Silvergate seems unperplexed and has a view to launching the product by the end of 2022.
“Hold the line” seems to be Silvergate’s strategy; whether it pays off or not will be determined in the months ahead.