The Fall of Crypto-Friendly Bank Silvergate
Silvergate Capital (SI), a friendly banking partner for cryptocurrency firms, is now on the brink of collapse. The company, headquartered in La Jolla, California, announced on Friday evening that it is suspending its Silvergate Exchange Network (SEN), while noting that its other deposit-related services are still operational.
The announcement came an hour after Moody's lowered Silvergate's bank deposit rating from Ba3 to Caa1, indicating that the bank's obligations are subject to very high credit risk. Silvergate was already facing financial losses and regulatory investigations in November, primarily due to the collapse of major clients such as FTX and Alameda Research. The company's stock, which plummeted on Thursday and Friday, has dropped by 95% over the last year.
The troubled bank, Silvergate, experienced a rush of deposit withdrawals from its cryptocurrency clients such as Coinbase, Paxos, Galaxy Digital, and other firms, which attempted to disassociate themselves from the bank.
The bank will likely to go into receivership for the protection of creditors.
Silvergate first became a regional bank in 1996. However, it wasn't until 2014, under CEO Alan Lane's leadership, that the company made the strategic decision to provide services to cryptocurrency clients like Genesis, which has since gone bankrupt. Silvergate differentiated itself in the market by offering banking services to a growing number of crypto startups and eventually created the Silvergate Exchange Network. On this formalized payments platform, cryptocurrency depositors could make U.S. dollar transfers and loans outside of traditional banking hours, operating 24/7.
As of the end of the fourth quarter in 2018, Silvergate held $1.8 billion in total deposits and $2 billion in assets. By the peak of the cryptocurrency market in 2021, its total deposits and assets had soared to $14.3 billion and $16 billion, respectively.
After the crypto exchange FTX went bankrupt, the total amount of deposits and assets held by Silvergate decreased to $6.2 billion and $11.3 billion respectively at the end of the fourth quarter of last year. As a result of the decrease in deposits, Silvergate's capital decreased by half relative to its assets. This caused its leverage ratio to fall from 10.7% in the third quarter to 5.3%, which is a cause for concern for banks as regulators may intervene if a US bank's leverage ratio falls below 5%.
Over $200M worth of crypto futures were liquidated on the Silvergate news. Bitcoin experienced the most significant liquidations within a 4-hour time period. 3.42K Bitcoins (BTC), with a value of $76.38 million, were liquidated, while 26.11K Ethereum (ETH), worth $40.82 million, were liquidated during the same timeframe.
Microstrategy addressed its loan with Silvergate:
Coinbase leaves Silvergate:
Block-Fi gets some of its money back:
And of course, Arthur Hayes’, disgraced CEO of BitMex, commentary for the win here:
What does this mean for our portfolios?
My current investment thesis is:
As I see it, we're drawing close to the bottom of the crypto markets, although it's likely to be a protracted downturn. There are still unknowns regarding the future of companies like Silvergate, FTX, and Genesis, and there's also regulatory scrutiny hanging over Binance. Interest rates are set to rise and eventually level off over the next few months. While 2023 is predicted to be a bear market with minor peaks and troughs, it's likely to stabilize by 2024, with fresh entrants bringing new, innovative ideas to the table. The market should pick up steam again following the next Bitcoin halving, expected in early 2024.
What I’m Reading This Week 📚
The Economist: How the titans of tech investing are staying warm over the VC winter
This Week By the Numbers 📈
On Friday, Wall Street experienced a surge in its performance, marking the end of a turbulent week. This was attributed to the relaxation of U.S. Treasury yields and positive economic data, which helped investors overlook the increasing probability that the Federal Reserve will need to maintain its restrictive policy until later in the year.
The three main U.S. stock indices all rose by more than 1%, and the tech-heavy Nasdaq saw an almost 2% increase, thanks to the support of interest rate-sensitive mega caps. The concerns over inflation and interest rates were eased by remarks made by Fed officials, which led to a decline in U.S. Treasury yields.
Top Stories 🗞️
Multicoin Capital’s Hedge Fund Lost 91.4% Last Year, Investor Letter Reveals
Multicoin Capital’s hedge fund lost 91.4% in 2022, according to the firm’s annual investor letter. The letter attributed last year’s decline to a turbulent year for cryptocurrencies, as well as direct and indirect impact from the collapse of crypto exchange FTX. In a separate letter to investors last November, Multicoin detailed the financial condition of its hedge fund, revealing that the fund had 10% of its assets stuck on FTX, as well as significant exposure to FTT, SOL and SRM, all tokens that saw steep sell-offs last November. Multicoin Capital, headed by managing partner Kyle Samani, launched its hedge fund strategy in October 2017, which invests in liquid tokens. The firm also operates three venture capital funds, and has invested in the now-bankrupt exchange FTX. Despite the massive drawdown, Multicoin’s hedge fund remains up 1,376% net of fees from its inception through 2022. As the broader crypto market rebounded from last year’s lows, Multicoin reported that the fund gained 100.9% in January 2023, bringing the fund’s inception-to-January return to 2,866%.
FTX Says $8.9 Billion in Customer Funds Are Missing
Cryptocurrency exchange FTX has revealed a “massive shortfall” in crypto and fiat currency holdings. Billions in customer funds are missing from both FTX and its US subsidiary FTX US. New documents show the extent of the losses incurred by Sam Bankman-Fried’s crypto empire. On Thursday, FTX released a public presentation showing that FTX had $2.2 billion in exchange wallets and fiat accounts. Only $694 million of these assets were in the most liquid “Category A Assets.” FTX uncovered more assets than its less liquid “Category B Assets,” which include its own FTX Token. However, even these questionable holdings are insignificant compared to FTX’s deficits. The exchange’s balance sheet shows a net deficit of $8.6 billion. The massive shortfall is likely due to its sister trading firm, Alameda Research, unchecked borrowing. According to the presentation, Alameda Research borrowed around $9.3 billion from customer accounts before the bankruptcy. The trading company reportedly only had around $475 million in cash in its accounts as of Jan. 31. Ray continued to stress the inadequate record-keeping practices of the prior management.
Tourism in El Salvador up 30% since Bitcoin adoption
El Salvador’s adoption of Bitcoin as legal tender in September 2021 has triggered a notable surge not only for its gross domestic product (GDP) but also for the local tourism development. According to Salvadoran Tourism Minister Morena Valdez, the tourism industry in El Salvador has surged more than 30% since the adoption of the Bitcoin law in September 2021. Valdez noted that El Salvador’s Bitcoin adoption has also impacted the flow of tourist visits, increasing the number of tourists coming from the United States. Prior to the Bitcoin law enactment, the majority of visitors was coming from neighboring countries in the Central American isthmus. Now, as many as 60% of tourists come from the United States, she said.
OpenAI’s Sam Altman Says Artificial General Intelligence Can ‘Break Capitalism’
“I think capitalism is awesome. I love capitalism. Of all of the bad systems the world has, it's the best one — or the least bad one we found so far. I hope we find a way better one. And I think that if AGI really truly fully happens, I can imagine all these ways that it breaks capitalism. We've tried to design a structure that is, as far as I know, unlike any other corporate structure out there, because we actually believe in what we're doing. If we just thought this was going to be another tech company, I'd say, “Great, I know this playbook because I’ve been doing it my whole career, so let's make a really big company.” But if we really, truly get AGI and it breaks, we'll need something different [in company structure]. So I'm very excited for our team and our investors to do super well, but I don't think any one company should own the AI universe out there. How the profits of AGI are shared, how access to is shared and how governance is distributed, those are three questions that are going to require new thinking,” say Sam Altman in an interview with Forbes.
Under pressure, Eli Lilly cuts insulin prices
After years of price hikes on insulin, Lilly on Wednesday said people with diabetes would see 70% reductions on its most common versions. The prices of Humalog, the company's top insulin product, and Humulin will fall 70% in the fourth quarter, according to the company. The price of generic insulin lispro, which is the same product as Humalog, will drop May 1 to $25 a vial, which Lilly says is less than Humalog cost in 1999. Humalog and the generic version are rapid insulins used to control high blood sugar in adults and children with type 1 and 2 diabetes. Lilly also said it would cap out-of-pocket costs for its insulin at $35 a month at some retail pharmacies. More than 1 million American adults currently ration insulin because of its high costs.