The Fall of Crypto-Friendly Bank Silvergate
Dear Investors,
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.
On Twitter…
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.
#NotFinancialAdvice
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.
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