This Crypto Bank Stock Has Raised Nearly 200% In The Last Three Months
In general, most bank stocks have fallen this year. But for the $ 2.6 billion financial company Capital of Silvergate (NYSE: SI), based in La Jolla, Calif., the story was completely different.
The bank carried out its initial public offering at the end of 2019 and for much of its public life, was trading between $ 13 and $ 16 per share. But in late September, the bank’s shares surged and (as of December 9) are trading at over $ 40 a share. The stock has appreciated by nearly 200% in less than three months.
Let’s meet this newcomer to the public markets and see what is driving the sharp increase in its share price.
There aren’t many banks that really understand cryptocurrency, but Silvergate is certainly one of them. The Bank has actually been around for a while, but several years ago it was predicted that cryptocurrencies such as bitcoin would one day be an investment asset.
As a result, the bank created its own digital currency payment system called Silvergate Exchange Network (SEN). SEN essentially serves as an intermediary between digital currency exchanges like Coinbase and institutional investors looking to trade crypto assets. The advantage is that SEN is a real-time payment network, which means it can clear transfers instantly 24 hours a day, 365 days a year. If you use a normal bank to log into a crypto exchange, transfers are only cleared during normal banking hours, which is not ideal for crypto assets that are constantly trading. In October, SEN surpassed $ 100 billion in lifetime transfer volume.
SEN has been great for the bank because it has allowed the company to bring in tons of non-interest bearing deposits, that is, those on which the bank does not have to pay interest. This ultimately helps to increase the overall margin of the bank. At the end of the third quarter, non-interest bearing deposits represented 95% of total Silvergate deposits. To say it’s absolutely exceptional would actually be a huge understatement. Most banks are happy to get 30% of total deposits from non-interest bearing sources. The cost of Silvergate deposits at the end of the third quarter was only 0.01%, which is again incredible even in this ultra-low interest rate environment.
SEN also helps generate non-interest income through deposit fees on its customers in digital currency. The bank’s non-interest income in the third quarter was 17% of total income, which is very good for a bank as small as Silvergate.
Silvergate also recently completed a pilot program on another interesting crypto product called SEN Leverage. SEN Leverage is a commercial and industrial product that allows clients to obtain a US dollar loan secured by bitcoin. These are very attractive because bitcoin is an extremely liquid form of collateral traded 24 hours a day, 365 days a year, and is therefore much easier to liquidate than other forms of collateral (like a house, for example). .
Some things to know
The stock’s performance seems to be at least partially linked to the bitcoin performance. If you look at the bitcoin and Silvergate price charts, the price of bitcoin and the price of Silvergate shares started to climb at the end of September. Silvergate CEO Alan Lane said during the company’s third quarter earnings call that the strong appreciation in bitcoin and the active trading environment has led to more transactions on SEN.
In addition, there is competition in space, with JPMorgan Chase, the largest bank in the country, recently product deployment which will market digital currencies. And there will likely be more competition as digital currencies become more mainstream. Lane said during the third quarter earnings call that he was not too worried because many crypto exchanges wish to have multiple banking partners. Also, as SEN’s network grows, it will only generate more income other than low cost interest and deposits. With a very good head start over its peers, Silvergate appears well positioned to succeed in a competitive environment.
There could be volatility
Considering the huge appreciation in the price of bitcoin over the past few months, I would expect the bank to generate strong profits in Q4, as there has likely been a lot of trading volume on the SEN.
While clearly a very successful bank in an exciting industry, the bank has just experienced tremendous growth and is now trading at around 270% of book value at the time of writing, it could therefore be a little volatile in the future. But if there is a downside and an opportunity to buy the stock at a lower valuation, I would definitely recommend doing so.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.