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Silvergate Plunges: Is Crypto Really Decentralized?
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Early Thursday, shares of crypto-related names got pounded to the downside after revelations emerged that the demise of the now-defunct crypto exchange FTX drove a bank run on Silvergate Capital . Silvergate is not an ordinary bank – the bank is largely focused on providing funding, payments, and loans to the crypto and digital asset industry.
What are the details?
In a premature earnings release, management divulged that crypto-associated deposits fell by nearly 70% for the fourth quarter. To compensate for the massive withdrawals, the company was forced to liquidate a large amount of debt it was holding on the balance sheet, resulting in more than $700 million in losses.
What now?
During the crypto boom, Silvergate was a leading stock. In fact, the company has been profitable every year since coming public and was growing revenue and EPS at a double-digit or triple-digit rate on quarterly. Investors eager to cash in on the crypto craze drove the stock up by more than 1600% in just two years’ time from 2019 to 2021.
Image Source: Zacks Investment Research
Pictured: SI: a classic boom and buster.
Now, Silvergate has gone from a company doing everything right to one that is in all the wrong places and spiraling downward. SI shares dropped by more than 40% Thursday morning, and the stock has nearly retraced all its massive gains since coming public. While the stock rose 27% yesterday, the gains were likely due to short covering and tax harvesting rather than new investment. The company has cut more than 40% of its workforce. Because management has decided to focus mainly on crypto (crypto accounts for nearly all the bank’s deposits), the recent crypto contagion is likely to have a massive impact on management’s strategy.
Is the Crypto Market Really that Decentralized?
The idea of decentralization is a cornerstone on which the cryptocurrency market is built. Decentralization refers to the fact that a network such as Bitcoin is not controlled by any single entity or organization (Satoshi Nakamoto created the network but never divulged his identity). Rather than relying on a centralized entity such as a government or singular person, Bitcoin uses a network of computers to validate transactions, ensure network security, and maintain the network.
While few dispute Bitcoin’s decentralization attributes, the centralization of the crypto industry itself has come to light in recent months. For example:
· FTX accounted for around $1 billion of Silvergate’s deposits.
· Silvergate has provided $100’s of millions in loans to Microstrategy (MSTR), a company that has adopted “the Bitcoin standard.
· Exchanges such as Binance and Coinbase (COIN - Free Report) account for a large portion of the crypto trading volume.
· Publicly traded crypto companies such as Riot Blockchain (RIOT - Free Report) and Marathon Digital (MARA - Free Report) are highly correlated.
Image Source: Zacks Investment Research
Pictured: Crypto-related stocks are highly correlated.
Outlook
Investors should be in no rush to participate in this industry. For now, the cloud of FTX hangs over crypto while profits dry up and uncertainty looms. Crypto-related securities are steeped in downtrends and have shown little signs of recovering soon. Stocks like Silvergate hold a worst possible Zack’s Ranking of 5. Be patient and wait for earnings estimates to improve and some semblance of certainty to return.
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Silvergate Plunges: Is Crypto Really Decentralized?
Early Thursday, shares of crypto-related names got pounded to the downside after revelations emerged that the demise of the now-defunct crypto exchange FTX drove a bank run on Silvergate Capital . Silvergate is not an ordinary bank – the bank is largely focused on providing funding, payments, and loans to the crypto and digital asset industry.
What are the details?
In a premature earnings release, management divulged that crypto-associated deposits fell by nearly 70% for the fourth quarter. To compensate for the massive withdrawals, the company was forced to liquidate a large amount of debt it was holding on the balance sheet, resulting in more than $700 million in losses.
What now?
During the crypto boom, Silvergate was a leading stock. In fact, the company has been profitable every year since coming public and was growing revenue and EPS at a double-digit or triple-digit rate on quarterly. Investors eager to cash in on the crypto craze drove the stock up by more than 1600% in just two years’ time from 2019 to 2021.
Image Source: Zacks Investment Research
Pictured: SI: a classic boom and buster.
Now, Silvergate has gone from a company doing everything right to one that is in all the wrong places and spiraling downward. SI shares dropped by more than 40% Thursday morning, and the stock has nearly retraced all its massive gains since coming public. While the stock rose 27% yesterday, the gains were likely due to short covering and tax harvesting rather than new investment. The company has cut more than 40% of its workforce. Because management has decided to focus mainly on crypto (crypto accounts for nearly all the bank’s deposits), the recent crypto contagion is likely to have a massive impact on management’s strategy.
Is the Crypto Market Really that Decentralized?
The idea of decentralization is a cornerstone on which the cryptocurrency market is built. Decentralization refers to the fact that a network such as Bitcoin is not controlled by any single entity or organization (Satoshi Nakamoto created the network but never divulged his identity). Rather than relying on a centralized entity such as a government or singular person, Bitcoin uses a network of computers to validate transactions, ensure network security, and maintain the network.
While few dispute Bitcoin’s decentralization attributes, the centralization of the crypto industry itself has come to light in recent months. For example:
· FTX accounted for around $1 billion of Silvergate’s deposits.
· Silvergate has provided $100’s of millions in loans to Microstrategy (MSTR), a company that has adopted “the Bitcoin standard.
· Exchanges such as Binance and Coinbase (COIN - Free Report) account for a large portion of the crypto trading volume.
· Publicly traded crypto companies such as Riot Blockchain (RIOT - Free Report) and Marathon Digital (MARA - Free Report) are highly correlated.
Image Source: Zacks Investment Research
Pictured: Crypto-related stocks are highly correlated.
Outlook
Investors should be in no rush to participate in this industry. For now, the cloud of FTX hangs over crypto while profits dry up and uncertainty looms. Crypto-related securities are steeped in downtrends and have shown little signs of recovering soon. Stocks like Silvergate hold a worst possible Zack’s Ranking of 5. Be patient and wait for earnings estimates to improve and some semblance of certainty to return.