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Here's Why Silvergate (SI) is Tumbling on Binance-FTX Led Chaos

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A leading provider of capital and banking services to cryptocurrency exchanges, Silvergate Capital Corporation has lost more than 35% so far this week as the Binance-FTX drama continues to shake the cryptocurrency market. The stock also hit a 52-week low of $32.25 yesterday, even as the broader market sentiments turned bullish on better-than-expected inflation data.

It all began on Monday night as one of the leading crypto exchanges, FTX, ran into a huge liquidity crunch. While earlier in the day, FTX CEO Sam Bankman-Fried had assured investors that everything was fine with the company’s assets, Binance’s (FTX’s biggest competitor) Changpeng Zhao – popularly known CZ – disclosed that his company was selling its holdings in FTX’s native token FTX Token .

This development spooked investors, which led to a major sell-off and insolvency issues at FTX. With investors demanding withdrawals to the tune of almost $6 billion, FTX wasn’t in the position to do so. So, CZ stepped in and announced his intention to acquire FTX.

This somewhat mollified the investors but the damage had been done. Further, more drama unfolded as after proper due diligence, Binance backed away from rescuing FTX citing reports of “mishandled customer funds and alleged U.S. agency investigations.” Though FTX is engaged in talks with “number of players” to raise capital, ambiguity surrounding the developments continues to weigh on investor sentiments.

Amid these dramatic developments, no single entity directly or indirectly related to the crypto and digital assets industry was untouched. The Bitcoin prices have plunged more than 15% since Nov 6 and even touched a 52-week low of $15,682.69 on Wednesday. Likewise, Ethereum USD tanked close to 20% in the same time frame.

Now coming back to our main story, the Silvergate Capital stock.

The company began serving digital currency providers in 2013 and has been gradually improving its market share by leveraging its technology platform and expertise to develop solutions for several large U.S. digital currency exchanges and investors globally. As of Sep 30, 2022, SI had more than 1,670 digital asset customers and $12 billion as digital asset customer deposits.

The company has its own Silvergate Exchange Network, with FTX as one of its customers. So obviously, investors turned bearish on the stock as the above-mentioned events took place over the past few days.

SI management came out with statements that further reinforce the fact that the company is not in any financial trouble. Alan Lane, the company CEO said, “As a prudentially regulated bank, we manage our balance sheet to provide liquidity for our clients while maintaining a strong capital position in excess of the well-capitalized status required by federal banking regulations.”

As of Sep 30, 2022, Silvergate Capital had a tier 1 leverage ratio of 10.71%, common equity tier 1 capital ratio of 40.72%, tier 1 risk-based capital ratio of 46.54% and total risk-based capital ratio of 46.63%.

Lane further added, “In addition to our securities available-for-sale portfolio, which amounted to $8.3 billion at September 30, 2022, as a federally regulated banking institution, we have the ability to borrow from the Federal Home Loan Bank and the Federal Reserve Bank, further strengthening our liquidity position.”

Our Take

Things seem to be overblown for Silvergate Capital. The company’s stock bore the brunt of these developments just because it is a significant player in the space that offers banking services to these and many others in the cryptocurrency industry.

As Silvergate Capital doesn’t hold any crypto assets of its own, it should be able to avoid any risk arising out of the FTX-Binance situation. As for the company’s future financial performance is concerned, it is showing resilience even during the crypto winter and is expected to maintain its profitability as digital assets continue to gain popularity among younger investors.

Also, investing in cryptocurrencies like Bitcoin and Ethereum is not the right move for every investor. As Silvergate Capital is required to follow several reporting and capital regulations for public companies and banks, it is an attractive choice for risk-averse investors who want exposure to digital currencies.

Silvergate Capital stock has plunged almost 78% so far this year. At $32.68 per share, the stock is currently trading at a price/tangible book value of 0.85X, way below the Zacks Finance sector average of 4.37X. Thus, this Zacks Rank #3 (Hold) company’s beaten-down stock price and attractive valuation might be a good entry point for investors.

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