Crypto Bank Silvergate is now the second most shorted stock in the US
Silvergate Capital (NYSE: ), one of the vital banking pillars of the crypto-ecosystem, has reported 72.50% of the volume of its shares shorted to FINRA. This makes Silvergate the second most shorted stock in the US. How did it happen?
Silvergate Shorting increases
Every other week, the Financial Industry Regulatory Authority (FINRA) collects data on publicly traded companies to issue a Short Interest Reporting. As of February 9, the crypto bank’s parent company is Silvergate Capital Corp. the second most shorted US stock.
However, MarketWatch already ranks Silvergate first at 73.08% of float shorted. This is the total number of shares available for public trading, at ~20.2 million SI shorted of 27.6 million float. FINRA’s short interest reporting is important because an increase in short interest indicates investor confidence in the stock.
In the case of Silvergate, investors’ rising short positions indicate that the stock could fall further. Short sellers borrow such stocks to sell them, making them “short” because they do not own what they sold. However, if the stock they shorted falls in value, they can buy it back at a lower price to return to the lender, thus withdrawing the profit between the purchase and sale price.
Year-over-year, Silvergate shares are down 87% as daily short volume increased by the end of 2022.
The question is: why is Silvergate now the most important short rate target?
Silvergate’s rejection examined
Regulated by the Federal Deposit Insurance Corp. (FDIC), the Federal Reserve and the California Department of Financial Protection and Innovation, Silvergate bank has served as the payment pillar for the largest crypto exchanges.
Image credit: Silvergate Capital
The cryptobank’s business model owes its success to real-time payment rails, the Silvergate Exchange Network (SEN). This allows crypto exchanges to facilitate fiat-to-crypto trading 24/7, which would not be possible in traditional banking. Silvergate was the first bank to make it happen, gaining a prominent first-mover advantage.
Therefore, Silvergate’s business model depends on the total volume of crypto trading. As well as holding deposits like other banks, Silvergate’s SEN Leverage service allows institutional investors to take loans as collateral. In this way, borrowers can leverage their Bitcoin holdings.
For example, in March, Michael Saylor’s MicroStrategy took out a $205 million BTC-backed loan to buy more bitcoin.
After the FTX stock market crash, Silvergate reported a net loss of $1 billion for . This was accompanied by a dramatic drop in deposits, from Q3’s $12 billion to $7.3 billion. To curb the ongoing bank run in the 4th quarter, which reached $8.1 billion by January, Silvergate borrowed $4.3 billion from the Federal Home Loan Bank (FHLB) of San Francisco.
Silvergate used its securities as collateral, which continue to weaken. So far this year, the SI share is down 10.54%. To further reduce losses, the bank laid off 40% of its workforce on January 5. This was in addition to selling $5.2 billion of debt securities in Q4 at a loss of $718 million.
To further worsen Silvergate’s financial position, Moody’s Investors Service downgraded Silvergate Capital and the bank itself to “junk”. Specifically, the bank’s long-term deposit rating from Baa2 (lower-medium) to Ba1, with a negative outlook.
Legal hassles on top of liabilities
On top of financial stress, Silvergate also faces legal challenges. The bank was first hit with a class-action lawsuit on December 14 for having “directly aided and abetted FTX’s fraud and breach of fiduciary duty via first-hand participation in the commingling of funds, improper transfers and lending of customer money.”
It is now widely known that Sam Bankman-Fried used FTX to transfer user funds to Alameda Research in violation of the users’ terms of agreement. In addition to the complaint, the Justice Department began investigating Silvergate’s FTX dealings in early February.
Silvergate to be Wall Street backed?
The main market maker in the /short squeeze, Citadel Securities, revealed its interest in the crypto space last September. Backed by both Citadel Securities and Charles Schwab, they announced the EDX Markets crypto exchange.
A bank lane like Silvergate would go a long way in making the Wall Street-backed crypto exchange happen. In this light, Citadel Securities disclosed a 5.5% stake in Silvergate, consisting of ~1.7 million shares valued at $25 million.
The world’s largest asset manager, BlackRock, has also increased its stake in Silvergate Capital from 6.3% to 7.2%. BlackRock previously partnered with Coinbase (NASDAQ: ) to open up crypto investing to institutional players.
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