Silvergate earnings finally catch crypto winter cooling

Crypto winter is finally catching up with Silvergate, whose unusual business model saw its largely interest-free deposits zoom while returns on investments rose.

The leading crypto bank collects required deposits from exchanges and crypto infrastructure providers who need to be able to drain their cash in a hurry. A boom in deposits, combined with tightening by the Federal Reserve and an investment portfolio with more than half of its holdings in floating-rate instruments, has sent profits skyrocketing in recent quarters.

As the crypto economy has cooled and the price of leading currency bitcoin has stabilized at a lower level, trading volume has decreased. The current environment leaves investors concerned that Silvergate’s deposits have fallen, as they did last quarter when they fell to $13.8 billion from $14.7 billion in the first three months.

On a year-over-year basis, Silvergate is still expected to report stellar numbers, with net income up 83% to $42.9 million, and earnings per share on the adjusted basis used by Wall Street up to $1.40 from 88 cents a year ago.

But the tide seems to be turning. Jared Shaw, CEO of Wells FargoWFC
Securities said Silvergate may not be able to benefit as much from rising bond market rates as conventional banks because the liquidity needs of customers require conservative investments. Wells Fargo earlier this month cut its full-year EPS outlook for Silvergate to $4.73 from $4.93, while its 2023 forecast was cut to $6.93 from $9.21.

Silvergate shares rose 5.2% on Monday to $70.65, although it remains well below the $239.26 it hit in November.

The depressed crypto market also has implications for one of Silvergate’s growth initiatives: peer-to-peer loans backed by bitcoin. Earlier this year, the bank made headlines by issuing a $205 million loan to analytics software company Microstrategy, which used the funds to buy bitcoin. However, with bitcoin’s price down 57% year-to-date, Shaw is not optimistic in the short term about the business flow. “Obviously, with bitcoin prices under pressure, people are going to have to put more collateral on that loan,” says Shaw. “I think the overall service use case for it is delayed and diminished.”

Investors will also be eager to hear an update on Silvergate’s plan to launch its own stablecoin by the end of the year. In January, the bank bought Meta’s abandoned Diem project for $182 million. The stablecoin could make Silvergate’s existing payment network more efficient, and the company’s CEO Alan Lane has said he believes US dollar-backed stablecoins have the potential to change the traditional payments landscape.

“The reality is that there is not a bank-regulated stablecoin issuance in the world right now,” says Michael Perito, CEO of Keefe, Bruyette & Woods. “They know the advantage of being a first mover, and I think that’s what they’re trying to move to.”

While stablecoins are generating excitement in traditional and crypto communities, there is regulatory uncertainty surrounding the progress of these projects.

In 2013, Silvergate became the first to target crypto companies as commercial banking clients. Today, the bank acts as the plumber behind much of the crypto economy by facilitating the conversion of dollars into crypto assets for customers such as exchanges. In addition, Silvergate provides institutional custody services, issues bitcoin-backed loans and operates its own real-time payment network. Silvergate banks for some of the biggest companies in crypto, including Coinbase, FTX, Kraken, Gemini and Circle.