This legendary value investor is going big on this crypto growth stock

The crypto winter has not been kind to the crypto bank Silvergate capital (SAY -2.82%)with the stock now down more than 60% after a parabolic run in 2020 and 2021.

But the stock got a good vote of confidence recently when legendary value investor Bill Miller, who runs the Miller Value Partners fund, announced he was buying Silvergate in the third quarter. While we don’t know exactly how much the fund bought, Miller said it was the fund’s largest new holding of the quarter. Let’s take a look at why Miller likes Silvergate and if he’s on to something big here.

A crypto business in high growth

Silvergate Capital is a licensed bank regulated by the Federal Deposit Insurance Corporation, but it’s far from your traditional lender.

Silvergate was the first bank to develop a real-time payment system called the Silvergate Exchange Network (SEN) specifically intended to better facilitate crypto trading between institutional investors and crypto exchanges. Because cryptocurrencies never stop trading and the US banking system does not work in real time, Silvergate solves a major pain point for these exchanges and traders.

Image source: Getty Images.

In addition, these exchanges and traders set up bank accounts with Silvergate when they are on board special education and bring many non-interest-bearing deposits to the bank. These are deposits on which the bank does not have to pay any return, and essentially serves as a free source of funding that it can invest in higher interest-earning assets.

Miller became famous when he hit S&P 500 15 years in a row as head of Add Mason Value Trust. He was caught making bad investments in Bear Stearns and AIG during the Great Recession, but has come roaring back in recent years. Miller also claims to be one of the largest individual shareholders in Amazon, after taking a massive position in the company in his personal portfolio during the Great Recession. Miller has also been a big believer in Bitcoin and had reportedly put half of his personal portfolio into the digital asset, as of the beginning of this year.

One of the reasons Miller likes Silvergate is because he believes it will become “the partner of choice for both exchanges and institutions in this rapidly evolving market.” After all, Bitcoin seems to be being adopted into the mainstream financial system more and more every day, with more Wall Street banks adding crypto-financial services. Silvergate has the first mover advantage in the area and continues to add a healthy flow of customers to SEN despite some deposit outflows and less SEN volume due to the weak investment activity in the area right now. Silvergate also plans to eventually roll out a US dollar-backed stablecoin, which management has delayed several times, but which could be a significant driver of future deposit and revenue growth.

Finally, Miller notes that most of Silvergate’s assets are floating rate and are financed by deposits that do not cost the bank any money. This makes the bank a big beneficiary of higher interest rates because it will boost the bank’s margins as returns increase on the assets Silvergate invests in. While a crypto winter has not been good for the stock and may continue to be challenging, Silvergate’s profits have increased this year , making it a rare crypto stock that actually benefits from higher prices.

An attractive entry point

As a value investor, Miller sees a big opportunity here, noting that the market rarely offers the opportunity to invest in a company that’s growing earnings at a 40% compound annual growth rate, while trading at 13 times annual earnings and just 8 times forward earnings .

I have to agree with Miller here. Silvergate offers great exposure to crypto without actually having any digital assets on the balance sheet.

Silvergate also offers the stability of a bank that can hedge against inflation under more normal scenarios when the Fed doesn’t make big rate hikes every month. When Bitcoin inevitably bounces back, which I believe it will eventually, Silvergate will be in a prime position to take advantage.