Why Silvergate Capital Stock gained 10% on Wednesday

What happened

Shares of Silvergate Capital (IF 11.15%) had gained 10.1% as of 3:05 p.m. ET on heavy trading volume. The jump was a welcome respite from Silvergate’s downward price trend in recent weeks, as the crypto-enabled bank was hit by the fallout from the financial meltdown of crypto exchange FXT. FTX concerns sent shares of Silvergate down 26% between Nov. 7 and Tuesday’s closing bell. Some of those dark clouds cleared up slightly on Wednesday.

So what

Silvergate’s 12% price drop last Friday began when institutional crypto trading service FalconX halted its use of the Silvergate Exchange Network (SEN) “out of an abundance of caution.” Investors feared that other crypto exchanges would follow, possibly damaging the SEN platform and causing a run on Silvergate itself.

Today, FalconX reassessed the situation and came to the conclusion that SEN is a safe place to do business. Therefore, the exchange is working as usual again on the Silvergate platform.

FalconX said the severing relationship with Silvergate “aligns with our standard process” during a time of financial crisis. “The concerns have subsided,” and it’s time to return to normal operating procedures, which involves relying on Silvergate’s trading network to settle crypto transactions against fiat currencies.

Now what

Silvergate’s return to FalconX’s good graces comes as no surprise, given the bank’s limited exposure to direct financial difficulties from the FTX scandal. As a Silvergate shareholder, I always find it encouraging to see Silvergate customers agree with the company’s own analysis. It’s a vote of confidence in Silvergate’s foundation and tax procedures.

Today’s rebound is far from a full recovery. Silvergate shares are still down 86% over the past year and the stock trades at just 4x free cash flow. It’s a good deal, and I might be able to pick up a few more shares while the sale lasts (but not right away, due to The Fool’s disclosure policy).

Anders Bylund holds positions at Silvergate Capital Corporation. The Motley Fool recommends Silvergate Capital Corporation. The Motley Fool has a disclosure policy.

Sallie R. Loera