Why Silvergate Capital Stock is up 8.4% today

What happened

Silvergate Capital (IF 3.11%) had a great day Monday. The stock rose 8.4% before its gains moderated – it closed the session up 3.1%. Investors somewhat appreciated how Silvergate Capital distanced itself from last week’s collapse of crypto trading exchange FTX.

So what

Over the past week, FTX’s liquidity crunch and subsequent bankruptcy filing has sent down just about every investment related to the cryptocurrency industry. The financial storm has undermined investor confidence in the stability of cryptocurrency trading services – and ultimately the concept of crypto itself.

At the end of last Friday’s session, the FTX Token (FTT -9.22%) at the heart of the scandal FTX had lost 86% of its value in seven calendar days. Bitcoin (BTC 5.73%)the oldest and biggest name in the crypto market, fell 13% in the same period.

Silvergate Capital plays an important role in the crypto industry, providing banking services and financial support to most crypto exchanges. This connection to the industry caused its shares to fall 34% last week.

However, after Friday’s closing bell, Silvergate Capital issued a statement on its exposure to the FTX situation. He noted that FTX accounted for less than 10% of Silvergate’s total customer deposits at the end of the third quarter. FTX has no other ongoing business with the bank beyond this modest deposit balance.

“Silvergate has no outstanding loans or investments in FTX, and FTX is not the custodian of Silvergate’s bitcoin-backed SEN leveraged loans,” said CEO Alan Lane. “To be clear, our relationship with FTX is limited to deposits.”

Additionally, the FTX mayhem had no effect on the Silvergate Exchange Network (SEN) trade settlement service, nor on Bitcoin-backed SEN Leverage loans.

In other words, management argued that FTX’s woes were happening at a comfortable distance from Silvergate Capital. Besides the fact that crypto prices have generally fallen in the wake of FTX’s collapse, Silvergate Capital investors shouldn’t be worried about the financial fallout, or so management says. company.

Now what

We haven’t heard of the FTX crisis yet. The company and its backers are under investigation by multiple federal agencies and regulators. Additionally, the full financial damage it has caused to other names in the crypto industry will not be known until the aftershocks trickle down to the next two quarters of earnings reports in the industry.

This is also true for Silvergate Capital. The company released its third quarter results in mid-October and is not expected to release its fourth quarter update until January. Until then, you’ll see plenty of speculation and perhaps a few more updates from the company’s management team, and the Silvergate stock chart will likely look like a roller coaster ride until further notice. order.

Investors who expect the crypto market to mature, stabilize, and deliver strong long-term returns will find their patience tested during this turbulent time. If you take management’s statement about the bank’s financial strength at face value, you might want to buy some Silvergate Capital stock when it’s cheap.

In total, shares of Silvergate Capital are down 32.2% since Nov. 4. They trade at 8.9 times earnings and 4.6 times free cash flow. Some investors will call this a bargain. Others will see this valuation as a reasonable discount based on the company’s exposure to cryptocurrency risk.

Every FTX mess-related name can fall much further from here, and any recovery could take years. If you’d rather not lose sleep over the next round of unpredictable crypto market swings, there’s no shame in staying away during this price drop, even if you’re still expecting big things from long-term cryptocurrencies.

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

Sallie R. Loera