Why Silvergate Capital Stock rose 5.3% on Wednesday

What happened

Silvergate Capital (IF 5.18%) rose on Wednesday, with the stock closing at $87.46, up 5.3% on the day.

Markets were flat for most of the morning, but surged in the afternoon and had their best day in weeks. The Dow Jones Industrial Average gained 439 points while the Nasdaq was up 247 points and the S&P500 increased by 72 points.

So what

Silvergate is one of the leading banks in the cryptocurrency industry. Its Silvergate Exchange Network (SEN) allows cryptocurrency exchanges to transfer money between them. As it is closely tied to cryptocurrency, Silvergate often moves more in tandem with crypto stocks than with banks. The stock is down about 40% since the start of the year.

But on a day when major cryptocurrencies were mostly down or flat, Silvergate likely surged with growth stocks as the Nasdaq rose 2.1%. The rise may have been linked to a speech by Fed Vice Chairman Lael Brainard, which the market may have interpreted as mildly positive.

Brainard reaffirmed what Fed Chairman Jerome Powell said in Jackson Hole, Wyoming, that the Fed is committed to doing what it takes to bring inflation down. This means raising interest rates. However, she also acknowledged the “risks associated with over-tightening” and added that at some point in the tightening cycle, “the risks will become more two-sided.”

The Fed also released its Beige Book on Wednesday, a report published eight times a year that summarizes economic activity. The latter report was mixed, saying the outlook for economic growth remained “generally weak” while noting that prices remained high. However, he added that price increases were slowing in nine of the Federal Reserve’s 12 banking districts.

Now what

Since the bank makes money on fees through transactions on its network, revenue will drop when cryptocurrency markets decline and volume slows. However, in a different sense, rising rates are not necessarily a bad thing for Silvergate. This is because it generates higher net interest income on its loans when rates rise, and since its deposits do not bear interest, it generates higher net interest income than most banks, relatively speaking, because it does not pay interest on deposits.

In the first half of the year, Silvergate saw net interest income jump 126% year over year. And with the continued rate increases, which are expected, net interest income is expected to increase even more, offsetting some of the crypto exchange network’s losses.

Dave Kovaleski has no position in the stocks mentioned. The Motley Fool recommends Silvergate Capital Corporation. The Motley Fool has a disclosure policy.

Sallie R. Loera