Why Silvergate Capital Stock rose almost 18% in March

What happened

Shares of Silvergate Capital ( IF -1.80% ) rose 17.6% in March, according to data provided by S&P Global Market Intelligence, significantly outpacing the S&P500yield of 3.6%. However, being a cryptocurrency-focused bank means that Silvergate Capital’s share price is more closely correlated to the movements of Bitcoin ( BTC 1.12% ) than on the stock market. And Bitcoin rose 24% in March.

So what

Let’s start with why the cryptocurrency space as a whole was on the rise in March, using Bitcoin as a proxy. In late February, Russia invaded Ukraine, an action that was met with severe economic sanctions from governments around the world. According to Coin Dance, the volume of Bitcoin transactions in Russia immediately increased, likely because Russian citizens were moving to protect the value of their assets from the rapid depreciation of the ruble.

Image source: Getty Images.

Additionally, there was also strong demand for Bitcoin from large buyers – known as “whales” – in March. For example, Luna Foundation Guard is a component of Terraform Labs, which runs the algorithmic stablecoin (a token whose value is directly tied to a government-backed currency) TerraUSDand its equivalent token, Moon. Founder Do Kwon decided it made sense to have Bitcoin reserves. Thus, from March 22 to the end of the month, Luna Foundation Guard purchased more than 21,000 Bitcoins.

Another Bitcoin whale active in March was MicroStrategy. Through its wholly owned subsidiary, MacroStrategy, it purchased 4,167 Bitcoins between February 15 and April 4; he now owns more than 129,000 Bitcoins in total. However, MicroStrategy does not have the money to continue buying Bitcoin at this rate. Therefore, he turned to Silvergate Capital for help.

On March 29, the two companies announced that Silvergate Capital had loaned $205 million to MicroStrategy to buy Bitcoin; the loan is secured by MicroStrategy’s existing bitcoin holdings. Few financial institutions would, and this is a clear demonstration of Silvergate Capital’s growth in this niche.

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Now what

Silvergate Capital’s stock rose in March on the back of a generally strong cryptocurrency market, as well as continued growth in its business. For perspective, the loan to MicroStrategy was made through the company’s Silvergate Exchange Network (SEN) leverage segment. By the end of 2021, SEN Leverage reached approximately $570 million in commitments. A $205 million loan to MicroStrategy is therefore a big deal.

However, some analysts are bullish on Silvergate Capital for more than just enabling transfers to exchanges and cryptocurrency lending. According to TheFly.com, Bank of America Analyst Brandon Berman has placed a price target of $200 on the stock, based on his belief that the company is well positioned in the stablecoin space.

As a reminder, Silvergate Capital purchased Diem Group from Metaplatforms in January. In the deal’s press release, management said it had “developed a strong appreciation of its potential to enable a Silvergate-issued stablecoin that will power the future of global payments.”

It’s too early to tell what this might mean for Silvergate Capital’s ability to create long-term shareholder value. But it certainly signals that the company will push the boundaries of banking in 2022 and beyond.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

Sallie R. Loera