Why Silvergate Capital’s share price fell 31.8% in June

What happened

Silvergate Capital (IF -2.26%) fell hard in June, falling 31.8% for the month, according to data from S&P Global Market Intelligence.

Silvergate Capital is the holding company of Silvergate Bank, which caters to the cryptocurrency industry. Its performance is lagging S&P500, which fell 8.4% for the month, and the KBW Banking Index, which fell 12.9% in June. Silvergate Capital is down about 57% year-to-date to July 7.

So what

Silvergate is one of the leading banks in the cryptocurrency industry thanks to its Silvergate Exchange Network (SEN) – a real-time payment platform that facilitates crypto trading. As such, Silvergate is closely tied to the movement of the crypto markets, which have been crashing since late last year.

In early June, Silvergate fell sharply after Morgan Stanley (MRS -0.34%) Analyst Manan Gosalia downgraded Silvergate’s stock from overweight to equal weight due to this correlation.

The decline of crypto assets is well documented. The court-ordered liquidation of crypto-focused hedge fund Three Arrows Capital in late June after it defaulted is just the latest example. This news sent most crypto-oriented stocks plummeting.

But Gosalia said in his research note that Silvergate stands to benefit from aggressive pressure from the Federal Reserve to raise interest rates. The Morgan Stanley analyst called Silvergate “the most asset-sensitive bank” he covers, as it brings in a high percentage of non-interest-bearing deposits through its SEN platform. Since Silvergate pays no interest on these deposits, rising rates mean pure profit, which can be invested in other assets. Gosalia said Silvergate has “a 30% net interest income advantage from the first 100 basis point (1%) increase in interest rates.”

Now what

Silvergate had a lot of foresight to build its market-leading SEN platform and benefited greatly during the rise of cryptocurrency assets. But unfortunately, it is now overtaken by the crisis, even if its turnover continues to climb and its operating margin is 59%. Furthermore, its valuation is extremely low, given its long-term growth potential, with a forward price-to-earnings (P/E) ratio of around 11, down from 45 a year ago.

There is a lot of potential for the future, with interest rates likely to continue to rise for the foreseeable future. It also owns the stablecoin Diem, buying it after its partner, Meta Platforms (META -0.76%), bailed out earlier this year. And it has a critical first mover advantage with its SEN platform which should give it a big advantage over current and future competitors. But for now, investors should proceed with caution given the uncertain conditions in the crypto space.

Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a board member of The Motley Fool. Dave Kovaleski has no position in the stocks mentioned. The Motley Fool holds positions and recommends Meta Platforms, Inc. The Motley Fool recommends Silvergate Capital Corporation. The Motley Fool has a disclosure policy.

Sallie R. Loera