Silvergate Earnings Finally Catching Crypto Winter Chill

Crypto winter is finally catching up with Silvergate, whose unusual business model saw its mostly interest-free deposits zoom while yields on its investments rose.

The leading crypto bank gathers demand deposits from exchanges and crypto infrastructure providers that need to be able to tap their cash in a hurry. A boom in deposits, coupled with Federal Reserve tightening and an investment portfolio with more than half its holdings in floating-rate instruments sent profit soaring in recent quarters.

As the crypto economy has cooled and leading currency bitcoin’s price has stabilized at a lower level, trading volume has declined. The current environment leaves investors concerned that Silvergate’s deposits have dropped, as they did last quarter when they fell to $13.8 billion from $14.7 billion in the first three months.

On a year-over-year basis, Silvergate is still expected to report stunning figures, with net income up 83% to $42.9 million, and earnings per share on the adjusted basis used by Wall Street up to $1.40 from 88 cents a year ago.

But the tide seems to be turning. Jared Shaw, managing director at Wells Fargo
WFC
Securities said Silvergate may not be able to take as much advantage of rising bond-market interest rates as conventional banks because the liquidity needs of its customers require conservative investments. Wells Fargo earlier this month cut its full-year EPS outlook for Silvergate to $4.73 from $4.93, while slashing its 2023 forecast to $6.93 from $9.21.

Silvergate shares rose 5.2% on Monday to $70.65, though it remains far below the $239.26 it crested at in November.

The depressed crypto market also has implications for one of Silvergate’s growth initiatives: bitcoin-backed loans. Earlier this year, the bank made headlines by issuing a $205 million loan to analytics software company Microstrategy, which used the funds to buy bitcoin. However, with bitcoin’s price down 57% year-to-date, Shaw is not optimistic in the short-term about the business stream. “Clearly, with bitcoin pricing under pressure, people need to put more collateral down for that loan,” Shaw says. “I think the overall service use case for that is delayed and reduced.”

Investors will also be eager to hear an update on Silvergate’s plan to launch its own stablecoin by the end of the year. In January, the bank purchased Meta’s abandoned Diem project for $182 million. The stablecoin could make Silvergate’s existing payments network more efficient and the company’s CEO Alan Lane has said he believes U.S. dollar-backed stablecoins have the potential to change the traditional payments landscape.

“The reality is there is not a bank-regulated issue stable-coin in the world right now,” Michael Perito, managing director at Keefe, Bruyette & Woods, says. “They know the advantage of being a first mover and I think that’s what they’re trying to move to.”

While stablecoins generate excitement in traditional and crypto communities, regulatory uncertainty looms over the progress of these projects.

In 2013, Silvergate became the first to target crypto companies as business banking clients. Today, the bank acts as the plumbing behind much of the crypto economy by facilitating the conversion of dollars to crypto assets for clients like exchanges. Additionally, Silvergate offers institutional custody services, issues bitcoin-backed loans and runs its own real-time payments network. Silvergate banks for some of the largest companies in crypto including Coinbase, FTX, Kraken, Gemini and Circle.