What happened

Shares of Silvergate Capital (NYSE:SI) fell 24.6% in April, according to data from S&P Global Market Intelligence. The crypto-focused bank plunged despite better-than-expected earnings reported during the month as high-growth stocks that had big gains in 2020 were pummeled by fears over rising rates and taxes.

Although Silvergate is a bank, it is valued much higher than a traditional lender thanks to its exposure to the booming cryptocurrency space.

Bitcoin icons on a translucent circuit board animation.

Image source: Getty Images.

So what

On April 20, Silvergate reported first-quarter earnings. Revenue of $31.1 million grew 52.4% year over year, while earnings per share of $0.55 grew 189% year over year. Both figures beat expectations. Silvergate seemed to hit an inflection point in its crypto exchange trading on its SEN platform, as well as in crypto-related deposits and its new SEN leverage product, which issues loans based on its clients' cryptocurrency holdings held at the bank.

Metric

QoQ Growth

YoY Growth

Digital currency customers

13.9%

29.9%

SEN transfers

181.3%

856.9%

Transaction revenue

86.8%

317.6%

SEN leverage loans

138.2%

1,472.0%

Data source: Silvergate Capital. Chart by author. QoQ = quarter over quarter. YoY = year over year.

Despite these booming growth numbers, Silvergate still fell hard. The reason is likely concerns over inflation and higher rates, along with concerns over hikes in the top capital gains rate. All of those factors together likely led to investors selling off huge winners that came into the month selling at frothy multiples. After all, Silvergate surged a whopping 1,400% over the 12-month period ending March 31 and entered the month trading at an 85 P/E ratio -- far higher than a typical bank, which trades in the low to mid-teens. Therefore, it was highly vulnerable to any sort of rotation or profit-taking.

Now what

Silvergate has a lot of exciting potential as a first-mover in cryptocurrency-related institutional banking, so it should probably trade at a higher valuation than a typical bank. Still, remember that Silvergate isn't a cryptocurrency itself, but a bank that makes money on loans and transaction fees. Therefore, investors should take care to think about the company's actual earnings power rather than merely riding crypto-price momentum.

After its April plunge -- which has continued into May -- Silvergate now trades at a more reasonable 37 times this year's earnings expectations. But that P/E ratio is still much higher than a typical bank, so Silvergate will have to show continued strong earnings and innovation to turn this negative momentum around.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning 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 richer.