Back in 2013, Silvergate Capital (SI 34.00%) became interested in the rise of cryptocurrencies and sought to acquire the major trading exchanges as banking clients. The bank created the Silvergate Exchange Network to allow the crypto exchanges and their institutional clients to move dollars 24/7.
The bank is now almost entirely focused on serving the crypto industry. It has 93 crypto exchanges as banking clients, along with 771 institutional investors. On this episode of The Five, Motley Fool contributors Jason Hall and Taylor Carmichael and analyst Auri Hughes talk about their favorite fintech stocks. Silvergate is Taylor's favorite small-cap in this space. This discussion was recorded live on Aug. 31.
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Jason Hall: I'm really interested in hearing about the company you want to talk about here.
Taylor Carmichael: Silvergate Capital, ticker, SI. It's a small company, small cap, $3 billion market capitalization. They're a tiny little bank out in California. They've been around for over 20 years. They've been profitable for a long time. They were a boring bank forever, and they got really interested in cryptocurrencies. And cryptocurrencies, they were there at the very beginning. Management decided "We want to get the trading exchanges as banking clients," and they wanted to solve problems for the crypto exchanges. Because this fintech, this is a new thing, it's a new currency and they're going to run into federal regulation at some point, having a bank on your side can really help you. What they did is they built this trading exchange called the Silvergate Exchange Network, SEN, and through that network, it solved the pain point for all the trading exchanges like Coinbase (COIN +3.98%) and Gemini and the various ones. Through this network, institutions who want to trade cryptocurrencies, $100 million or whatever, they can do it 24/7 through Silvergate's network. Silvergate has all the major exchanges in as clients. They've also got a bunch of institutions as clients. Basically, at this point, the old bank is gone, and all they're doing is crypto. They're the bank for the crypto industry, and they're tiny. That's the amazing thing. It's just a $3 billion market cap. Their profit margin is 40 percent. Their revenue growth is 99 percent. Their numbers are amazing. All they have in their bank is cash. They don't actually bank, they don't hold the cryptocurrencies. What they do is hold the dollars, and all these traders park dollars at Silvergate so they can move the dollars back and forth. They do the trade on Coinbase or whatever exchange, and the dollars change accounts at Silvergate. Silvergate, the way they make money, they have all these dollars in this account and they don't pay any interest in their non-interest-bearing accounts. It's free money for Silvergate, and they basically get the interest on all of these deposits, and their deposits have gone up dramatically, as you can imagine.
Jason Hall: Almost $12.3 billion in total assets at the end of last quarter.
Taylor Carmichael: It's gone really big, and they have two other big things that are going forward. One is they got a deal with Facebook (FB +0.76%), which is amazing because Facebook's a $500 billion company, but they need to work with this $3 billion company. When you see that sort of value need, to me, that's just a huge opportunity for the little company to become a much bigger company. Facebook is creating a stablecoin, and what they're trying to do with that stablecoin is provide banking services to all the underbanked around the world who use Facebook but don't have a banking account, and to be able to save money, change money, and just to use their coin. Facebook's point, that's a reason for creating a cryptocurrency. Well, all of the stablecoins that are out there are done through Silvergate. Silvergate's the expert for all of this stuff. Facebook has signed them up to do that. This is just a really underappreciated, under-the-radar stock. My cost basis is $15 or something. It's a little over $100 now. I would just love Fools to take a look at it and tell me if there's anything wrong with it because I'm just in love with this company right now.
Jason Hall: Those economics look really interesting. [laughs] There's no doubt about that.
Auri Hughes: That sounds very compelling, I'm going to have to put it on my watch list.
Jason Hall: There you go.
Taylor Carmichael: The interesting thing is crypto was really big earlier in the year, so the stock zoomed up in December and zoomed higher. But even when crypto cooled, the stock didn't actually cool with it because their numbers are still going just based on all the trades that are happening. It's not just Bitcoin (BTC +4.79%), it's all the other cryptocurrencies that get traded along with it. Often, people just talk about Bitcoin.
Jason Hall: It's interesting to see how the cryptocurrency use-cases continue to play out and more companies become involved in it. Like Facebook is looking to use it to solve problems for people in the real world. It'll be interesting to see how that continues to play out. A company like Silvergate, that's really cool because they found a banking angle where they can be the experts and then leverage that. That's going to be fun.
