Shares of cryptocurrency bank Silvergate Capital (SI -8.49%) traded nearly 13% higher this week, as of 12:30 p.m. EDT Thursday, after a bank analyst initiated coverage of the stock.
Morgan Stanley analyst Ken Zerbe not only initiated coverage of the bank, but also assigned Silvergate an overweight rating, meaning Zerbe believes Silvergate can perform better than other stocks in the banking sector.
Silvergate is a niche bank because it has developed a proprietary payments platform that facilitates instantaneous transactions between cryptocurrency traders and cryptocurrency exchanges. The bank also originates lines of credit collateralized by Bitcoin (BTC -0.72%) and is going to be the exclusive issuer of Facebook's Diem U.S. dollar stablecoin.
In a research note, Zerbe said Silvergate has the "widest risk-reward of any bank we cover," projecting that earnings at the bank will grow at least 37% every year through 2025.
I certainly agree with Zerbe that this bank should outpace the industry on earnings growth. As the bank brings more clients onto its payments platform, it will reap more fee income as clients use other products at the bank. Silvergate also has a ton of excess liquidity it can deploy into loans like its Bitcoin-collateralized line of credit, as well as securities.
While there could be some regulatory risk on certain products and its stablecoin business, Silvergate doesn't hold any cryptocurrencies on its balance sheet, which puts me at some ease. I think the potential reward here clearly outweighs the risk.