When people talk about fintech, they're usually talking about Square (SQ 3.25%) or PayPal (PYPL 1.26%), the two companies that have been amazing performers over the last decade. Silvergate Capital (SI -3.76%) is a much smaller player in this space but is making some really big moves. It's the first bank to move into the crypto space and has created a trading exchange for institutions that want to invest in this asset class.
And now, Silvergate is producing Meta Platform's (META 3.01%) new crypto coin, a stablecoin called Diem. Silvergate is going to navigate the regulatory waters for its big-tech partner and produce the coin. It will also bank all the Facebook users who want to use the coin.
In this episode of "The 5," Taylor Carmichael explains why he owns Silvergate stock. This segment was recorded live on Oct 11.
Jason Hall: What is your favorite fintech stock? Maybe it's a bank, maybe it's not. Maybe it's what a bank will look like to somebody else. Taylor, kick us off.
Taylor Carmichael: Oh, wonderful. I'm going to talk about Silvergate Capital. This is probably my favorite stock in the market right now, and I think it's the most undervalued company that I can think of in regard to where it might be one day and where it is now. Silvergate, to give a little background, they've been around for over 20 years. But they got very interested in cryptocurrencies. When crypto started, this is almost a decade ago, they wanted to get the crypto trading exchanges as banking clients. They wanted to solve a pain point for the crypto exchanges, which is, crypto has traded 24/7, and how do you do that via the banking system? They created their own trading exchange network called Silvergate Exchange Network, or the SEN. Through this, institutions who want to buy $100 million of crypto or whatever can do so 24/7. They make the buy on the crypto exchange, but the dollars change bank accounts at Silvergate.
Silvergate has been the bank for crypto trading for a while now. They're first mover in this area. They don't bank any of the crypto assets. All they do is collect the dollars, and these are all sitting in trading accounts, so they're not paying any interest. So it's free money for Silvergate. They're basically very conservative in how they make money. They've just been making money on the interest, on all this money that's sitting in their accounts. They've got this huge first-mover advantage. They've got a couple of thousand institutions as clients of the bank. They've got all the major exchanges as clients of the bank. That's really nice. As interest rates go up, which they're going to have to eventually, Silvergate is going to make a huge amount of money because again, this money is sitting and they don't pay any interest out, but they collect a lot of interest coming in. That's gotten me really excited. But the main thing that's exciting about Silvergate is this deal they have with Facebook. Facebook is coming out with their own coin called Diem, and what their goal is, is to bank the underclass worldwide. This is, I think Goldman--
Hall: Hundreds of millions of people around the world do not have access to financial services.
Carmichael: This is like a $250 billion market opportunity for Facebook. It could even move the needle for Facebook. But Facebook's a trillion-dollar company. Silvergate's 4 billion and they're critical to this whole deal. There have been four stable coins that have come out. Silvergate did them all. They are very familiar with banking regulations. They are very familiar with financial regulations. They're going to be the bank behind Facebook's move into this territory. I'm just hugely excited about Silvergate. I think they are absolutely going to be an acquisition for somebody, for PayPal, for Square, maybe for Morgan Chase (JPM 0.24%). I don't know who's going to want to acquire them at some point, but this company's just too valuable in the spot where they are. I'm extraordinarily bullish on this company right now.
Hall: Taylor, this is the second time I've heard you talk about this bank and it gets more interesting to me every time I hear from you.[laughs]
Carmichael: I love it. I'm just very excited about it. I wish somebody would tell me the bad because I've seen no flaws in this thing and I'm sure there's something I haven't thought of.
Hall: I would say the closest thing that I can think of off the top of my head, as you said, that eventually interest rates have to go up, the Fed is going to say, "Hold my beer," I guess. We've seen negative interest rates in Europe. I think you're right at some point, but I guess that the bigger thing is we just don't know how long. It could take a hell of a lot longer than maybe we expect. I think the big thing here is that you have to treat this as a wonderful business that's making some money in this area right now. Eventually, like with all banks that can be a catalyst, that just might take longer than we expect. Maybe if there's any blind spot that's in, that's not a bad blind spot, that's just maybe returns take longer than you expect.
Carmichael: At this stage, you're really not buying them for that. That's just something to keep in the back of your mind. You're buying them for the crypto. I guess if you're extremely bearish on cryptocurrencies and you think the whole thing is going to just fall apart, then you shouldn't be invested in the stock because they are all in on this. So is Square, so is PayPal. If you are invested in those, you really might want to take a look at Silvergate because that's the small-cap version of where this is heading.