Shares of the crypto bank Silvergate Capital (SI -3.76%) are up nearly 37% since the close of trading last Friday after an analyst issued a note regarding the company's correlation to Bitcoin (BTC 1.36%). Shares may also be moving because of a report released by President Joe Biden's Working Group on Financial Markets regarding stablecoins.
On Monday, an analyst at Morgan Stanley noted in a report that Silvergate's stock price movement was correlated with that of Bitcoin. If you've been following the business, then this should come as no surprise because the bank's entire business model is built on its real-time payments network that supports and facilitates crypto trading.
Because the payments system can clear transactions instantly and at any time, and Bitcoin and other cryptocurrencies trade around the clock, the payments system is appealing to institutional crypto traders and crypto exchanges.
With Bitcoin absolutely taking off toward the end of 2020, Silvergate's stock has followed its ascent. On its recent earnings call, Silvergate management confirmed that transfer volume on its payments network is correlated to crypto spot-trading volume.
Also on Monday, the President's Working Group on Financial Markets issued a report on stablecoins suggesting that Congress pass laws that only enable insured banks to issue stablecoins because banks are a highly regulated industry.
This would appear to be good news for Silvergate because it is a licensed bank. Additionally, Silvergate has formed a partnership with Meta Platforms' (META 3.01%) Facebook to become the exclusive issuer of its Diem stablecoin. Management on the bank's third-quarter earnings call hinted that it was waiting for the president's report to come out before launching the Diem pilot, so hopefully the pilot can be launched soon.
Even after the big run-up in its stock price, Silvergate still only trades at a roughly $5.7 billion market cap, so perhaps there is a whole new side of the market waking up to the stock.
At roughly $214 per share, Silvergate trades at 79 times earnings. That's high, but I continue to hold my shares for the time being due to all of the momentum in the business, particularly with the potential launch of the Diem pilot.