It has been a fantastic year for cryptocurrencies with the price of Bitcoin up 60% year to date and more than 140% over the last year. But the world of crypto extends far beyond that of just cryptocurrencies.
There are custodians that hold crypto, exchanges that help consumers and institutions trade, crypto miners, and many others involved in the ecosystem. It has been a great year for these businesses as well. As we head into 2022, here are two crypto-related stocks I'm excited about.
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1. Silvergate Capital
If you haven't heard about Silvergate Capital (SI 27.89%), it's really time to get acquainted. The licensed bank has built a real-time payments system called the Silvergate Exchange System (SEN) that enables two parties on the network to send large payment transactions to one another that are cleared instantaneously and can be sent at any time. This is advantageous for cryptocurrency exchanges and institutional traders, because cryptocurrencies trade all the time, and the U.S. doesn't operate on a real-time payments system.
Silvergate was the first bank to have this system up and running, and it has more than 1,300 customers on SEN. In the second quarter, SEN utilization, which is correlated with cryptocurrency spot-trading volume, hit nearly $240 billion. SEN has enabled Silvergate to bring in lots of deposits the bank doesn't pay any interest on, as well as fee income. The company has also been issuing lines of credit that are collateralized by Bitcoin.
The stock is up 86% year to date and was up a whole lot more before a recent pullback, but there is still much more to come for Silvergate. Namely, the bank will hopefully soon launch a pilot with Meta Platforms in which Silvergate will be the exclusive issuer of its Diem U.S. dollar stablecoin. Stablecoins are digital assets pegged to a currency or commodity.
Diem provides another massive opportunity on top of what SEN is already doing. Silvergate will be able to make money by collecting fees for the minting and burning of Diem. It will also earn interest on the reserve deposits backing Diem and gain access to new customers to sell other banking products to.
The President's Working Group on Financial Markets issued a recent recommendation that only insured banks be able to issue stablecoins. This could be good news for Silvergate, because if lawmakers follow this advice, that would create regulatory clarity. Like cryptocurrencies, the world of stablecoins is largely unregulated. Some see this as an advantage, but it also creates uncertainty, because a company may start pursuing an opportunity only to find out new laws or rulings make it too complex or expensive. If Congress requires licensed banks like Silvergate to mint and burn stablecoins, that will give the company the assurances it needs to roll out this part of the business with long-term sustainability.
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2. Customers Bancorp
On the surface, Customers Bancorp (CUBI 1.77%) really looks like a traditional bank. It has a lot of core banking operations, and investors are currently valuing it like a bank as well. But Customers is starting to look like an emerging crypto opportunity, because it has been developing a payments system similar to Silvergate. The Customers Bank Instant Token (CBIT) also allows different businesses on the network to send and receive payments instantly between one another. Considering Customers is planning to use CBIT to serve over-the-counter trading desks, cryptocurrency exchanges, market makers, and institutional funds, I would think it has a similar use case as Silvergate, while only a few banks are providing this kind of payments platform right now.
Not only did Customers launch this platform quickly, but it brought in $1.5 billion of non-interest-bearing deposits from customers before the platform was even fully launched. Customers is also building a lot of other innovative businesses outside CBIT, such as a technology and venture capital banking team and a digital small business banking platform.
What's also exciting about Customers is that despite a huge run-up of the stock this year, it still only trades at about 160% of tangible book value (what a bank would be worth if it were liquidated) and 7.5 times earnings. If its cryptocurrency business blossoms, that valuation should go much higher.
