Shares of Silvergate Capital (SI -8.70%) rose 17.6% in March, according to data provided by S&P Global Market Intelligence, well outpacing the S&P 500's 3.6% return. However, being a cryptocurrency-focused bank means that Silvergate Capital's stock price more closely correlates to the movements of Bitcoin (BTC 1.17%) than to the stock market. And Bitcoin was up 24% in March.
Let's start with why the cryptocurrency space as a whole was up in March, using Bitcoin as a proxy. In late February, Russia invaded Ukraine, an action that was met with severe economic sanctions from governments around the world. According to Coin Dance, Bitcoin transaction volume in Russia spiked immediately, likely because Russian citizens were moving to protect the value of their assets from the quick depreciation of the ruble.
Moreover, there was also strong demand for Bitcoin from large buyers -- called "whales" -- during March. For example, Luna Foundation Guard is a component of Terraform Labs, which runs the algorithmic stablecoin (a token whose value is tied directly to a government-backed currency) TerraUSD, and its counterpart token, Luna. Founder Do Kwon has decided it makes sense to have reserves in Bitcoin. So from March 22 through the end of the month, Luna Foundation Guard purchased more than 21,000 Bitcoins.
Another active Bitcoin whale in March was MicroStrategy. Through its fully owned subsidiary, MacroStrategy, it purchased 4,167 Bitcoins between Feb. 15 and April 4; it now owns over 129,000 Bitcoins total. However, MicroStrategy doesn't have the cash to keep buying Bitcoins at this rate. Therefore, it turned to Silvergate Capital for help.
On March 29, the two companies announced that Silvergate Capital had loaned MicroStrategy $205 million to buy Bitcoin; the loan is collateralized by MicroStrategy's existing Bitcoin holdings. Not many financial institutions would do this, and it's a clear demonstration of Silvergate Capital's growth in this niche.
Silvergate Capital stock was up in March thanks to a strong cryptocurrency market in general, as well as due to the ongoing growth of its business. For perspective, the loan to MicroStrategy was made through the company's Silvergate Exchange Network (SEN) Leverage segment. At the end of 2021, SEN Leverage was up to around $570 million in commitments. So a loan of $205 million to MicroStrategy is a big deal.
However, some analysts are bullish on Silvergate Capital for more than just enabling transfers to cryptocurrency exchanges and lending. According to TheFly.com, Bank of America analyst Brandon Berman has placed a $200 price target on the stock, based on his belief the company is well-positioned in the stablecoin space.
For background, Silvergate Capital purchased Diem Group from Meta Platforms in January. In the press release about the deal, management said it had "developed strong appreciation for its potential to enable a Silvergate-issued stablecoin that will power the future of global payments."
It's too early to know what this could mean for Silvergate Capital's ability to create long-term shareholder value. But it certainly signals that the company will be pushing the envelope in banking in 2022 and beyond.