The past year has been quite volatile for both stocks and cryptocurrencies. The S&P 500 index has lost about 1.5% in the past year, while Bitcoin has fallen 28% in that same time.
One stock that has outpaced both is Silvergate Capital (SI 23.33%), a bank that serves cryptocurrency customers. Silvergate Capital is up 9% over the last year and up more than 800% over the past five years. Some recent moves could help propel the bank's shares even higher. Specifically, there are two initiatives management talked about during its recent earnings conference call that should have investors excited.
Silvergate's purchase of Diem Group's assets helps it push into stablecoins
Silvergate closed its acquisition of Diem Group's intellectual property from Meta Platforms for $182 million in cash and stock in the first quarter.
Diem is a blockchain-based payment company with intellectual property for the development, deployment, and operations infrastructure to run a blockchain-based payment network. These assets are critical to running a stablecoin that is compliant with regulations.
Stablecoins look to mimic traditional currencies. A stablecoin is a cryptocurrency collateralized by the value of an underlying asset. Stablecoins have the benefits of cryptocurrencies -- transparency, security, immutability, and decentralization -- without the volatility. Stablecoins are used on cryptocurrency exchanges in place of cash.
Diem focuses on improving commerce between customers and merchants and improving cross-border payments. It looks to provide infrastructure for the 1.6 billion underbanked or unbanked population globally.
Stablecoins have exploded in growth in recent years and serve a meaningful role in the cryptoeconomy. The two largest stablecoins, Tether and USD Coin, have a market cap of $133 billion.
However, stablecoins have been the subject of criticism by regulators. In 2019, the New York attorney general opened an investigation of Tether. The main criticism came over the assets that were backing the stablecoins. In a settlement agreement, the attorney general's office found that Tether had no reserves backing the stablecoins in circulation for certain periods of time. As part of the settlement, Tether was prohibited from doing business in New York.
This is what gives Silvergate a considerable opportunity. Alan Lane, chief executive officer of Silvergate, said, "Through conversations with our customers, we identified a need for a U.S. dollar-backed stablecoin that is regulated and highly scalable to further enable them to move money without barriers."
Silvergate has been working with cryptocurrency customers since 2013 and has built up knowledge of the market. The company hopes to launch its stablecoin initiative later this year, and it could prove to be another smart move for the cryptocurrency bank.
Euro SEN will expand it to a new customer base
Another area of expansion for Silvergate is its euro Silvergate Exchange Network (SEN). The SEN is a payments network that allows customers to transfer U.S. dollars between various crypto exchanges. The euro SEN will be built on the same technology as the dollar SEN payment rails. Its major customers include Coinbase, Gemini, and Bitstamp.
The SEN has been a source of tremendous growth for Silvergate. This network has allowed the bank to increase its transaction revenue by 162% compounded annually over the past three years.
Thanks to the SEN, it has also increased its digital currency deposits by 130% in the past year alone.
A stellar stock for the long haul
Silvergate Capital continues to be an intriguing stock in the cryptocurrency industry. The company has a first-mover advantage, being one of the first banks to help cryptocurrency customers navigate an uncertain regulatory environment.
Its continued work on expanding its SEN and stablecoin initiative should propel its next phase of growth and help it continue increasing transaction revenue and deposits. The bank also trades at a forward price-to-earnings of 27. While this is high relative to other banking stocks, Silvergate's focus on cryptocurrency makes it far from a traditional bank that should be an excellent stock for the long haul.