What happened
Shares of the cryptocurrency bank Silvergate Capital (SI -20.00%) traded roughly 7.5% lower as of 1:33 p.m. ET today after a Wall Street analyst assigned the stock an "equal weight" rating.
So what
Morgan Stanley analyst Manan Gosalia attributed the rating due to Silvergate's strong correlation to crypto prices, which have struggled in volatile markets. Gosalia noted, however, that the bank is a big beneficiary of rising interest rates.
"Silvergate is the most asset-sensitive bank in our coverage, with a 30% benefit to net interest income from the first 100-bp (1%) increase in interest rates," Gosalia wrote in a research note.
The bank has built a proprietary real-time payments platform called the Silvergate Exchange Network (SEN) in order to better facilitate crypto trading, which occurs around the clock. As clients join SEN, they bring lots of non-interest-bearing deposits, which the bank of course pays no interest on. So when rates go up, Silvergate can invest its excess deposits into higher-yielding assets.
Gosalia said Silvergate's long-term potential is related to its potential future stablecoin offering, in which the bank has plans to mint and burn a U.S. dollar-backed stablecoin. Earlier this year, Silvergate acquired the assets behind the Diem stablecoin project from Meta Platforms.
Now what
While I agree with Gosalia that Silvergate could be held back by the crypto market in the near term, I feel like the stock is a clear buy as opposed to an equal weight rating. SEN has a first-mover advantage with its network and has proven to be incredibly successful at adding new clients.
Also, the Federal Reserve's overnight benchmark lending rate could end the year at around 3%, which would result in net interest income exploding at the bank. Finally, while Silvergate's stablecoin initiative could be difficult to mobilize I do not believe it is at all factored into the stock's valuation yet, meaning there could be huge upside if successful.
