What happened
Silvergate Capital (SI +4.54%) rose higher on Wednesday with the stock price closing at $87.46, up 5.3% on the day.
The markets were flat for most of the morning but surged in the afternoon and had their best day in weeks. The Dow Jones Industrial Average gained 439 points while the Nasdaq was up 247 points and the S&P 500 rose 72 points.
So what
Silvergate is one of the leading banks for the cryptocurrency industry. Its Silvergate Exchange Network (SEN) allows cryptocurrency exchanges to transfer money between one another. As it is closely tied to cryptocurrency, Silvergate often moves more in tandem with crypto stocks than it does with banks. The stock is down about 40% year to date.
But on a day when the leading cryptocurrencies were mostly down or flat, Silvergate likely jumped with growth stocks as the Nasdaq rose 2.1%. The surge may have been related to a speech by Fed Vice Chair Lael Brainard, which the market may have interpreted as slightly positive.
OTC: SI
Key Data Points
Brainard reaffirmed what Fed Chair Jerome Powell said at Jackson Hole, Wyoming -- that the Fed was committed to doing what it takes to lower inflation. That means raising interest rates. However, she also acknowledged the "risks associated with overtightening" and added that at some point in the tightening cycle, "the risks will become more two-sided."
The Fed also released its Beige Book on Wednesday, a report issued eight times per year that summarizes economic activity. This latest report was a mixed bag, stating that the outlook for economic growth remained "generally weak" while noting that prices remained elevated. However, it added that price increases were moderating in nine of the 12 Federal Reserve bank districts.
Now what
Since the bank makes money on fees through transactions on its network, revenue will drop when the cryptocurrency markets are down and volume slows. However, in a different sense, rising rates are not necessarily a bad thing for Silvergate. That is because it generates higher net interest income on its loans when rates go up, and since its deposits are non-interest bearing, it generates higher net interest income than most banks, relatively speaking, because it doesn't pay interest on deposits.
In the first half of the year, Silvergate saw net interest income climb 126% year over year. And with continued rate increases, which are expected, net interest income should grow even more, offsetting some of the losses from the crypto exchange network.
