Silvergate Capital (SI -12.11%) stock is sinking after it reported Q3 2022 earnings on Monday. The shares fell by more than 20%, even as the digital asset bank said its cryptocurrency customer base continued to grow. The rub? Crypto assets on balance decreased by a huge amount from last year. The company is also delaying the launch of a new blockchain product amid regulatory scrutiny.

Silvergate remains a promising company if you believe crypto will eventually make a comeback. Signs in Silvergate's report point to a lot of big institutional investors believing as much as well. But is this next-gen bank stock a buy during a long and dark crypto winter?

How did we get here anyways?

A crypto winter refers to the depressed prices for cryptocurrencies compared to recent highs. With easy money flowing during the zero-interest rate environment of 2020 and 2021, speculation in the young crypto industry was rampant. But now the U.S. Federal Reserve is trying to reel things back in with its aggressive interest rate increases, which are aimed at taming inflation. Higher interest rates mean a lower present value for speculative assets -- especially crypto. 

Top digital assets Bitcoin (BTC -0.27%) and Ethereum (ETH 0.25%) help illustrate this epic rise and fall. While still much higher in value than before the pandemic, Bitcoin and Ethereum are down more than 70% from the all-time highs they reached in late 2021.

Bitcoin Price Chart

Data by YCharts.

That brings us to Silvergate. The company's flagship product, Silvergate Exchange Network (SEN), provides a 24/7 exchange for digital currencies and U.S. dollars and euros. It was built for Silvergate's institutional investor banking clients that want to send and receive money between their accounts and those of their customers. More recently, a Bitcoin-based lending product was added to SEN. 

Given that the crypto winter is approaching its one-year anniversary, it was widely expected that Silvergate's crypto exchange-based revenue would eventually get hit hard. The third-quarter results show the freeze is starting to set in.

Silvergate is feeling the cold of the crypto winter

On the surface, Silvergate's Q3 financials looked good. Digital asset customers continued to grow, rising to 1,677, compared to 1,585 at the end of last quarter and 1,305 a year ago. Clearly, there is still institutional investor interest in crypto. 

Earnings per share jumped 13% from Q2 to $1.28, and were up 45% from Q3 2021. However, this was largely due to higher interest rates. Silvergate is still deploying the enormous influx of deposits it received from institutional investors in recent years. Like any bank, new capital to invest is good when you're investing in interest-bearing securities (bonds), and when the interest rates on those bonds are rising. 

Silvergate can thank the Fed's aggressive interest rate hikes this year. Silvergate said its net interest margin (a measure of the income a bank earns on interest rate-bearing assets, minus what it pays out in interest on deposits and other sources of funding) was 2.3%. That compares to just under 1.3% last year.

Rising interest rates are masking some weakness related to the precipitous fall in crypto prices, though. Silvergate said its digital asset customer deposit value was $12 billion in Q3, down from $13.8 billion in Q2. True, $12 billion is still higher than the $11.2 billion in deposits in Q3 2021, but if this trend persists as crypto winter lingers it will eventually hurt Silvergate's earnings.

Some really interesting news to watch

There are some additional points to keep an eye on. During the earnings call, Silvergate Chief Executive Officer Alan Lane said the anticipated rollout of a U.S. dollar-based stablecoin won't happen this year. Silvergate acquired the stablecoin assets from Diem (which was headed up by Facebook, now Meta Platforms (META -1.41%)) early in 2022 to help accelerate its development of this blockchain-based product. Silvergate has said there is considerable interest among its clients for a blockchain payments system to be added to SEN. 

Lane assured analysts on the call that the stablecoin rollout isn't being held up because of technology issues. Rather, given the blowup of some crypto companies and the collapse of the stablecoin Terra (USTC -3.71%), regulators are tapping the brakes on new crypto projects that could disrupt the stability of the financial system's plumbing. At this point, Lane and the top team can't say when regulators will give Silvergate's new system the go-ahead.

Nevertheless, Silvergate Capital still has some good things going for it. It's still getting new interest in crypto investing, and it's adding new features to SEN. Crypto winter is slowing this growth story big time, and it's hard to say when things will start to thaw. At this point, Silvergate stock is at the very least interesting. More pain could be in store given the crypto market (and stock market) turmoil. But at less than 15 times trailing 12-month earnings, this could be a top crypto economy stock to consider nibbling a bit on right now. Just remember to keep those bets, if any, very small, as crypto is a fast-developing and wild market.