What happened
Silvergate Capital (SI) enjoyed a good day on Monday. The stock rose by as much as 8.4% before its gains moderated -- it closed the session up by 3.1%. Investors somewhat appreciated the way Silvergate Capital distanced itself from last week's meltdown of crypto-trading exchange FTX.
So what
In just the past week, FTX's liquidity crisis and subsequent bankruptcy filing have dragged down pretty much every investment with ties to the cryptocurrency sector. The financial firestorm has undermined investors' trust in the stability of cryptocurrency trading services -- and, ultimately, the concept of crypto at all.
At the end of last Friday's trading, the FTX Token (FTT) at the heart of the FTX scandal had lost 86% of its value in seven calendar days. Bitcoin (BTC 3.49%), the oldest and largest name in the crypto market, fell by 13% over the same period.
Silvergate Capital plays an important role in the crypto sector, providing banking services and financial support to most crypto exchanges. That connection to the industry sent its shares down by 34% last week.
However, after Friday's closing bell, Silvergate Capital published a statement on its exposure to the FTX situation. It noted that FTX represented less than 10% of Silvergate's total client deposits as of the end of the third quarter. FTX doesn't have any other business outstanding with the bank beyond that modest deposit balance.
"Silvergate has no outstanding loans to nor investments in FTX, and FTX is not a custodian for Silvergate's bitcoin-collateralized SEN Leverage loans," said CEO Alan Lane. "To be clear, our relationship with FTX is limited to deposits."
Furthermore, the FTX chaos had no effect on the Silvergate Exchange Network (SEN) transaction-settling service, nor on the Bitcoin-backed SEN Leverage liquidity-boosting loans.
In other words, management argued that FTX's woes were occurring at a comfortable distance from Silvergate Capital. Apart from the fact that crypto prices broadly have fallen in the wake of FTX's collapse, Silvergate Capital investors shouldn't worry about the financial fallout from it -- or so says the company's management.
Now what
We haven't heard the last about the FTX crisis yet. The company and its backers are under investigation by several federal agencies and regulators. Also, the full financial damage it has done to other names in the crypto sector will not be known until the aftershocks ripple through the next couple of quarters' worth of earning reports across the industry.
That's true for Silvergate Capital, too. The company reported its third-quarter results in mid-October, and it isn't due to deliver its Q4 update until January. Until then, you'll see plenty of speculation and perhaps a couple of additional updates from the company's leadership team, and Silvergate's stock chart will probably look like a wild roller-coaster ride until further notice.
Investors who expect the crypto market to mature, stabilize, and produce solid long-term returns will have their patience sorely tested during this turbulent period. If you take management's statement regarding the bank's financial solidity at face value, you might want to pick up a few shares of Silvergate Capital while they're cheap.
All told, Silvergate Capital's stock is down by 32.2% since Nov. 4. It trades at 8.9 times trailing earnings and 4.6 times free cash flows. Some investors will call that a bargain. Others will see that valuation as a reasonable discount based on the company's exposure to cryptocurrency risks.
Every name connected to the FTX mess may fall a lot further from here, and any recovery could be years in the making. If you would rather not lose sleep over the crypto market's next round of unpredictable swings, there's no shame in staying on the sidelines during this price dip -- even if you still expect great things from cryptocurrencies in the long run.
