What happened
The market continues to worry about the fallout of FTX's bankruptcy last week, which is hurting cryptocurrency-related stocks today. Some of the biggest moves aren't in cryptocurrencies themselves, but rather in the companies that make money off cryptocurrency trading and other financial services.
Shares of Silvergate Capital (SI 11.11%) fell as much as 16.9% in trading on Thursday morning, Coinbase (COIN 5.68%) was down as much as 7.5%, and Block (SQ 2.32%) was even down 4.6%. The stocks are down 9.3%, 3.7%, and 3.1% at 11:15 p.m. ET.
So what
John J. Ray III, who is leading the team administering FTX in bankruptcy, filed with the court this morning, outlining the financial situation of FTX and its related entities. Not only were there shocking revelations like payroll approvals via emoji, but corporate controls also appeared to be almost nonexistent.
Ray said, "Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here." For perspective, Ray led Enron through bankruptcy, so this is a pretty bad statement.
The implications continue to be felt across crypto, with Blockfi reportedly preparing to file bankruptcy, while Gemini and Genesis are restricting some activities. This could lead to not only lower trading and loan activity for Silvergate, Coinbase, and Block, but also financial risks if they're caught up in any collapses.
Silvergate Capital will be one to watch in coming days because investors have been worried about a run on the bank. After the market closed yesterday, the company said it had an average quarter-to-date digital asset customer deposits of $9.8 billion, which is down from $12 billion in the third quarter of 2022. It's safe to say investors are leaving, but Silvergate has only given an average of deposits in Q4, so we don't know the pace of the bank run right now.
Now what
Crypto companies have different kinds of risks in the current market, but they sometimes trade in the same direction short term. In the case of these three companies, I think Coinbase and Block have relatively low risk because they aren't loaning out the money the way Silvergate and FTX were, so they're not in danger if people want to pull assets out.
Silvergate may take more time to fully understand. The company's deposits are clearly falling, but management didn't give a full explanation of how much has been pulled out in the last 10 days since the FTX collapse began. CEO Alan Lane will give an update at 2:55 p.m. ET at a conference, which should clear up some questions.
In any crypto investment, caution is the key today. Selling and watching from the sidelines isn't a bad idea, even if you don't think the worst will happen to any specific crypto company, because we've seen risks that may be bigger than they appear.
