What happened
Shares of Silvergate Capital (SI 11.11%) had gained 10.1% as of 3:05 p.m. ET on heavy trading volume. The jump was a welcome respite from Silvergate's plunging price trend in recent weeks, as the crypto-friendly bank was hit by fallout from the FXT crypto exchange's financial meltdown. FTX-related concerns drove Silvergate's stock 26% lower between Nov. 7 and Tuesday's closing bell. Some of those dark clouds lightened up slightly on Wednesday.
So what
Silvergate's 12% price drop last Friday started when the institutional crypto trading service FalconX halted its use of the Silvergate Exchange Network (SEN) "out of an abundance of caution." Investors feared that other crypto exchanges might follow suit, perhaps damaging the SEN platform and causing a bank run on Silvergate itself.
Today, FalconX has reassessed the situation and reached the conclusion that SEN is a safe place to do business. Therefore, the exchange is doing business as usual on the Silvergate platform again.
FalconX said that the paused Silvergate relationship "aligns with our standard process" in times of financial stress. "Concerns have abated," and it's time to get back to normal operating procedures -- which involves relying on Silvergate's trading network to settle crypto-based transactions against fiat currencies.
Now what
Silvergate's return to FalconX's good graces is no surprise, given the bank's limited exposure to direct financial pain from the FTX scandal. As a Silvergate shareholder, I still find it heartening to see that Silvergate's customers agree with the company's own analysis. It's a vote of confidence in Silvergate's fiscal foundation and procedures.
Today's bounce is far from a full recovery. Silvergate shares are still down by 86% over the last year and the stock trades at just 4 times free cash flows. That's a bargain, and I just might grab some more shares while the fire sale lasts (but not right away, due to The Fool's disclosure policy).
