So far, 2023 has been a mixed bag for stock investors, with ups and downs reflecting the depth of uncertainty on Wall Street. Amid pessimistic predictions for the economy, stocks have thus far been relatively resilient overall, but they haven't been able to put together the beginning-of-the-year rally that so many market participants have been impatient to see. Thursday morning didn't bring any clear direction, with futures contracts on stock indexes mixed in the premarket session.
The cryptocurrency market also suffered big declines in 2022, with investors hoping for a rebound in the coming year. However, the fallout from recent events has continued to hurt stocks in the industry. Silvergate Capital (SI 11.11%) reported just how hard it had to work to deal with the rapidly changing situation, and investors are more uncertain than ever about what the crypto-focused bank's future will look like and its potential impact on the entire digital asset market.
Silvergate stock drops as deposits plunge
Shares of Silvergate plunged 40% in premarket trading on Thursday morning, losing twice as much ground as they gained in Wednesday's trading session. The bank's release of preliminary fourth-quarter financial metrics and a business update sent chills up shareholders' spines, given the sheer size of asset movements during the past several months.
Total deposits from Silvergate's digital asset customers dropped from $11.9 billion at the end of September to $3.8 billion at year-end. The bank reported that about $150 million of its deposits were from customers that have filed for bankruptcy protection. To be clear, Silvergate appears to have adequate capital to cover its deposit commitments, with cash and equivalents adding up to $4.6 billion.
However, Silvergate's statement showed just how hard it had to work to raise capital as deposits flowed out of the bank. Silvergate sold $5.2 billion in debt security holdings during the fourth quarter, and it incurred a loss of $718 million as a result of those sales. The bank also had to take the somewhat extreme step of selling certain securities that it had previously identified as intending to hold until maturity.
What's next for Silvergate?
The pain might not be over for Silvergate. The bank said that it expects to sell off a portion of its remaining $5.6 billion in debt securities in early 2023 to reduce its wholesale borrowings, and that will result in an additional impairment charge on Silvergate's fourth-quarter financial report.
Silvergate is also taking aggressive steps to preserve its business. Changes to its product portfolio could help eliminate less profitable lines of business, while work on controlling expenses could help shore up its bottom line. The biggest hit will come from layoffs, as Silvergate will make a 40% reduction in its headcount, causing 200 employees to lose their jobs.
Even with the changes, though, Silvergate is doubling down on serving its core digital asset customers. Its Silvergate Exchange Network continues to maintain volume levels consistent with where they were earlier in 2022, and the SEN Leverage product has kept producing loans that perform as expected with no losses or forced liquidations to date.
The collapse of the FTX cryptocurrency exchange sent shockwaves across the digital asset space, and Silvergate is just the latest in a number of crypto stocks that have seen a big impact on their businesses. Interestingly, major cryptocurrencies have seen their prices hold steady and even move up slightly in the opening days of 2023, but that doesn't mean there won't be bumps along the way in the months to come.
