What happened

Shares of Silvergate Capital (SI 2.44%) sank 36.6% in December, according to data from S&P Global Market Intelligence. The bank, which focuses on serving the cryptocurrency industry, is facing increasing pressure from customers, lawyers, and the government over its connection with the disgraced cryptocurrency exchange FTX, which was a depositor at Silvergate. 

Things have been going poorly for the bank in recent months. After soaring as much as 1,000% in 2021 and early 2022, shares of the bank are now down 85% in the past three months. 

So what

The finance world was rocked in early November, when it was revealed that Sam Bankman-Fried had been funneling customer deposits from his cryptocurrency exchange, FTX, to try to make up for gigantic losses at his hedge fund, Alameda Research. The theft is estimated to be upwards of $8 billion and went toward a variety of things, including paying for lavish real estate properties. Now he's in custody and awaiting trial.

Many analysts are interested in what other companies are connected to the FTX scandal. One of them is Silvergate Capital, where FTX/Alemada Research had bank accounts. In a press release, Silvergate executives claimed that FTX accounted for less than 10% of its $11.9 billion in customer deposits as of the end of September. This did not assuage investor fears, with Silvergate shares moving sharply downward after the news broke in early November.

To add to these fears, in early December a lawsuit was filed against Silvergate, alleging that it aided and abetted FTX's fraud against customers. Investors were probably spooked even further by this news. If Silvergate gets indicated along with the FTX executives, it's likely to lose its bank charter and be forced to shut down. That would be terrible news for shareholders.

Now what

Even though Silvergate claimed FTX made up less than 10% of deposits, that didn't stop its other customers from pulling funds from the bank. This week, Silvergate reported that it had just $3.8 billion in customer deposits at the end of December, compared with $11.9 billion three months prior.

Massive withdrawal requests can be devastating to banks, and it is possible a run on the bank is forming. Whatever ends up happening, Silvergate looks to be in dire shape, meaning you should avoid the stock at all costs.