What happened
Shares of Silvergate Capital (SI 19.97%) fell 18.2% in January, according to data from S&P Global Market Intelligence. The bank and financial services provider is still reeling from the FTX scandal that rocked the cryptocurrency markets in late 2022, which had a relationship with Silvergate. Silvergate is down 82% over the past six months, making it one of the worst-performing stocks in the United States over that timespan.
So what
Silvergate Capital is a bank that provides services for the crypto market. It provided -- and still provides -- depository services for other companies that are in the crypto space. One of these customers was the infamous FTX, run by the fraudster Sam Bankman-Fried. After FTX declared bankruptcy and it was revealed that it stole upwards of $10 billion in customer assets, investors started to fear what exposure Silvergate had to this fraud, if any.
Turns out that the FTX scandal had a huge impact on Silvergate. At the end of 2022, Silvergate had $3.8 billion in deposits from digital asset (i.e. crypto) customers, down sharply from $11.9 billion at the end of September. It's not a good thing for a bank to lose the majority of its deposits in such a short time period. For one thing, it gives it less capital to make loans with. For another, it can cause a run on the bank, where all of its customers ask for their deposits back at once as they fear Silvergate lacks the liquid reserves to pay them. This situation can cause a bank to resell its loans at low prices to raise cash, which is what happened to Silvergate in late 2022.
The U.S. government is highly skeptical of Silvergate, with senators currently probing its relationship with FTX and wanting to know whether the bank had any knowledge of the fraud going on at the infamous crypto exchange. Nothing definitive has come out yet, but investors hate uncertainty and any hint of fraud, which probably caused some selling pressure for the stock last month.
OTC: SI
Key Data Points
Now what
Silvergate is in a tough spot right now. Its book value per share -- the best metric of intrinsic value for a bank -- fell from $46.55 in December 2021 to $12.93 at the end of 2022. The company posted a net loss of $1 billion in the fourth quarter of 2022, which is around double the current market capitalization of the firm.
Avoid buying the dip on Silvergate Capital. This company could be on the verge of bankruptcy if it doesn't turn things around soon.
