What happened
Shares of the crypto bank Silvergate Capital (SI 9.76%) popped as much as 18% earlier today after the hedge fund Citadel Securities, which is run by Ken Griffin, disclosed a 5.1% stake in the embattled stock. As of 1:45 p.m. ET today, shares of Silvergate traded roughly 15.6% higher.
So what
In addition to Citadel, Susquehanna Securities in another filing today disclosed a 7.5% stake in Silvergate. Yesterday, George Soros' fund revealed a fresh stake in Silvergate as well.
Silvergate Capital has seen its stock ravished by more than 85% over the last year. The bank operates a real-time payments network that enables crypto traders and exchanges to transfer fiat dollars between one another in real time, which makes crypto trading more efficient. The model enabled Silvergate to grow deposits extremely fast following the pandemic.
But after the bankruptcy of FTX, which had been a big client of Silvergate's, there was a crisis of confidence in the crypto industry and Silvergate saw close to 70% of its deposits leave the bank in the fourth quarter of 2022, essentially amounting to a bank run. Silvergate survived but destroyed a ton of shareholder equity in the process because the bank had been forced to sell bonds while they traded at a big loss to cover deposit outflows.
Now, Silvergate has become a battleground stock. It's the second-most shorted stock in the market right now with more than 72.5% of its shares being shorted. However, some still believe the bank has a future and maybe even a bright one long term.
What now
The big overhanging concern right now is whether Silvergate will face some kind of regulatory action relating to its relationship with FTX that would either severely damage the bank or put it out of business.
Most of the market seems to think so, and the U.S. Justice Department has launched an investigation into Silvergate's role in the FTX debacle, although the bank hasn't yet been formally accused.
While I had previously been a long-term shareholder of Silvergate, I decided to sell my position following a recent short squeeze that pushed the stock into the $20s. Given the regulatory uncertainty and the heavy short interest, shares will remain volatile in the near term and there's no guarantee that Silvergate won't face some kind of big regulatory action. That said, if Silvergate does avoid a big regulatory punishment, I would certainly consider purchasing the stock again.
