CRYPTOCURRENCY STOCK SHOWS RESILIENCE IN THE FACE OF BITCOIN'S PLUMMET

Thousands of cryptocurrencies and blockchain technology are being adopted by a wide range of companies to support the sector - from asset managers to banks to crypto mining companies. Bitcoin's (BTC 0.10%) price has dropped more than 52% this year, and crypto stocks have followed suit. Nevertheless, one crypto stock, in particular, has demonstrated remarkable resilience. Even though the stock price of the company has fluctuated at times, the business continues to operate very well.
Sustainable Business Models
Silvergate Capital went public in 2019 (SI -5.58%). Having recognized early on that cryptocurrencies would be investable assets, the organization provided critical infrastructure for institutions to trade cryptocurrencies with crypto exchanges. The Silvergate Exchange Network (SEN) is a proprietary real-time payments system maintained by Silvergate that allows multiple parties on the network to transfer funds throughout the year, 24 hours a day, seven days a week. Due to the fact that the U.S. banking system does not operate all the time, whereas cryptocurrencies do, SEN is a very efficient way to trade cryptocurrencies.
In spite of the fact that Silvergate does not hold any cryptocurrency on its balance sheet, the bank benefits from large deposits of non-interest-bearing deposits brought into the bank by its SEN clients. There is no interest paid on these deposits, and the bank can invest them in the bond market or in loans and make money on the spread. These deposits are not only not subject to interest, but SEN has also helped the bank increase deposits rapidly.
Bitcoin is a controversial investment due to its finite supply, but Silvergate's business model makes it an inflation hedge as interest rates increase, as are the yields on bonds and many of its loans. Silvergate, despite the plunging price of Bitcoin, generated a record $1.13 in earnings per share in the second quarter of this year. Due to a 40% growth in loans and bonds revenue from the first quarter, the bank's revenue increased.
There Is Continued Strength In The Credit Quality
Silvergate's stock was sold by investors during the second quarter because of two concerns: how deposit levels would trend, and whether there may be forced liquidations or losses on its specialized lending product, SEN Leverage. Bitcoin is used to collateralize the SEN Leverage line of credit in U.S. dollars. Despite the fact that Silvergate requires borrowers to strongly collateralize their U.S. dollar loans with Bitcoin, the product appears to be very safe. Aside from this, Silvergate safeguards its collateral with partner custodians, and Bitcoin trades around the clock, making it arguably the most liquid type of collateral available.
Silvergate provided a $205 million term loan to the business intelligence and Bitcoin buyer MicroStrategy (MSTR -10.62%) in March. MicroStrategy used the proceeds to purchase additional Bitcoin. When MicroStrategy warned in May that if the price of Bitcoin fell below $21,000, there could be a margin call, some investors may have been concerned. Silvergate's credit was still in good standing at the end of the second quarter with no forced liquidations. As a result, Silvergate still has extremely high levels of capital. The CEO of SEN Leverage, Alan Lane, stated on the Q2 earnings call that "you are not going to see this as a high multiple of our capital.".
Current Trends In Deposits
As Following its listing on the stock exchange, the bank has experienced its first decline in average digital currency deposits since going public. The amount decreased from $14.7 billion in the first quarter to $13.8 billion in the second quarter. The deposits of the bank are a very important driver of profitability for the institution, so it is not what investors are looking for. Nevertheless, the price of Bitcoin has fallen from more than $45,500 at the end of Q1 to less than $20,000 at the end of Q2. It is also interesting to note that the average deposit levels during Q2 varied greatly, with a high of $17.6 billion and a low of $12.60 billion.
Silvergate's management blamed the wide variance in deposit levels on "significant dislocations that occurred throughout the broader ecosystem, which was partially caused by the collapse of various digital asset platforms. However, Silvergate did not experience any customer losses as a result of these events and continues to pay no interest on deposits. There were 85 new customers added to SEN in Q2, bringing the total to 1,585. According to Lane, the pipeline of prospective customers remains "robust," with 300 prospects.
Being the first bank to launch such a network, Silvergate has a first-mover advantage, which makes its network more attractive with growth. Clients also need to wait a long time to join SEN, which suggests they're taking a long-term view of the crypto industry.
Future Perspectives
SEN's model is sustainable through the ups and downs of the crypto cycle, according to Silvergate. The company makes more money on its deposits when rates rise, and SEN Leverage loans are highly collateralized and extremely liquid.
 While Bitcoin might fall in the near term, in the long term I believe both Bitcoin and crypto trading are here to stay; this makes the infrastructure Silvergate offers very attractive and valuable, especially as the network grows. We remain bullish on the stock.

By Rashmi Goel