Silvergate Capital Corporation (NYSE:SI, $194.77): “Stable Growth”
By: Ayden
Domico, AIM Student at Marquette University
Summary
• Silvergate Capital Corp. (NYSE:SI) is the holding company for
Silvergate Bank and is a leader in the FinTech and digital currency markets
while also offering traditional banking services.
• The
company’s Silvergate Exchange Network (SEN) is an advanced payments platform
that allows customers to exchange both fiat money and cryptocurrencies in
real-time while also providing institutional-grade access to loans backed by
Bitcoin.
• Adopting cryptocurrencies as
early as 2013 has pushed Silvergate to become an experienced leader in digital
currency transfers, which has allowed the firm to capitalize on new products
such as Bitcoin and Ethereum derivates.
• Silvergate’s partnership with
Meta (formerly known as Facebook) to become the sole minter and burner of the
social media platform’s stablecoin, Diem, has been delayed by regulatory issues
but may soon come to reality.
• The U.S. Treasury has recently
urged Congress to pass legislation that would allow regulators to treat
stablecoins and their issues like banks, putting Silvergate at an advantage as
the firm is already a chartered bank in the State of California and is a
Federal Reserve member bank.
• Silvergate Capital CEO Alan
Lane embraces regulation and has recently reiterated that stablecoins are a
“real big opportunity for the future.”
Key
points: Silvergate has far outpaced expectations throughout this year
and last on the heels of the Silvergate Exchange Network and its vast
capabilities while remaining a ‘Hold.’ With a take rate of just about 0.0051%
per transaction and near-immediate payment processing, the SEN boasts features that
competitors simply cannot match. The network also now allows for access to
institutional-level loans secured with Bitcoin as collateral, using internal
controls to mitigate the risk of price volatility. This addition, called SEN
Leverage, has quickly grown to already comprise over 16% of Silvergate’s
overall loan portfolio.
CEO Alan Lane’s early emphasis on
the adoption of digital currencies has begun to pay off for Silvergate, as the
SEN’s ability to seamlessly transfer cryptocurrencies in real time has
propelled it to become the transaction platform for a number of crypto
platforms in common use today. With this experience, Silvergate again has a leg
up on the competition when it comes to new products such as Bitcoin and
Ethereum futures contracts offered by the Chicago Mercantile Exchange. No other
bank and few other transactional platforms offer this kind of access to their institutional
clients.
While Silvergate is currently
capitalizing on the multi-functionality of the SEN, the firm’s largest
opportunity going forward may be the partnership with Meta to become the
exclusive issuer of the social media giant’s stablecoin Diem. The coin will be
used for transactions on Meta’s various platforms, such as FaceBook and
Instagram, and Silvergate will be the sole minter, burner, and regulator of the
digital currency. The coin’s transactions will occur on the SEN, increasing
both transaction volume and the number of users utilizing the platform. The highly
anticipated Metaverse will also likely feature Diem as its official currency,
as Meta is the company behind both the stablecoin and the virtual reality world
that is looked at as the future of human interaction.
The rollout of Diem has been
delayed over this past year due to regulation issues, as stablecoins are very
new investment vehicles and lawmakers and advocates want to prevent ‘runs’ on
them. However, a new report issued by the President’s Working Group on
Financial Markets of the Treasury Department led by Janet Yellen recommended
that stablecoins be required to be issued by federally chartered banks so that
they may be properly regulated. This gives Silvergate an advantage and natural
moat to deter competition, as Silvergate Bank has a charter and has been
operating as a typical commercial bank aside from their cryptocurrency ventures
since 2009.
Recently, Silvergate has begun to
be covered by major Wall Street analysts as it has continued to grow
exponentially, attracting investor attention around the world. After analyst
Ken Zerbe of Morgan Stanley initiated coverage of Silvergate at “Overweight” in
early, October, the firm’s stock price rose about 30% in the week that
followed. With its recent meteoric rise, this stock will continue to garner
more publicity and analysis, which should translate to increased trading volume
as time goes on.
What
has the stock done lately?
Silvergate has been the financial
sector’s darling performer of the COVID-19 Pandemic, rising from an
all-time-low price of $7.63/share on March 20, 2020, to a record high of $239.26/share
on November 22, 2021, representing an increase of ~3,036% in just under two
years. While much of this growth occurred between 3Q20 and 2Q21, Silvergate’s
price is again rising at an increasing rate, climbing ~116% between today and
September 21st of this year. Silvergate closed at $194.77 on
November 22nd.
Past
Year Performance: Silvergate has risen in price by a staggering
611.86% over the past 12 months, outperforming the market benchmark almost 19
times over. While much of the firm’s growth has been realized throughout the
pandemic, a large opportunity remains for Silvergate as the sole issuer of
Meta’s stablecoin Diem; I expect continued growth at a stable rate, especially
as this coin is rolled out within the ‘Metaverse’ and analysts begin to look at
this stock more closely.
My
Takeaway
Silvergate has been one of the
top-performing stocks throughout the market since the onset of the COVID-19
Pandemic, and with its original investment thesis fully intact and more
substantial growth opportunities such as the release of Meta’s stablecoin Diem
on the horizon, Silvergate Capital Corporation remains a “hold” for the
foreseeable future. Furthermore, increased analyst coverage will steadily
increase investor confidence in this new, big player in the financial
space.
