Wednesday, December 15, 2021

An International Equity holding: Silvergate Capital Corporation (NYSE:SI, $194.77): “Stable Growth” By: Ayden Domico, AIM Student at Marquette University

 Silvergate Capital Corporation (NYSE:SI, $194.77): “Stable Growth”

By: Ayden Domico, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


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.

Source: FactSet

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. 

Source: FactSet