Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.
Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.
Motley Fool Issues Rare “All In” Buy Alert
You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More
Shares of Silvergate Capital (SI -10.75%) had another rough day on Friday. The regional bank at the heart of the cryptocurrency sector keeps facing new fallout from the FTX exchange’s financial meltdown. Silvergate’s stock traded 11.7% lower at 12:24 p.m. ET.
Silvergate already issued a statement, explaining that its exposure to financial damage from the FTX crash is limited to “less than 10%” of the bank’s $11.9 billion in customer deposits. The exchange had not signed any loans from Silvergate, and FTX was never an active custodian on the Silvergate Exchange Network’s (SEN) liquidity products.
This Wednesday, the company also posted a mid-quarter update with some updated financial data. Excluding assets owned by FTX and related parties, Silvergate’s client deposits now stand at $9.8 billion, suggesting that other customers have withdrawn approximately $0.1 billion of their funds in recent weeks. At the same time, SEN is running as expected and Silvergate had no loan losses to report.
FTX is now run by a different leadership team, headed by CEO John J. Ray III. If the name sounds familiar, you might recall him managing the bankruptcy proceedings of Enron, GMAC ResCap, Nortel Networks, Eastman Kodak, and Overseas Shipholding Group, just to name a few. Given Ray’s background, I don’t think FTX will get back into the business of managing cryptocurrency trading platforms. Still, FTX asset holders such as Silvergate certainly have an experienced name in charge of reimbursing some of the losses.
However, the sands are still shifting. This morning, institutional crypto-trading platform FalconX told its clients that it would stop using Silvergate SEN “out of an abundance of caution for our customers.” Instead, FalconX will manage its back-end business with the Coinbase-backed stablecoin USD Coin (USDC 0.06%) until further notice. Tweets sharing this news triggered this morning’s price drop in Silvergate shares.
For the record, USD Coin was unmoved by the news and stayed perfectly pegged to a value of $1. Coinbase fell more than 7% for a different set of FTX-related reasons.
How bad is the FTX mess? Well, I already mentioned Ray’s long history of managing through financial calamities, and his presence alone cannot be a good sign. But it gets worse.
“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here,” Ray wrote in the petition for Chapter 11 proceedings.
Silvergate’s price drop on Friday reflects the way this event is rattling investors’ nerves. That’s a legitimate reaction to a scary situation, but I think the price drop is overdone at this point.
It’s never a good thing when one customer crashes so hard that you lose the trust of other clients. However, Silvergate stands at an arms-length distance from the FTX scandal and routinely passes the financial stress tests every American bank must perform. For example, Silvergate’s Tier 1 leverage ratio stood at 10.7% in the recently reported third quarter. That measure of financial health, where a higher score is better, lands in the top 20% of all banks in the third quarter.
The next few quarters will be painful as the crypto sector as a whole works its way through the FTX debacle, but I’m not worried about Silvergate buckling under the pressure. Silvergate’s stock looked undervalued before today’s drop. Now that it has lost 30% of its value in five short days, it strikes me as a slam-dunk buy.
Just make sure you agree with my assumptions and analysis before you hit that buy button, though. The road ahead will definitely be rocky, so you have to be prepared for some wild price swings in the months ahead.
Anders Bylund has positions in Coinbase Global, Inc. and Silvergate Capital Corporation. The Motley Fool has positions in and recommends Coinbase Global, Inc. The Motley Fool recommends Silvergate Capital Corporation. The Motley Fool has a disclosure policy.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
Market-beating stocks from our award-winning analyst team.
Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/19/2022.
Discounted offers are only available to new members. Stock Advisor list price is $199 per year.
Calculated by Time-Weighted Return since 2002. Volatility profiles based on trailing-three-year calculations of the standard deviation of service investment returns.
Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool’s premium services.
Making the world smarter, happier, and richer.
Market data powered by Xignite.
