Silvergate Capital, a crypto-focused bank, believes that the bear market affecting the entire crypto industry is not over yet. Moreover, their CEO believes that the effects could be adverse in the coming quarters, but he is bullish on crypto lending.
Over the next few quarters, the crypto industry could still pose problems for some crypto exchanges and funds. However, at some point, this will all be over, and we’ll just wait for what the next catalyst will be.
Allan Lane, CEO and former TradeFi banker
Given the broader global economic reset, investors should not compare the current price decline to previous ones. Digital assets have fallen in line with macro trends such as rising rates and inflationary pressures.
Despite rising 33% the previous week, Silvergate stock has lost 42% of its value this year. The VanEck Digital Transformation (DAPP) ETF is up 15% in the past week while falling 67% this year. Global equity markets, particularly those in stocks considered riskier, have been hit by rising rates and fears of recession. The tech-heavy Nasdaq Composite Index has lost nearly 25% of its value this year.
Favorable in the long term
Due to the crypto downturn, analysts were expecting a dismal quarter for various crypto businesses, from exchanges to miners. Still, Silvergate’s second-quarter earnings defied expectations.
The second quarter of 2018 saw a 34% increase in US dollar transfers. Additionally, net income grew 85% year-over-year, according to The Silvergate Exchange Network (SEN), a fiat on-ramp for bitcoin markets.
Silvergate stuck to what it knows best and avoided FOMO. Thus, he was able to avoid the pitfalls of the bear market. Lane said they are trying to stay in their lane and not follow the current fad. They focus on what they do well and on solving problems for their consumers.
According to Canaccord Genuity, risk management was an important factor in Silvergate’s results. In a letter to clients, Canaccord equity research analyst Joe Vafi noted one critical factor. Despite significant volatility in the current crypto price, a risk management program has not led to any loan write-downs.
Given the development engines used by the company, Vafi believes that Silvergate’s profits will triple. His price target is $200 and he values the stock as a buy. On Friday, the company’s shares finished at $86.50 each.
Silvergate to embrace borrowing bitcoin
The recent failures of crypto-connected financial organizations aren’t stopping Lane. He is still in favor of adopting bitcoin for his lending program.
We continue to be very interested in lending against bitcoin. We want to increase that because we think it’s one of the best fundraisers we’ve ever done.
Most recently, Silvergate used its SEN Leverage program to provide MicroStrategy with a $205 million term loan. The purpose was to allow the trading analytics company to purchase additional bitcoins.
According to Lane, the recent crypto meltdown was a great stress test for Silvergate. It has proven its ability to withstand the volatility of its lending business model. He added that Silvergate developed the lending platform to understand that it would come with volatility.
According to Lane, some lenders have had problems issuing unsecured clients. But, Silvergate demands excessive collateral. Borrowers have three options if market conditions deteriorate. Make other bitcoin pledges, complete loan payment totals, or let Silvergate decide whether or not to sell some of their bitcoin.
Launch of Diem
Silvergate has acquired the stablecoin project, Diem, from Meta Platforms. The project was first introduced as Libra in June 2019.
The assets obtained from Diem certainly provide a good basis for a stablecoin for e-commerce. Despite some details, Canaccord’s Vafi wrote it down in a letter to investors. “We can’t help but believe that demand from payment providers and merchants could be significant over time.”
During the earnings conference call, Silvergate said that the launch of stablecoin is still planned for this year.