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Another crypto giant goes under – Silvergate’s crisis explained

Silvergate's stock fell to a new all-time low as the crypto bank has had to shut down its business, fueling a selloff on crypto markets.

Silvergate Capital Corporation (SI) caught the attention of the whole world as its stock dived 50% in one day, far away from its peak in November 2021. Another crypto market selloff was caused because of Silvergate’s collapse.

Silvergate’s stock plunge explained

One of the main reasons Silvergate got in trouble is because of a prolonged bear market. Silvergate stock made astonishing returns for investors throughout late 2020 and the whole of 2021. But it all changed with crypto’s peak in November 2021. 

Related article: Crypto exchange Kraken is launching its own bank

Silvergate peaked at $240 around the time Bitcoin found its top at $69,000, showing a strong correlation despite being stock. However, the downturn was much more difficult for Silvergate, as the stock is now down almost 99% from its all-time high. After announcing more trouble, the stock even tumbled 50% in just one day

Silvertgate stock, weekly chart, source:

The company got in big trouble as it failed to provide an annual report. Even more crypto stocks dropped as fear from Silvergate spread. Bitcoin buyer MicroStrategy slipped a few percent, and Coinbase dropped as well during a negative sentiment.

White House pays attention

Numerous companies announced they stopped accepting or initiating payments from or to Silvergate. Even the White House is watching the situation.

Karine Jean-Pierre, the White House press secretary, claimed that the Biden administration is keeping an eye on the situation at Silvergate Bank. She compared it to other troubled crypto firms and said that President Joe Biden has urged Congress to act.

Karine Jean-Pierre, source:

Jean-Pierre explained she couldn’t comment on Silvergate specifically during a press briefing at the White House on Monday, but that several crypto companies have experienced major issues in recent weeks. She also cited statements from federal bank regulators warning of the risk cryptocurrencies could pose to banks and other financial institutions.

“In recent weeks banking regulators have released guidelines on how banks should protect themselves from risks associated with crypto. As you know, this is a president that has repeatedly called on Congress to take action to protect everyday Americans from the risk posted by digital assets and he will continue to do so,” Jean-Pierre stated.

She added that the White House will continue to monitor filings along with reports, and they are aware of the current situation. Having US Securities and Exchange Commission (SEC) and the White House watch over Silvergate may get the company in more trouble than they could have ever imagined. 

Why is Silvergate actually in trouble?

There is a plausible chance that Silvergate might be the first bank to fail due to bad liabilities rather than bad assets. Customers with money in Silvergate were urged to relocate it elsewhere after the bank warned its business may shut down.

A run on a bank is usually triggered by significant liabilities. With Silvergate, it’s all inverse. After venturing into a market that few other banks were willing to enter, Silvergate quickly became the go-to financial institution for crypto traders and exchanges

Also interesting topic: What should happen for Bitcoin to reach $10 million per coin?

Many exchanges’ funds were kept there, including those of the FTX. A basic service it offered, which it branded as Silvergate Exchange Network, attracted crypto speculators because it promised quick settlement of the dollar side of crypto deals between clients.

When crypto prices skyrocketed throughout the covid outbreak, Silvergate’s deposit base jumped as well, from $1.8 billion at the end of 2019 to a peak of $14.3 billion at the end of 2021. This trend reversed as the crypto market burst, particularly in Q4 2022. SI stock was on a similar ride as shown earlier. 

Silvergate deposits from 2019, source:

The company got into big trouble as it took loans against cryptocurrencies and got investigated by the Justice Department because of its links to FTX. Its survival is now very questionable.

Will Silvergate recover?

Many of the industry’s largest cryptocurrency companies, including Coinbase Global, have cut ties with Silvergate as a banking partner. As Sam Bankman Fried‘s cryptocurrency exchange, FTX, went down in November, it prompted a massive exodus of investor funds from the bank in the final three months of the year. 

Crypto-related deposits at Silvergate, source:

Actually, investors pulled out more than $8 billion from the bank in the last couple of months. Since then, the company has been fighting to stay solvent. But that could be tough as analysts from Wedbush think the end might be near.

“We believe a receivership/liquidation scenario is a distinct possibility and arrive at a liquidation value of $5 per share,” Wedbush analysts stated.

Silvergate already touched the $5 level on the 3rd of March, plunging harder than ever before. But who’s actually the loser here and what could the collapse of this company cause?

Who’s losing on Silvergate’s crisis?

There are many shareholders who are losing on the downfall of Silvergate. For instance, EOS and Block.One founder, Brendan Blumer, is down more than $80 million on his investment in Silvergate. He bought SI stocks for $90 million on November 16th, 2022. That was one unlucky entry.

Read more: What caused the stock market crash of 1929?

Still better than buying in November 2021. However, his investment is now worth 90% less since the purchase, being down over $80 million in less than 4 months. The company’s market cap declined from approximately $7.6 billion at its peak to its current $90 million. 

But stock investors are not the only ones who lost on Silvergate as Bitcoin fell 6% after the troubled crypto bank reported a delay in filing the annual report. That drew the whole market downward, wiping out over $40 billion in total crypto market cap in just a few hours. 

The chart of total crypto market cap, source:

Final thoughts

Some investors are panicking over a possible crash of Silvergate, but if crypto survived the collapse of FTX, it will easily survive this one as well.

Bitcoin now even trades above pre-FTX levels, so another failure of a crypto centralized entity should not hurt the crypto market that much. Maybe a little, but just in the short term. 

I got into financial markets by accident in 2012 and started with Forex trading. Later in 2017, I started investing in stocks in cryptocurrencies and began writing articles profess...


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