Despite Low Crypto Trading Volume, Silvergate Capital Continues to Grow Well
With crypto trading volumes down significantly in the first quarter of the year, investors knew crypto stocks would face headwinds when they announced their first quarter results. The bank Silvergate Capital ( IF -1.75% ) was no exception, with the platform running much of its core business model tied to spot crypto trading volumes. But despite the weaker volumes seen in the first three months of the year, Silvergate not only beat quarterly earnings estimates well, it also continued to show that the bank can grow even when market conditions of cryptography writ large are not necessarily favorable.
Develop your ecosystem
Silvergate operates a real-time payment system called the Silvergate Exchange Network (SEN), which allows multiple parties on the network to clear and settle payment transactions instantly. SEN is especially useful for institutional crypto traders and crypto exchanges because while cryptocurrencies trade around the clock, the US payment system does not operate in real time. Since SEN volume, which powers Silvergate’s entire business model, is tied to spot crypto trading volume, I wasn’t sure what to expect for the quarter. But while the volume of transactions through SEN fell in the first quarter, the bank continued to develop the network and show that SEN still attracts a lot of interest.
The volume of SEN transfers reached just $142 billion for the quarter, which is the lowest seen in the last five quarters. However, Silvergate added 122 new digital currency customers to SEN in the first quarter, which is the most it has done in the past five quarters. Silvergate was the first bank to offer this type of real-time payment platform, giving it a first-mover advantage. As the network grows, it becomes increasingly attractive for more businesses to join, as there are more parties to interact with.
Silvergate CEO Alan Lane said crypto price volatility doesn’t really affect customer growth on the platform because onboarding businesses on the network can take a long time and because companies that join take a long-term view of cryptocurrencies. Lane also said that lower crypto prices should actually encourage more customers to join because it’s an opportunity to get into crypto at a better entry point if you missed out on any of the previous booms, but it really doesn’t work that way either.
Also during the quarter, Silvergate strengthened its SEN Leverage product, a US dollar line of credit secured by Bitcoinfrom $571 million in total outstanding balances at the end of 2021 to nearly $1.1 billion in the first quarter of 2022. The quarter included a $205 million loan to MacroStrategy, a division of the company MicroStrategy, which acquires and holds Bitcoin. SEN Leverage allows bitcoin-heavy companies to essentially stake their bitcoin for US dollars that they can use to grow their business, making them more capital efficient. This use case also appeared to hold for a quarter of lower crypto trading volume.
Finally, despite lower crypto exchange volume, Silvergate grew its first quarter earnings nicely, generating nearly $25 million, or $0.79 in earnings per share in the quarter, up from the quarter. previous and from one year to the next. The main reason for the increase in profits is that SEN customers bring many deposits to the bank. As the Federal Reserve begins to raise its benchmark overnight lending rate and long-term interest rates also rise in the first quarter, Silvergate is able to deploy these deposits into higher yielding bonds, which translates into higher profits.
A reason to love this stock
The fact that crypto trading volume was weak in the first quarter and Silvergate still added SEN customers and posted higher profits is one of the reasons I like this stock. Yes, crypto trading volumes influence bank activities but it is not the only factor. Silvergate clients are thinking about crypto long-term, and I expect the bank to have a strong year as higher interest rates continue to boost earnings.
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