Silvergate Capital, a crypto-focused bank, believes that the bear market affecting the whole crypto industry is not over yet. Furthermore, their CEO feels the effects could get adverse in the coming quarters, yet he is upbeat on crypto lending.
Over the coming quarters, the crypto industry may still pose challenges for some exchanges and crypto funds. However, at some point, all that will be over, and then we will just be waiting for what is the next catalyst.
Allan Lane, CEO and formerTradeFi banker
Given the broader global economic reset, investors shouldn’t compare the present price decline to earlier ones. Digital assets have dropped in line with macro trends like rising rates and inflationary pressures.
Despite rising 33% in the previous week, Silvergate stock has lost 42 percent of its value this year. The VanEck Digital Transformation ETF (DAPP) has increased 15% over the past week while falling 67% this year. Global equity markets, particularly those for stocks seen as riskier, have been harmed by rising rates and recession fears. The tech-heavy Nasdaq Composite Index has lost nearly 25% of its value this year.
Due to the crypto downturn, analysts expected a dismal quarter for various crypto enterprises, from exchanges to miners. Yet, Silvergate’s second-quarter earnings defied expectations.
The second quarter of 2018 saw a 34% increase in transfers of U.S. dollars. Also, net income increased by 85% year over year, according to The Silvergate Exchange Network (SEN), a fiat on-ramp for bitcoin markets.
Silvergate stuck to what it is most knowledgeable about and avoided FOMO. Thus, it was able to avoid the traps of the bear market. Lane said they strive 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 a significant factor in Silvergate’s outcomes. In a letter to clients, Canaccord equity research analyst Joe Vafi noted one critical factor. Despite significant volatility in the current price of cryptos, a risk management program led to no loan writedowns.
Given the development drivers the firm is using, Vafi believes that Silvergate’s earnings will treble. His price objective is $200, and he rates the stock as a buy. On Friday, shares of the company finished at $86.50 each.
Silvergate to adopt borrowing bitcoin
The recent failures of financial organizations connected to cryptos are not stopping Lane. He is still in favor of adopting bitcoin for its lending program.
We continue to be very interested in lending against bitcoin. We want to increase that because we think it is some of the best financing we have 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 business analytics company to buy extra bitcoin.
The recent crypto meltdown, according to Lane, was an excellent stress test for Silvergate. It proved its ability to resist volatility in 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 issues when issuing clients unsecured. But, Silvergate demands excessive collateralization. Borrowers have three options if market conditions worsen. Make further bitcoin pledges, complete loan payments total or let Silvergate decide whether to sell some of their bitcoin.
Launch of Diem
Silvergate acquired the stablecoin project, Diem, from Meta Platforms. The project was first introduced as Libra back in June 2019.
The assets obtained from Diem certainly provide a good base for a stablecoin for e-commerce. Despite few details, Canaccord’s Vafi wrote this in a letter to investors. “We cannot help but believe that demand from payment providers and merchants might be substantial over time.”
During the earnings conference call, Silvergate said that the Stablecoin launch is still schedulefor this year.