A few years ago, real estate banker and lender Silvergate Capital foresaw massive potential for cryptocurrencies and blockchain technology. It launched the Silvergate Exchange Network (SEN) to enable real-time payments and cryptocurrency conversion (when a crypto is exchanged for U.S. dollars). Total customers were at 1,104 at the end of the first quarter, up from 969 at the end of 2020 and 850 the year prior. Among its users is none other than Coinbase, as well as lots of trading exchange competitors like Binance or Kraken and institutional crypto asset managers too.
Silvergate is not a trade exchange like Coinbase—it’s a bank. Thus it primarily makes money from banking fees and interest-bearing securities based on customer deposits. And because those deposits have skyrocketed in the last year along with crypto prices, Silvergate’s balance sheet has ballooned—giving it plenty of cash to deploy to make more interest income. Digital currency deposits were $6.8 billion at the end of March compared to $1.7 billion a year ago. Resulting net income was $12.7 million in the latest quarter, up 189% year over year.
The value of customer deposits have likely taken a hit, though, for the same reason there’s been concern for Coinbase’s fee revenue: crypto prices are down. Nevertheless, Silvergate was still in the process of deploying all of the new deposits it has amassed in the last year and sees plenty more SEN user additions as well. It also added new Bitcoin-based credit products and could add other banking features to its platform. Following the last quarterly report, it was announced Facebook’s U.S.-dollar-backed digital currency Diem (formerly known as Libra) will exclusively be issued by Silvergate. Diem was designed to power Facebook’s aspirations in digital payments. If it takes off, this could be an incredibly large new customer for Silvergate.
After shares took a hit along with Bitcoin and other crypto prices, Silvergate trades at a price-to-book value of 4.2 and 68 times trailing 12-month earnings per share (based on a current market cap of just over $3 billion). It’s a steep price tag for a bank stock, but this is no ordinary bank. This is a forward-thinking enabler of the new blockchain-based financial system that could have lots to gain if cryptocurrencies see widespread adoption in the years to come.