Silvergate Capital: The First Blockchain Bank – Seeking Alpha

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Silvergate Capital (SI) is a leading financial infrastructure provider of cryptocurrency solutions for institutional and commercial customers. Cryptocurrency and the decentralization of Modern Monetary Theory will give new economic expansion. The value of cryptocurrency comes from the blockchain, a network that developers work on. The variety of financial engineering on these platforms gives way to high yield stable coins and other high yielding DeFi assets. These give investors stable yields that will generate 3-4% more than T-bonds. This theme will quickly increase the adoption of cryptocurrency as a whole. To date, the only significant decentralization adoption that has occurred was done by the President of El Salvador. He has bought the dip and continues to buy Bitcoin (BTC-USD) for his country’s sovereign wealth fund. These are all signs pointing toward mass adoption on an international level in the future.
Silvergate Capital November 2021 Investor Presentation
The unique ecosystem around crypto will bring new advances in the Web3 landscape. More institutional investors will want to get into the space as crypto becomes less volatile. The volatility crush in these assets will drive massive inflows by asset managers and high net worth individuals alike. The commercial applications of cryptocurrency can be huge. The blockchains being built today are likely to be the beginning of the financial system that everyday consumers will interact with in the future.
The massive implications of cryptocurrencies’ TAM cannot be understated. The entire global financial system has the potential to operate through blockchain networks. A common rebuttal I hear from doubters of cryptocurrency’s potential is the high fee costs on many blockchain networks. Ethereum has high ‘gas fees’ (transaction fees), making mass adoption at current levels impossible. However, this is a needed part of the maturity of cryptocurrencies. One of the cryptocurrencies’ foremost spokesman Vitalik Buterin stated that Ethereum (his project!) is not ready for mass adoption. This is widely accepted; however, it is hard to say that.
Silvergate Capital November 2021 Investor Presentation
The network effects of cryptocurrency will soon be felt across the international economy. The increasing transaction revenue and increasing IPs will directly benefit Silvergate’s future growth potential. The dollar trading volume will also be significant because as crypto becomes a higher accepted asset, stable coins and fiat currencies will become a critical arbitrage spread for traders.
Silvergate Capital November 2021 Investor Presentation
The Silvergate exchange network will be critical to future success. These brokers are the future of crypto because they apply to a wide range of demographics. Coinbase (COIN) fields a broader audience, with many older and younger investors using the platform to invest in growing known currencies. At the same time, brokers such as Gemini and Genesis are used for lesser-known cryptocurrencies and yield farming. These can be very profitable yet risky endeavors.
The operations are a significant benefit of owning Silvergate. The company has many strategic efforts with larger banks to deepen their cryptocurrency exposure. These efforts will drive fundamental growth for Silvergate and expand their partnerships to open up new revenue streams. Silvergate can open the eyes to larger banks on the potential securitization and yield of many coins and how they relate to fiat currencies. Overall, the expansion opportunities are there, and Silvergate has much potential business they can pivot to and benefit from.
Silvergate Capital November 2021 Investor Presentation
The zero-cost funding strategy provides customers better access to crypto without the fees. This will make investing in cryptocurrencies more feasible for asset managers and hedge funds alike. This volatility crush due to the securitization of the asset will be a significant boon toward banks and provide a basis for future 7-8% yields on these stable coins.
Silvergate Capital November 2021 Investor Presentation
Strong revenue growth will be vital in showing analysts that Silvergate stock is legit. With revenue growing faster than costs, it’s easy to see the scalability of the company’s valuation. Silvergate’s management is positioning the company well to benefit from future coin offerings and advances in the Web3 space with various new business channels on the way.
There are inherent risks in the crypto business. Volatility has been a significant problem. Crypto has been crashing over 40% in recent weeks. Recently this concern has led investors to dump their cryptocurrency holdings. This is a massive mistake as today’s prices will represent fractions of the future market value. Silvergate is at the front end of these services, and the company will continue to dominate the space moving forward. Currently, there is no other bank as focused on cryptocurrency as Silvergate, and the first-mover advantage will rear its head in future quarters. More players will be in this space, and investors need to be prepared for future competitors. While there have been few innovations on an institutional level, there is an excellent opportunity for the market to expand in the future.
Silvergate does not have many peers within the crypto space, so I chose to value the company against emerging economies or high-growing banks. First BanCorp (FBP) is a Puerto Rico-based bank that offers traditional banking services for retail and commercial consumers. The company has been raking in solid net income and beneficiary of rate increases worldwide by operating in this emerging economy. The next bank I choose is Fulton Financial (FULT), a more stable bank that has a 20% revenue growth rate YoY. Even though the company is just a regional New Jersey banking corporation, both companies have seen significant growth rates. Comparing Silvergate to these more traditional growing banks puts the overall beta of crypto into perspective and what the crypto exposure will do to a portfolio. However, in times like these, it’s essential to consider the risk-sensitivity of these assets. Growth investors should look for long-term stability as adoption comes. This will drive consumer and commercial adoption. That innovation will be the last leg of growth.
Silvergate Capital Price Return Peer Comparison (Seeking Alpha)
The price return for all banks has been relatively consistent. Since crypto recently crashed, the company’s valuation has come back to earth. Overall, banks have performed pretty steadily. The dividends for both companies have helped stabilize the price, so they don’t have wild swings like Silvergate. Investors can look for volatility, but overall, Silvergate’s yields along with the blockchain. Silvergate will be the first to monetize these assets and create new revenue streams that are not baked into the stock price. Silvergate will remain profitable and continue expanding in the ever-growing blockchain economy.
Silvergate Capital P/E Peer Comparison (Seeking Alpha)
The overall P/E compression in the past twelve months may surprise investors. Even though Silvergate has been undergoing massive swings recently, the company has been steadily performing quarter over quarter. Currently, the company sports a Forward P/E of 28. Silvergate shouldn’t be valued as a traditional bank. The financial applications of this technology will be revolutionary to the industry. The early adoption and endorsement of cryptocurrency by Silvergate will be a long-term driver for the space in general. I like Silvergate stock for 2022 as the recent price dip is an excellent opportunity for growth investors to acquire shares.
Silvergate is positioning itself very well to benefit from various macro trends. These long-term tailwinds will propel shares higher. This will expand the current earnings multiples and increase the overall market cap. This is due to the sheer size of the market increase. There is an excellent opportunity to own shares at a market cap of $3 billion and many significant cryptocurrencies dipping. I rate Silvergate a buy and look forward to evaluating the company’s future growth prospects and earnings reports.
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Disclosure: I/we have a beneficial long position in the shares of SI either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.