Whenever there’s a high risk, there’s almost always a chance for a high reward. In a time when regulators around the world are cracking down on the burgeoning cryptocurrency space, there’s one company that’s not only undeterred by setbacks but is thriving. Of course, I’m talking about Silvergate Capital (NYSE:SI), whose stock has returned 603.8% in the past year.
Heck, the cryptocurrency bank even bested Bitcoin‘s 477.4% return during the same period. So why is Silvergate so popular all of a sudden? Let’s find out.
Image source: Getty Images.
A very unique bank
Silvergate is a waypoint into the mysterious cryptocurrency realm. The company has four major areas of operations:
- The Silvergate Exchange Network (SEN) that facilitates USD transfer between cryptocurrency exchanges and institutional investors
- Conversion of fiat money-backed crypto (stablecoins) to USD
- Access to low-interest USD asset loans, with borrowers depositing their Bitcoin as collateral
- Safe storage of cryptocurrencies
The company currently provides such services to 93 cryptocurrency exchanges and 771 institutional investors such as hedge funds. Notable clients include Binance.us, Coinbase, Fidelity Digital Assets, PayPal, and CME Group. It also has 360 customers engaged in activities such as crypto mining or building decentralized finance services.
During the second quarter of 2021, Silvergate facilitated a whopping $239.6 billion worth of transfers on its network, recognizing $11.3 million in revenue. Both represent significant increases over the $22.4 billion in SEN transactions and $2.4 million in revenue it brought in Q2 2020. Like any other bank, the company lends out money while only using a portion of its deposit as collateral in a process called fractional reserve banking. Total leverage increased more than tenfold in the past year to $258.5 million worth of loans in Q2.
Why invest now?
Under the current international banking regulations (Basel III), a bank’s capital must be at least 8% of its risk-weighted total assets (loans, mortgages, etc.). This is called the risk-based capital ratio (RBC). It ensures that a sudden stock sell-off or rise in default rates wouldn’t wipe out a bank’s capital due to the latter’s leverage. The higher the ratio, the healthier the bank, but the less its profits due to less leverage.
Major U.S. banks typically have an RBC of 15% and possess a net interest margin (NIM) of between 2% to 5%. However, it’s clear that Silvergate is a very conservative bank as its RBC stands at a whopping 48% while possessing a NIM of 1%. So there’s definitely a lot of room for the company to leverage up and beef up its returns. What’s more, its default rate stands at roughly 0%, compared to 0.05% for its competitor banks.
With the rise of the $172.15 billion decentralized finance (DeFi) industry, there are now more opportunities than ever for investors to buy and hold cryptos and earn fixed income with them. As a result, expect continued massive demand for Silvergate’s fiat-crypto services. And don’t forget about its ability to expand its loan portfolio and increase interest profits, either. Overall, I’d consider this a high-flying crypto stock to buy, even at 38 times earnings going forward.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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