Silvergate Capital Corporation, a crypto-focused bank, recently took Wall Street by storm with a massive short interest. According to the latest Short Interest Reporting by the Financial Industry Regulatory Authority (FINRA), Silvergate stands in second place as the most-shorted stock in the United States, with over 72.5% of its shares shorted.
How has Silvergate been doing?
Silvergate disclosed a fourth-quarter 2022 net loss to common stockholders of $1 billion on January 17. The bank saw a large decline in deposits during the time, prompting it to seek wholesale financing and sell debt instruments to stay afloat, as detailed in a report filed with the United States Securities and Exchange Commission (SEC).
Due to the ensuing panic, Silvergate, the leading bank in the cryptocurrency industry, was forced to liquidate assets at a significant loss, wiping out $8.1 billion in deposits.
According to the bank’s early publication of its quarterly figures, crypto-related deposits fell 68% in the fourth quarter. Silvergate had to sell off some of its debt holdings to cover the cashouts. The bank’s overall loss since at least 2013 is $718 million, which is more than it made selling the debt.
Silvergate’s Silvergate Exchange Network connects investors’ bank accounts with exchanges, making it easier for institutional investors to transfer money into and out of crypto-trading platforms.
Around $1 billion of the bank’s deposits come from FTX and other entities owned by the crypto exchange’s founder, Sam Bankman-Fried. Their collapse in November caused widespread panic in the cryptocurrency market and caused Silvergate shares to plummet.
In contrast to other banks, Silvergate’s unique structure allowed it to weather a severe drop in deposits. It divested itself of many of its branches and other regular banking activities, so it could concentrate on opening bank accounts for cryptocurrency exchanges and investors.
The bank holds almost all of its deposits in liquid assets like cash or quickly marketable securities, the vast majority of which are tied to cryptocurrencies.
Silvergate reported having $4.6 billion more in liquid assets than it had deposits of $3.8 billion at the end of the fourth quarter of 2022. It also has $5.6 billion in liquid debt instruments, including U.S. Treasurys. According to the bank, its network saw an increase in daily average volume in the final quarter of 2022.
Adjusting to market downturns
The bank began taking out loans against its assets to cover withdrawals, but when interest rates rose, it found itself in an unfavorable position: it was spending more on interest payments than it was bringing in from its investments in securities. That meant selling the assets into a bond market that was already losing value.
Silvergate will reduce operations to weather the economic crisis. Following the failure of its own effort to build a cryptocurrency-based payments network, the bank has let off 40% of its workforce and abandoned ambitions to launch its own digital currency, writing out the $196 million it spent on the technology Facebook had developed.
A lot of attention has been focused on the bank because of its involvement with FTX and Sam Bankman-Fried’s crypto trading business, Alameda Research LLC. In November, Alameda’s use of FTX client cash to finance reckless investments led to the firms’ demise.
