A common motto in investing is that high risk just about always comes with a big reward. As of yet, regulators throughout the world are cracking down on crypto. Despite this, one company isn’t buckling under the pressure but is rather thriving: Silvergate Capital. Their stock, which has the code NYSE: SI, returned over 600 percent in the last year.
During the same time, the crypto bank did better than Bitcoin’s 477 percent surge. But why has the company gained so much popularity suddenly?
For starters, it’s a pretty unique bank. They operate in four major realms. Their exchange network facilitates the transfer of USD between crypto exchanges and institutional investors. They convert stablecoins into USD. They also offer access to USD asset loans boasting low-interest rates. For these loans, borrowers deposit their Bitcoin tokens as collateral. Lastly, they provide users with a safe place to stow away their crypto.
As of yet, the company offers these services to 771 institutional investors, including hedge funds, along with 93 crypto exchanges. Some of their more notable clients are CME Group, PayPal, Fidelity Digital Assets, Coinbase, and Binance’s US branch. Not to mention, it has 360 customers involves in crucial operations like building DeFi services and mining crypto tokens.
During Q2 of this year, Silvergate Capital assisted with transfers on their network that amassed a worth of $240 billion. Out of this, they recognized that $11.3 million was revenue. Both these values have grown considerably since the second quarter of last year.
Just like other financial institutions, they lend money to borrowers but only use a percentage of the deposit as collateral. This process is called fractional reserve banking. In the past year, the total leverage rose by over ten times.
New investors may be wary about investing in a new stock but the choice has merit. According to recent international banking regulations, it’s crucial that an at least 8 percent of a bank’s risk-analyzed total assets make up its capital. This is the ratio involving risk-based capital. It makes sure that a quick rise or sell-off in default rates don’t eliminate a bank’s capital. So the higher the ratio, the better health the bank enjoys. At the same time, it also makes reduced profits.
The US’ biggest banks have an RBC of around 15 percent, and NIM, net interest margin, of 2 to 5 percent. Nevertheless, Silvergate is a heavily conservative bank considering that its RBC is surprisingly 48 percent. Meanwhile, it enjoys a net interest margin of 1 percent.
Consequently, there’s plenty of room for the company to gain leverage and enhance returns. In fact, their default rate is around 0 percent, as opposed to competitors’ 0.05 percent.