According to crypto-focused bank Silvergate Capital, the bear market affecting all parts of the digital assets industry isn’t over yet. The next few quarters could bring more pain (SI).
Some exchanges and crypto funds may still have some problems in the next few quarters, but “all of that will be done at some point. After that, we’ll just be waiting for the next catalyst,”. CEO and former TradFi banker Alan Lane told CoinDesk in an interview.
But investors shouldn’t compare the current drop in crypto prices to those of the past because of the broader global economic reset. Lane said that digital assets have fallen with macro trends like rising rates and inflationary pressures.
Silvergate shares are down 42% this year but up 33% in the previous week. The VanEck Digital Transformation ETF (DAPP), which contains crypto stocks including Coinbase (COIN) and Marathon Digital (MARA), is down 67% this year but up 15% in the last week. Rising interest rates and crisis fears have impacted global stock markets, significantly riskier stocks. Nasdaq Composite Index is down 25% this year.
Analysts expect a terrible quarter for crypto companies like exchanges and miners because of the downturn. Still, Silvergate’s earnings went against the trend.
The Silvergate Exchange Network (SEN), a “fiat on-ramp” for bitcoin markets, saw a 34 percent increase in U.S. dollar transfers during the second quarter compared to last year. Its net income went up by 85 percent compared to the previous years.
Lane said that Silvergate avoided the problems of the bear market by doing what the bank does best and not giving in to the fear of missing out (FOMO). “We really try to stay in our lane and not chase the latest fad, but really just focus on what we do well, and essentially just solving problems for our customers,” Lane said.
Investment bank Canaccord Genuity feels risk management helped Silvergate’s earnings. In a note to clients, Canaccord equities research analyst Joe Vafi stated, “Perhaps the largest long-term positive for the story was a risk management program that led to no loan writedowns, even if the spot price of crypto was volatile and there was default contagion across the wider ecosystem.”
Vafi also thinks Silvergate’s earnings will double over the next few years because the company is taking steps to grow. He gives the stock a “buy” rating and a price target of $200. On Friday, each share was worth $86.50.
Even though several crypto-related financial institutions have recently failed because they had too much debt, Lane is still planning to use bitcoin for its lending program.
“We’re absolutely still interested in lending against bitcoin,” Lane said. “We believe that is some of the best lending we’ve ever done, and we want to continue to grow that.”
Most recently, Silvergate used its SEN Leverage program to give Michael Saylor’s MicroStrategy a $205 million term loan so the business intelligence company could buy more bitcoin.
Lane said the lending platform was built with the idea that it would be risky. He says the recent crypto rout was a good stress test for Silvergate to show its lending business model can handle volatility.
Lane says that some lenders who had problems were those who gave customers unsecured or under-collateralized loans, while Silvergate requires too many securities. If market conditions don’t improve, a borrower can pay down their loan, pledge more bitcoin or Silvergate can decide to sell some of the borrower’s bitcoin on their behalf.
In January, Silvergate bought the technology and other assets from Diem, the stablecoin project from Meta Platforms (formerly Facebook) that was first announced as Libra in June 2019.
“While details remain few, the assets acquired from Diem do indeed provide a solid platform for a stablecoin for ecommerce, and we cannot but believe that demand both from payments platforms and merchants could be strong over time,” Canaccord’s Vafi added in his note to clients.
During its earnings call, Silvergate said that the launch of Stablecoin is still on track for this year.