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FTX Collapse: Silvergate, crypto-focused bank, left scrambling after $8.1 billion bank run; stock plummets by 45%

In the wake of the recent collapse of crypto exchange FTX, crypto-focused bank Silvergate is left scrambling for liquidity after Silvergate’s customers withdrew digital deposits amounting to $8.1 billion during the 4th quarter of 2022 alone.

Following the news of the bank run, shares of Silvergate Capital Corp. plummeted to $12.27, representing a drop of about 45%. This was Silvergate’s biggest one-day decline since 12 March 2020.

Consequently, according to the Wall Street Journal, Silvergate had to spend the equivalent of a decade’s profit and fired 40% of its workers in order to save itself from collapse. 

In order to meet the demands of this bank run, Silvergate had to sell old securities and derivatives at a loss of $718 million. Silvergate also wrote off $196 million which relates to its acquisition of the technology and assets of Diem Association from Meta (formerly Facebook) and has also suspended its plan to launch a digital currency.

Silvergate, as FTX’s crypto-supporting bank, held deposits for FTX units as well as the trading firm Alameda Research. Silvergate is currently under scrutiny by US lawmakers.

According to Silvergate’s issued statement, “[t]he digital-asset industry has undergone a transformational shift, with significant over-leverage in the industry leading to several high-profile bankruptcies”. Consequently, “[t]hese dynamics have sparked a crisis of confidence across the ecosystem and led many industry participants to shift to a ‘risk off’ position across digital-asset trading platforms”.

Considering the crisis above and the associated risks, is Silverbird abandoning the crypto industry? 

No, says Silvergate: “While Silvergate is taking decisive action to navigate the current environment, its mission has not changed”, the bank said. “Silvergate believes in the digital asset industry.”

Silvergate has been the banker to Coinbase Global Inc., FTX, Gemini Trust Co., and a number of other crypto companies. Consequently, 90% of Silvergate’s total deposits is crypto-related. But Silvergate keeps almost all of its deposits in cash or easily traded securities, not in crypto.

Will Silvergate survive this crisis?

Meanwhile, J.P. Morgan has downgraded its rating on Silvergate stock from overweight to neutral and slashed its price target to $14 from $30. Similarly, Bank of America downgraded its rating to underperform. Morgan Stanley and Wells Fargo also cut their price targets for Silvergate stocks.

With regulators increasingly warning banks about the risks involved with cryptocurrencies, Silvergate is not likely to get much or any government support. In fact, while followers believe that this situation may eventually lead to the collapse of Silvergate, some others think Silvergate’s focus on crypto makes it an attractive takeover target for a larger company. Whatever it comes to, what is certain is that whatever happens to Silvergate will send a strong message to both already existing and prospective crypto-focused banks in the United States and across the world.

A publicly traded company, Silvergate used to be a small private banking business. A California-based commercial bank focused on digital currency businesses, Silvergate Capital (NYSE:SI) was officially listed on the NYSE, opening at $12.75, in November 2019. In January 2022, Silvergate shares soared by 12.11% after hitting over $107 on deal to buy blockchain assets from Meta. Silvergate shares hit its all-time high (ATH) 19 November 2021 when it climbed up to $219.75 per share.