Crypto Contagion Rears Its Ugly Head Once Again
Coming into the week, crypto-related stocks such as Coinbase COIN had been on a tear, as the cloud of the FTX collapse began to dissipate slowly.
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Thursday evening, crypto markets spiked lower, led by Bitcoin. In about a half hour, Bitcoin cratered by 5% or $1200, wiping out more than $20 billion in market cap.
Silvergate Causes Skittishness
Despite the recent wave of optimism, Silvergate Capital SI, a crypto-centric bank, is causing skittishness once again in the crypto world. In our recent piece “Crypto Contagion: Avoid these 3 Crypto Stocks Until the Dust Settles” we highlighted some of the potential concerns surrounding Silvergate. In recent months Silvergate has seen its reputation diminish and its financial picture worsen rapidly as investors mull over just how much exposure the company had to the doomed crypto broker FTX.
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As you can see in the chart above, Silvergate’s leverage is increasing dramatically. The crypto bank, which has been fighting to survive after a “bank run” has received intense scrutiny from short seller Marc Cohodes. Cohodes is best known for his short-selling prowess and ability to conduct “deep dives”, expose frauds, and profit handsomely. Though Silvergate was having a rough year already, things got worse this week after the company delayed filing its 10-K. Shares dropped 58% and are down 94%.
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The implications of a total collapse of Silvergate are unknown – however, they exist in one obvious form. A failure would further damage the industry’s already damaged reputation and potentially lead to further crack-downs from regulators. Microstrategy MSTR, a company known for taking on “a Bitcoin Standard,” is also under the magnifying glass because it has taken on hundreds of millions of dollars in loans from Silvergate to acquire Bitcoin. Thursday afternoon, Microstrategy’s Michael Saylor did his best to quell investor concerns by tweeting a statement from Microstrategy that read, “We have a loan from Silvergate not due until Q1 ’25. There are market concerns re SI’s fin. condition. For anyone wondering, the loan wouldn’t accelerate b/c of SI insolvency or bankruptcy. Our Bitcoin collateral isn’t custodied w/ SI and we have no other financial relationship with SI.”
Takeaway
Crypto markets have shown resilience in 2023 amid the ugly backdrop of the FTX debacle and the investigation into its founder Sam Bankman Fried. However, the news from Silvergate Capital illustrates that news-driven “tape bombs” are still a tangible reality for crypto investors. If crypto can move past roadblocks such as FTX and Silvergate, the rewards for investors are potentially fruitful. With that said, risk management is paramount in the short term. Prospective investors should acknowledge the speculative nature of the space and position themselves accordingly.
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