The bear market hitting every corner of the digital asset industry is not over yet and may see some more pain in the coming quarters, according to cryptocurrency-focused bank Silvergate Capital (SI).
The crypto sector may still see a few pain spots for some crypto exchanges and funds over the next few quarters, “but at some point all of that will be done, and then we’ll just wait for what the next catalyst will be,” he said. TradFi CEO and former banker Alan Lane told CoinDesk in an interview.
However, investors should not compare the current fall in the price of crypto to previous ones, given the broader global economic reset, as digital assets have fallen along with macro trends, including rising rates and inflationary pressures, Lane said.
Silvergate shares are down 42% this year, although they have jumped 33% in the past week. The VanEck Digital Transformation ETF (DAPP), which holds a basket of various crypto stocks including exchange Coinbase (COIN) and miner Marathon Digital (MARA), has fallen 67% this year, but has risen 15% in the past. course last week. Rising rates and fears of recession hurt global equity markets, especially stocks deemed riskier. The tech-heavy Nasdaq Composite Index is down about 25% year-to-date.
Given the cryptocurrency slowdown, analysts are predicting a weak quarter for various cryptocurrency companies, from exchanges to miners, but Silvergate’s second quarter results reversed the trend.
The Silvergate Exchange Network (SEN), a fiat on-ramp for bitcoin markets, saw a 34% increase in US dollar transfers in the second quarter compared to a year ago, while revenue net grew 85% year-on-year.
According to Lane, Silvergate avoided the pitfalls of the bear market by sticking to what the bank does best and not chasing FOMO. “We really try to stay in our lane and not chase after the latest fad, but focus on what we do well, and basically solving our customers’ problems,” Lane said.
Investment bank Canaccord Genuity believes risk management has been a key factor in Silvergate’s positive results. “Perhaps the biggest long-term bright spot in history was a risk management program that resulted in no loan write-downs, despite significant volatility in crypto spot prices. -currencies and some default contagion into the broader ecosystem,” Canaccord equity research analyst Joe Vafi said in a note to clients.
Vafi also expects Silvergate to double its earnings over the next few years, given the various growth engines the company has engaged in. He values the stock with a buy and price target of $200; shares closed at $86.50 each on Friday.
Amid the recent collapse of several cryptocurrency-linked and overleveraged financial institutions, Lane remains supportive of using bitcoin for his lending program.
“We are absolutely still interested in lending against bitcoin,” Lane said. “We think it’s one of the best loans we’ve ever made, and we want to continue to develop it. »
More recently, Silvergate used its SEN Leverage program in a $205 million term loan to Michael Saylor’s MicroStrategy, so the business intelligence firm could buy more bitcoin.
Lane said the lending platform was built knowing it would come with volatility, and says the recent cryptocurrency rout was a good stress test for Silvergate to show it can withstand volatility in its lending business model.
Among the lenders that have had problems are those that offered customers unsecured or under-collateralized loans, while Silvergate requires over-collateralization, according to Lane. If market headwinds persist, a borrower can repay their loan, pledge more bitcoins as collateral, or Silvergate can make the decision to liquidate bitcoins on their behalf if needed.
In January, Silvergate purchased the technology and other assets of Diem, the stablecoin project from Meta Platforms (formerly Facebook) first announced as Libra in June 2019.
“While details remain scant, the assets acquired from Diem do indeed provide a strong platform for a stable currency for e-commerce, and we can only believe that demand from both payment platforms and merchants could be strong over time,” Canaccord’s Vafi added in her note to clients.
Silvergate said on its earnings conference call that its stablecoin launch remains on track for this year.
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