Silvergate Capital (NYSE: SI), an asset bank of DKK 5.6 billion. dollars, which specializes in serving cryptocurrency clients, has experienced astonishing growth since it was listed in late 2019. Silvergate is currently trading at more than $ 160 per share. The bank is currently trading at more than 700% of material book value.
With such a quick start to its early life as a public company, can Silvergate continue to be a major growth company? The answer is complicated, so let’s take a look.
Growth stocks are expected to surpass their peers in terms of earnings and stock price increases, primarily because they have a competitive advantage in the industry they are in and / or enormous potential. Silvergate certainly meets these criteria.
Several years ago, management thought cryptocurrencies liked Bitcoin (CRYPTO: BTC) one day would be an investable asset, so the bank built its own internal payment system called the Silvergate Exchange Network (SEN). SEN is a real-time payment network that can clear transactions in US dollars immediately around the clock, 365 days a year, between two users in the network. This is ideal for institutional crypto traders and crypto exchanges because cryptocurrencies trade around the clock.
The launch of SEN gave Silvergate an advantage for the first time. The bank has loaded more than 600 institutional investors, 76 digital currency exchanges and 286 other customers into the cryptocurrency space at SEN. The parties need to be on the network to trade with each other, so as the network grows, it only becomes more attractive for others to participate. Silvergate executives said they had more than 200 potential customers in their SEN pipeline by the end of 2020.
SEN has helped make Silvergate very attractive from a banking investment point of view. The customers on the network bring in large amounts of non-interest-bearing deposits, for which the bank does not have to pay anything. At the end of 2020, non-interest-bearing deposits accounted for almost 98% of the bank’s total deposits, and the bank’s total cost of deposits was 0.01%. These numbers are truly unheard of in the industry even in this extraordinarily low environment. SEN is also a good generator for fee income.
Not without risk
Silvergate certainly still has plenty of untapped potential. It will continue to add new clients to its network, which will continue to generate revenue. It also has a new loan product called SEN Leverage, which is a credit line in US dollars backed by Bitcoin. This product is in the early stages and is already off to a good start. The bank has also said that rolling out new products to its cryptocurrency client base is part of its strategy, so I firmly believe that the bank will be able to continue to grow revenue and profitability from this.
But when you evaluate Silvergate as a growth stock, you need to understand that there is risk. With each passing day, cryptocurrencies are becoming more common and coming closer to being anchored in the traditional financial system. As more institutional dealers become involved, banks that deal with these dealers take notice. Signature Bank and JPMorgan Chase seems to have designed similar real-time payment solutions targeted at the crypto community. Recently, Bank of New York Mellon said it would begin possession and transfer of digital assets in the same way as with bonds and stocks. While Silvergate has the first advantage, these are all larger banks with far more resources.
There is also a growing wave of real-time payments to the US financial system. The Federal Reserve is building its FedNow payment system in real time, which would be available to financial institutions of any size. The Fed is aiming for a release date in 2023.
It is uncertain how big a threat FedNow could be to SEN. There is already a real-time payment network in operation called RTP, which many banks, both small and large, have already joined. However, transactions on RTP are limited to $ 100,000, so I doubt it is a major threat to SEN because I can imagine institutional investors making much larger transactions.
And by 2023, SEN is likely to have already built up its network a lot and will offer more tailored crypto products to its customers, making it much more appealing. But it will be interesting to see how any bank that has access to real-time payments can affect Silvergate’s growth.
Could it be a growth stock?
Silvergate has many qualities of one growth stock and is in the early stages of growth of its business. But its current valuation is extremely high. It is also a small bank and it may be necessary to raise capital further. Silvergate actually just recently successfully issued common stock and has plenty of capital right now and plenty of room on the balance sheet for loan growth. But if it continues to grow like gangbusters, it may be necessary to raise equity along the line, which then dilutes shareholders.
The company may also be volatile in the short term along with the prices of Bitcoin and other cryptocurrencies because so much of its business is tied to the use of these digital assets. I think the company will continue to grow earnings and I certainly like the stock, but it will probably be difficult to maintain the type of appreciation that the stock has seen over the last six months.
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