Silvergate took a big bet on crypto and it paid off

Yesterday, we glossed over an interesting company while discussing stablecoins (check it out here if you missed it) — so we decided to take a closer look.

You can take big risks when you’ve got nothing to lose. While major banks stayed away, Silvergate Capital (NYSE:SI) took a chance on crypto in 2013…

The bet with a big payout…

Silvergate was founded in 1988 but the real story began in 2013 when it became a crypto-focused bank — getting a first-mover advantage. Today, Silvergate is…

• The leading US crypto bank with over 1,300 clients and 14B in deposits.
• Profitable with strong growth rates closely tied to crypto’s — 94% sales growth in 2021.

But it’s also at the mercy of crypto’s volatility — with SI up 830% between 2020-2021 as crypto prices surged — but down 42% since November (again alongside crypto prices).

SI also offers traditional services — providing real estate loans and other banking services — but its crypto payments network business is what’s growing the fastest…

Silvergate’s prized asset

In 2017, Silvergate launched its payment platform, Silvergate Exchange network (SEN) — which lets institutional clients move large sums of capital between accounts and crypto platforms.

• Given the 24/7 nature of crypto, traditional large banks couldn’t serve crypto customers.
• SEN was one of the first products to address this need — which subsequently grew its other crypto services.

In 2021, SEN facilitated $787.4B in transfers from 1,381 clients, generating $35M in fees for Silvergate — 222% growth from the previous year and nearly half its net income.

Last month, Silvergate acquired Meta’s Diem assets — carrying on Meta’s dreams of building a stablecoin product — a massive market as highlighted before.

With its hands in stablecoins, Silvergate’s role in crypto would expand — pushing it towards fintech and away from banking.

Investors: Looks familiar…

Silvergate reminds us of Silicon Valley Bank (NASDAQ:SIVB) — which found a niche providing banking services to tech and healthcare companies in Silicon Valley.

• In tech’s early days, banks were reluctant to fund startups and innovation — which gave SIVB an early advantage.
• SIVB outperformed the market in the past 10 years with a 981% total return (27% compounded annual return).

Now, Silvergate is giving investors another opportunity to get exposure into an early sector — without directly holding the riskiest assets.