Silvergate Capital: cryptoland finally gets its proper bank run

Finally, a genuine bank run in cryptoland. Silvergate Capital on Thursday announced deposits from its digital assets customers fell from about $12bn to just $4bn in the fourth quarter. To fund those withdrawal requests, the California-based bank first relied on borrowings and then turned to selling off $5bn of debt securities in its portfolio. These portfolio sales led to a paper loss on those transactions of more than $700mn.

Silvergate catered to institutional crypto investors. One of its main products offered a payments network for digital exchanges and platforms. It had worked with FTX, which like Celsius Holding and Voyager Digital, all succumbed to bankruptcy when unable to satisfy withdrawal requests following a collapse in cryptocurrency prices.

Speaking of dissatisfaction, Silvergate’s shares nearly halved on Thursday. The company insisted it retains plenty of excess liquidity. However, the loss incurred from the securities sale will deplete its equity capital. Its book value stood at $1.3bn at end September.

Though its ambitions have been curtailed, perhaps permanently, its survival demonstrates how crypto-oriented institutions that take cash from customers can successfully navigate a liquidity crisis.

According to a November investor presentation, three-quarters of Silvergate’s deposit base and equity capital were held mostly in government bonds. That decision allowed the bank to meet withdrawal requests, even when selling investments at a loss.

Silvergate had a market capitalisation of more than $6bn in 2021. Its price to book value ratio then was a whopping 4.5 times even as its returns on equity were often only between 10 and 15 per cent. The hyped valuation depended on the hope that crypto would become a massive asset class, while Silvergate offered the plumbing for the industry.

Silvergate argues it has not surrendered. It has simply decided to retrench for the time being. Unlike others involved with cryptocurrency, it may find a means to survive financially. Its reputation though will not.