Here is the real challenge facing Silvergate and other ‘crypto banks’, says this short seller

by Arthur · March 5, 2023

By Frances Yue

Hello! Welcome back to the Distributed Ledger. This is Frances Yue, crypto reporter at MarketWatch.

Silvergate Capital Corp. ( SI ) shares closed down more than 57% on Thursday, after the crypto-friendly bank said in a regulatory filing on Wednesday that it would not file its audited 2022 annual report on time, and it is evaluating the impact of a number of events on its ability to continue as a going concern.

Several crypto companies, including Coinbase, Galaxy Digital, Paxos and Circle, said they would halt all or part of payment transactions with the bank.

In this section, I’ll break down what that means for the crypto industry.

You know the drill — find me on Twitter at @FrancesYue_ to share thoughts on crypto, this newsletter, or your personal stories with digital assets.

The Silvergate problem?

Brad Lamensdorf, co-portfolio manager of the Ranger Equity Bear ETF (HDGE), an active short-term exchange-traded fund, said the fund began shorting Silvergate stock when it traded around $50 and covered the position after it fell to $15 dollars. , when it started to become “really expensive to borrow”.

Silvergate stock has lost over 97% of its value since hitting an all-time high above $200 in November 2021, according to Dow Jones market data.

Lamensdorf said he has been bearish on Silvergate and some crypto-native companies, namely because he believes they won’t be able to compete with traditional financial heavyweights like Morgan Stanley ( MS ) or Goldman Sachs Group ( GS ) once they gather up their offers. and when crypto regulation comes in. Smaller banks and some crypto-native broker-dealers “won’t be able to compete, because they don’t have the kind of balance sheet that these other big banks have,” Lamensdorf said.

The smaller, crypto-friendly banks “are trying to house a lot of value in a capital banking base that is incredibly volatile,” Lamensdorf said. “The whole industry just isn’t set up to work properly the way Morgan Stanley or Goldman Sachs would work right now.”

For now, concerns about Silvergate are forcing crypto companies to concentrate more on other platforms, according to Lamensdorf. Banks have traditionally been reluctant to work with crypto companies due to a lack of regulation, meaning that crypto companies have not had many options when it comes to where to store their deposits.

If Silvergate goes under, it will “limit the business opportunities for crypto companies,” said Julius de Kempenaer, senior technical analyst at StockCharts.com.

Silvergate declined to comment beyond Wednesday’s regulatory filing.

It can get to the point where “you have 90% of everyone in one place, which is terribly dangerous because if that one place goes down, you have no diversification,” according to Lamensdorf.

Signature Bank, another crypto-friendly bank, saw its shares down 2.7% on Thursday, according to Dow Jones market data.

Still, major cryptocurrencies appear to be holding their own on Thursday, with bitcoin trading above $23,000 and ether at just under $1,650.

FTX co-founder pleads guilty

Nishad Singh, co-founder and former head of engineering at bankrupt crypto exchange FTX, pleaded guilty in New York to six criminal charges, including conspiracy to commit securities and commodities fraud, on Tuesday, according to multiple media reports.

Singh has also agreed to cooperate against his former boss Sam Bankman-Fried, former CEO of FTX, according to a report by The Wall Street Journal.

“Nishad is deeply sorry for his role in this and has accepted responsibility for his actions. He wants to do everything he can to make things right for the victims, including by helping the government to the best of his ability in this case,” Andrew D Goldstein and Russell Capone, attorneys at Cooley LLP representing Singh, wrote to MarketWatch in an email.

Meanwhile, in a civil suit, the US Securities and Exchange Commission on Tuesday accused Singh of defrauding investors in his role at FTX, according to a complaint.

According to the SEC’s complaint, Singh created software code that allowed FTX customer funds to be transferred to Alameda Research, a crypto hedge fund owned by Bankman-Fried and Gary Wang, co-founder of FTX.

Cathie Wood roots for bitcoin

Cathie Wood, chief executive of ARK Invest, reiterated her support for cryptocurrencies such as bitcoin and ether on Monday, despite the collapse of several digital asset companies last year and fresh signs that US regulators want to tighten controls on the industry.

Wood called the Bitcoin network “completely decentralized and transparent,” but said bankrupt crypto companies FTX, Celsius and Three Arrows were “completely opaque and centralized,” in an interview with CNBC on Monday. “It was the companies that went under,” she said.

Crypto in a flash

Bitcoin lost 2.3% in the past week and was trading at around $23,472 on Thursday, according to CoinDesk data. Ether gained 0.2% in the same period to around $1,648.

Biggest Gainers    Price    %7-day return 
SingularityNET     $0.53    33% 
Stacks             $0.94    27.8% 
Maker              $886.33  16.6% 
Synthetix Network  $2.91    16.5% 
Bitget Token       $0.43    10.8% 
                            Source: CoinGecko 
Biggest Decliners  Price  %7-day return 
Conflux            $0.22  -20.5% 
Tezos              $1.18  -18.4% 
Hedera             $0.07  -16.6% 
Klaytn             $0.26  -16.6% 
WEMIX              $2.14  -16.1% 
                          Source: CoinGecko

Crypto companies, funds

Shares of Coinbase Global Inc. ( COIN ) rose 2.2% for the week to around $63.29. MicroStrategy Inc. ( MSTR ) lost 4.8% so far this week, to $252.01.

Crypto miner Riot Blockchain Inc. (RIOT) fell 3% to $6.13 as of Thursday. Shares of rival Marathon Digital Holdings Inc. ( MARA ) fell 14% to $6.28 in the past week. Ebang International Holdings Inc. (EBON) fell 6.5% in the last week to trade at $7.20.

Overstock.com Inc. ( OSTK ) stock fell 9.3% to $18.77 during the week.

Shares of Block Inc. ( SQ ), formerly known as Square, are up 5.3% to $77.99 for the week so far. Tesla Inc. ( TSLA ) shares were down 5.5% at $191.69.

PayPal Holdings Inc.’s ( PYPL ) stock fell 1.5% on the week to trade at around $74.08. Nvidia Corp.’s ( NVDA ) lost 1.5%, falling to $232.94 in the past week.

Advanced Micro Devices Inc. ( AMD ) shares were up 0.9% at $80.15 for the week.

Among crypto funds, ProShares Bitcoin Strategy (BITO) fell 2% on the week to $14.48 on Thursday, while counterpart Short Bitcoin Strategy ETF (BITI) traded up 1.3% to $27.24. The Valkyrie Bitcoin Strategy ETF (BTF) fell 1.4% in the past week to $9.25, while the VanEck Bitcoin Strategy ETF (XBTF) lost 1.8% to $23.59.

Grayscale Bitcoin Trust (GBTC) fell 2.3% over the past five days to $11.51 on Thursday.

– Frances Yue

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03-05-23 2030ET