Why Silvergate Capital Sank in January
Shares of Silvergate Capital (NYSE: SI) fell 18.2% in January, according to data from S&P Global Market Intelligence. The bank and financial services provider is still reeling from the FTX scandal that rocked the cryptocurrency markets in late 2022, which had a relationship with Silvergate. Silvergate is down 82% over the past six months, making it one of the worst-performing stocks in the United States over that timespan.
Silvergate Capital is a bank that provides services for the crypto market. It provided -- and still provides -- depository services for other companies that are in the crypto space. One of these customers was the infamous FTX, run by the fraudster Sam Bankman-Fried. After FTX declared bankruptcy and it was revealed that it stole upwards of $10 billion in customer assets, investors started to fear what exposure Silvergate had to this fraud, if any.
Turns out that the FTX scandal had a huge impact on Silvergate. At the end of 2022, Silvergate had $3.8 billion in deposits from digital asset (i.e. crypto) customers, down sharply from $11.9 billion at the end of September. It's not a good thing for a bank to lose the majority of its deposits in such a short time period. For one thing, it gives it less capital to make loans with. For another, it can cause a run on the bank, where all of its customers ask for their deposits back at once as they fear Silvergate lacks the liquid reserves to pay them. This situation can cause a bank to resell its loans at low prices to raise cash, which is what happened to Silvergate in late 2022.
Source Fool.com
