This crypto bank under the radar is soaring

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In 2013, Silvergate Capital (NYSE: SI) became interested in the rise of cryptocurrencies and sought to acquire major trading exchanges as banking clients. The bank created the Silvergate Exchange Network to allow crypto exchanges and their institutional clients to move dollars 24/7.

The bank is now focused almost entirely on serving the crypto industry. It has 93 crypto exchanges as bank customers, as well as 771 institutional investors. In this episode of The Five, Motley Fool contributors Jason Hall and Taylor Carmichael and analyst Auri Hughes talk about their favorite fintech stocks. Silvergate is Taylor’s favorite small cap in this space. This discussion was recorded live on August 31st.

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Jason Hall: I’m really interested to hear about the company you want to talk about here.

Taylor Carmichael: Silvergate Capital, TTY, SI. It’s a small, small-cap company with a market capitalization of $ 3 billion. It’s a very small bank in California. They have been around for over 20 years. They have been profitable for a long time. They were a boring bank forever, and they got really into cryptocurrency. And cryptocurrencies, they were there at the very beginning. The management decided “We want to get the trade as bank customers”, and they wanted to solve the problems with the crypto exchanges. Because this fintech is a new thing, it’s a new currency and they’re going to run into federal regulation at some point, having a bank by your side can really help. What they did was they built this trading exchange called Silvergate Exchange Network, SEN, and through this network it solved the problem of all trading exchanges like Coinbase (NASDAQ: COIN) and Gemini and the different. Thanks to this network, institutions that wish to exchange cryptocurrencies, $ 100 million or other, can do so 24/7 through the Silvergate network. Silvergate has all major exchanges as customers. They also have a bunch of institutions as clients. Basically at this point the old bank is gone and all it does is crypto. They are the bank of the crypto industry, and they are tiny. This is the amazing thing. It’s just a market cap of $ 3 billion. Their profit margin is 40 percent. Their turnover growth is 99%. Their numbers are incredible. All they have in their bank is cash. They don’t actually bank, they don’t hold cryptocurrencies. What they do is hold the dollars, and all these traders park dollars in Silvergate so they can go back and forth with the dollars. They trade on Coinbase or any exchange, and dollars change accounts at Silvergate. Silvergate, the way they make money, they have all these dollars in that account and they don’t pay any interest on their non-interest bearing accounts. It’s free money for Silvergate, and they’re basically getting interest on all of those deposits, and their deposits have grown dramatically, as you can imagine.

Jason Hall: Almost $ 12.3 billion in total assets at the end of last quarter.

Taylor Carmichael: It’s become very important, and they have two other big things going on. One is that they have a deal with Facebook (NASDAQ: FB), which is amazing because Facebook is a $ 500 billion company, but they have to work with this $ 3 billion company. When you see that kind of value need, to me it’s just a huge opportunity for the small business to grow into a much bigger business. Facebook is creating a stablecoin, and what they’re trying to do with that stablecoin is provide banking services to all the underbanked around the world who use Facebook but don’t have a bank account, and to be able to save money. money, change money, and just to use their coin. The point of Facebook is a reason to create cryptocurrency. Well, all the stablecoins out there are done through Silvergate. Silvergate is the expert for all of this. Facebook signed them up to do it. It’s just a really underrated and under the radar stock. My cost base is $ 15 or something. It’s a little over $ 100 now. I just wish Fools would take a look and tell me if there’s something wrong with me because I’m just in love with this business right now.

Jason Hall: This economic data looks really interesting. [laughs] there is no doubt.

Auri Hughes: It sounds very convincing, I’m going to have to put it on my watch list.

Jason Hall: There you go.

Taylor Carmichael: What’s interesting is that crypto was really important earlier in the year so the stock rose in December and zoomed higher. But even when the crypto cooled down, the stock didn’t really cool down because their numbers are still based on all ongoing transactions. It’s not just Bitcoin (CRYPTO: BTC), it’s all other cryptocurrencies that are traded with it. Often people just talk about Bitcoin.

Jason Hall: It’s interesting how cryptocurrency use cases continue to play out and more and more companies are getting involved. Like Facebook seeks to use it to solve problems for people in the real world. It will be interesting to see how this continues to unfold. A company like Silvergate is really cool because they’ve found a banking angle where they can be the experts and then take advantage of it. It’s gonna be fun.

This article represents the opinion of the writer, who may disagree with the official recommendation position of a premium Motley Fool consulting service. Were motley! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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