Important Points

Some of the world’s largest cryptocurrency exchanges and financial institutions use Silvergate’s fiat-money services. Its low leverage and increasing consumer demand make the stock an excellent buy.

When there is a big risk, there is virtually always the possibility of a large payoff. In an era when regulators around the world are cracking down on the expanding cryptocurrency market, one company is not only unafraid of setbacks, but thriving. Of course, I’m referring to Silvergate Capital (NYSE:SI), which has returned 603.8 percent in the last year.

In fact, the cryptocurrency bank outperformed Bitcoin’s 477.4 percent gain within the same time period. So, what’s the deal with Silvergate’s unexpected popularity? Let us investigate.

A very unique bank

Silvergate is a stepping stone into the fascinating world of cryptocurrencies.

The company’s main areas of operation are as follows:

  • The Silvergate Exchange Network (SEN) enables the transfer of USD between cryptocurrency exchanges and institutional investors.
  • Conversion of fiat-backed cryptocurrency (stablecoins) to USD
  • Borrowers can obtain low-interest USD asset loans by depositing their Bitcoin as security.

Cryptocurrency storage that is secure

Currently, the company provides similar services to 93 cryptocurrency exchanges and 771 institutional investors, including hedge funds., Coinbase, Fidelity Digital Assets, PayPal, and CME Group are among the notable clients. It also has 360 customers who are involved in activities such as crypto mining and the development of decentralized finance services.

Silvergate facilitated a record $239.6 billion in transfers on its network during the second quarter of 2021, earning $11.3 million in revenue. Both are huge improvements from the $22.4 billion in SEN transactions and $2.4 million in the income generated in Q2 2020.

In a technique known as fractional reserve banking, the corporation, like any other bank, lends money while only utilizing a portion of its deposit as collateral. Total leverage has more than tenfold grown in the last year, reaching $258.5 million in loans in Q2.

Why should you invest now?

The current international banking standards (Basel III) require that a bank’s capital be at least 8% of its risk-weighted total assets (loans, mortgages, etc.). This is referred to as the risk-based capital ratio (RBC). It assures that a rapid stock sell-off or surge in default rates will not deplete a bank’s capital because of the latter’s leverage. The higher the ratio, the healthier the bank, but the lower the profits because of less leverage.

Major banks in the United States typically have an RBC of 15% and a net interest margin (NIM) of 2% to 5%. However, it is evident that Silvergate is an extremely conservative bank, as its RBC is a stunning 48 percent, with a NIM of 1%.

As a result, there is clearly a lot of space for the company to leverage up and increase its returns. Furthermore, its default rate is close to zero percent, compared to 0.05 percent for its competitors.

With the growth of the $172.15 billion decentralized finance (DeFi) market, there are more chances than ever for investors to buy and retain cryptos while earning a stable income. As a result, Silvergate’s fiat-crypto services will continue to be in high demand.

Not to mention its capacity to extend its loan portfolio and increase interest income. Overall, even at 38 times earnings in the future, I’d consider this a high-flying crypto company to purchase.