Silvergate shares fall by nearly 50% over FTX exposure. This raises survival concerns

The share price of cryptocurrency-focused US bank Silvergate plummeted by nearly 50% in early trading on Thursday after fresh revelations about the extent of its exposure to the collapse of crypto exchange FTX raised questions about its ability to survive.

It delayed publishing its annual report on Wednesday and announced a new sale of assets to pay debts. However, it also warned that it was evaluating “its ability to remain as a going concern” through a filing to the SEC, the US regulator for financial markets.

Silvergate also indicated that it would be subject to further regulatory scrutiny in its filing. This could lead to a reduction in profitability.

It stated that its business could be adversely affected “various litigation (including private lawsuits) and regulatory inquiries and investigations”, which include congressional committees and the US Department of Justice.

This warning sparked a frenzy of activity with major partners, including cryptocurrency exchange Coinbase, dropping Silvergate in an avalanche to safety.

Coinbase used Silvergate to process cash transactions for customers. Coinbase stated that due to “recent developments” and an excess of caution, Coinbase has stopped accepting or initiating payments from Silvergate.

“Coinbase has de minimis corporate coverage to Silvergate,” added the company in a tweet.

After Coinbase’s announcement on Thursday, Silvergate shares plunged nearly 50% to $7 during early trading on New York’s stock exchange. However, they recovered slightly to $7.60 on Thursday. They closed at $13.53 on the previous day. Its stock price reached an all-time high at $219.75 during the crypto boom of late 2021.

The bank, more than 30 year old, moved its entire business to the service of the cryptocurrency industry in 2013. It grew quickly alongside the sector.

However, the collapse by FTX exposed it, and it announced plans to sell $5bn of assets for money at the start of 2023, announcing a loss of almost 20% to address “sustained lower deposits levels” and maintain a liquid balance sheet.

Silvergate had seen cryptocurrency users withdraw funds from crypto exchanges. These exchanges then withdrawn currency from their accounts at Silvergate making it dangerously inliquid. It said that these withdrawals were due to a “crisis in confidence throughout the ecosystem”.

Silvergate is still struggling, but other areas of the crypto industry are flourishing. Bitcoin and Ethereum both have increased by 40% since the beginning of the year. Coinbase is also up 76% over the same period, despite a slight stumble due to its relationship with the bank.

According to the industry newsletter Crypto Global this rally is not leading to optimism. Akash Pasricha, a writer, said that crypto-vcs founders and investors are now adopting a measured mindset.