Foreign from 2020 through November of 2021, the single best performing Bank stock in the U.S was a little-known bank called Silvergate. Capital The company ipo'd on the New York Stock Exchange in 2019 for 12 dollars per share. At the time, it had a little under 2 billion dollars of assets. By the end of 2021, Silvergate's assets had grown eight-fold to 16 billion dollars and its stock price had increased 18 fold to 219 dollars.

The impressive growth attracted investors including Kathy Woods Ark Invest, which became a major shareholder in the bank. Banking is a mature and slow-moving industry. It's highly unusual for any bank to grow so much in such a short period of time, but there is nothing normal about Silvergate. Silvergate focused almost exclusively on the crypto industry, with FTX being one of its biggest clients.

In December of 2022, Silvergate announced roughly 1 billion dollars of losses related to a massive asset liquidation. This loss threatens to wipe out roughly 90 percent of the bank's tangible Book value. The stock has lost all of its gains and there are serious questions about how much longer it can continue operating as a going concern. To make matters even worse, the bank is also facing a lawsuit accusing it of complicity and Sam Beekman Freed's fraud.

FTX Alameda and other related entities head over 20 Silvergate bank accounts, which they use to misappropriate billions of dollars in customer assets. In this video, we'll look at how Silvergate became the backbone of the crypto industry and how its downfall will impact the financial system for years to come. This video is brought to you by Masterworks The collapse of the crypto industry in Silvergate. Bank Highlight the fact that no investor should ever put all their eggs in one basket.

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And now back to the video. Silvergate was founded in the 1980s as a small Community Bank in Southern California They only had a handful of branches and operated as a normal Bank taking deposits and lending to small businesses and home buyers. But this all changed when they hired a man called Alan Lane to be CEO in 2013 Lane became interested in Bitcoin and personally invested in the cryptocurrency. But more importantly, he also decides to Pivot Silvergate to focus almost exclusively on the emerging crypto industry.

Unlike the stock market cryptocurrency markets are open 24 7. people can buy or sell cryptocurrencies at all hours of the day. The problem is most banks only operate during regular business hours. Additionally, wire transfers and ACH transfers typically take a few business days to process.

Lane Wanted to create a new banking solution tailored specifically towards the needs of the crypto industry, so he created The Silvergate Exchange Network or Sen. Sen allows customers to send and receive US dollars to other Silvergate accounts 20 24 hours a day, seven days a week and 365 days a year. The primary customers of Sen were crypto exchanges. He used this to settle US dollar related transactions in real time.

This gives end users of the crypto exchanges the capability to transact in either crypto or US dollars at any time of the day unconstrained by the normal business hours of Old School Banks Over the subsequent years, Silver gets deposit base exploded. as more and more crypto exchanges opened Silvergate bank accounts. They also benefited from a lack of competition in the space with uncertainty around regulation. Most banks didn't want anything to do with crypto exchanges, giving Silvergate the opportunity to take dominant market share in the nascent industry.

In 2019, Silvergate sold off its Legacy small business lending unit in California. With this, the bank was all in on the crypto industry. That same year. They ipo'd on the New York Stock Exchange Silvergate stock became popular with the crypto bowls, including Kathy Wood.

Silvergate's IPO was just in time for the crypto Mania of 2020 and 2021, which provided an unprecedented Boom for the bank. The price of Bitcoin was skyrocketing as institutional investors, including microstrategies started buying billions of dollars worth of the coin, millions of individual investors started opening up crypto accounts for the first time. By this point, Silvergate became an indispensable backbone for the entire industry. Just about every large crypto exchange had bank accounts with Silvergate including FTX.

Silvergate prominently posted a testimonial from Sam Binkman Freed on their website saying that the firm revolutionized banking for blockchain companies. At the height of the crypto. Mania In 2021, Silvergate's assets exploded to over 16 billion dollars and their net income increased almost 80 billion dollars. Things were going so well for Silvergate.

Then in January of 2022, they paid 180 million dollars to acquire the remains of Facebook's failed blockchain project DM Silvergate intends to pick up where Facebook left off in creating a blockchain based payment solution. The vast majority of Silvergate's deposits were a non-interest-bearing accounts. Because of the unique services offered by the Sen. Network Crypto exchanges were willing to deposit their cash at Silvergate, despite the fact that they earned zero interest, so forget invested them primarily in U.S government bonds.

These offered low yields, but are risk-free and given that Silvergate's cost of deposits was Zero, they were still able to make a positive net interest margin. They also lent money to crypto companies, including microstrategy using Bitcoin as collateral, but this only represented a very small part of their balance sheeting. While Alan Lane had created an extremely profitable system, it also turned Silvergate into a one-trick pony. Most banks have sophisticated lending operations which allow them to earn yields far in excess of government bonds.

For example, they might originate loans for automobile purchases or home mortgages. If a bank can make enough money on their loans, they can afford to offer attractive interest rates on savings accounts to attract depositors after selling off their small business lending division, so Overgate had almost zero ability to originate High yielding loans. Their entire business model revolved around taking non-interest bearing deposits from crypto exchanges. If that fails, their entire business model would collapse when FTX collapsed.

In November Of 2022, the House of Cards finally came crumbling down. FTX Alameda and other related entities had more than 20 bank accounts at Silvergate with over 1 billion dollars of aggregate deposits. The FTX collapse caused a Monumental shift in the entire crypto industry. When the most reputable firm in the industry turned out to be a fraud.

people lost confidence and started withdrawing their money from all exchanges. Silvergate did not lend any money to FTX or any of the other crypto exchanges that went bankrupt. Nevertheless, the Meltdown of the crypto industry still proved catastrophic. Many asset managers and other institutional investors started liquidating their crypto Holdings due to Contagion fears.

On January 5th Silvergate published preliminary Fourth Quarter Financial results which showed the extent of the FTX Fallout their deposits decreased by 8 billion off a base of 13 billion dollars. That's a 61 decrease. To make good on the withdrawal requests, Silvergate was forced to liquidate 5.2 billion dollars worth of Assets in the fourth quarter, and they expect to liquidate another 5.6 billion dollars in the first quarter of 2023. This adds up to a massive 10 billion liquidation.

The assets that they liquidated included government bonds, mortgage-backed Securities, and municipal bonds. As interest rates have risen, the value of these bonds have decreased. Thus, Silvergate expects to recognize a roughly 1 billion dollar loss in the liquidation. Also, remember that just last year, Silvergate spent roughly 200 million dollars to acquire Facebook's failed blockchain project called DM.

Given the fears around the crypto industry, Silvergate believes it would no longer be feasible to launch a blockchain-based payment solution, so they recognized a 196 million dollar impairment charge. This means they believe the DM assets that they acquired just one year ago are now completely worthless. Prior to the FTX collapse, Silvergate had about 1.1 billion dollars of tangible Book value. The one billion dollars of liquidation losses will bring their Book value down by roughly 90 percent.

This is a catastrophic loss FTX and Alameda had over 20 Silvergate accounts, which they used to facilitate their massive fraud. Before Fdx's collapse, Silvergate prominently displayed a testimonial by Sam Bateman Freed on their website. Obviously, this is incredibly embarrassing in hindsight, but at the time FTX was one of their largest customers. Supposedly sophisticated investors including Sequoia Capital BlackRock Tiger, Global and Kevin O'leary were all fooled by SPF.

However, as a regulated Bank, Silvergate's level of responsibility is far greater. The U.S Banking industry is highly regulated. Banks are required to monitor their customer accounts for anomalous or suspicious behavior. For example, if somebody comes to the bank branch to deposit ten thousand dollars of cash every weekend there's a high probability that they're involved in money laundering.

The bank is required to investigate this customer and potentially report it to law enforcement. While it's impossible to catch every single instance of money laundering, banks are illegally required to put sufficient systems in place to prevent fraudulent transaction. In December An FTX victim named Joey Gonzalez by all the class-action lawsuit against Silvergate claiming that they are negligent in their responsibilities SPF himself has admitted that customer wire deposits were improperly sent to Alameda's bank account for a period of time. According to the lawsuit, the Alameda bank account in question was at Silvergate.

The Alameda bank account presumably received huge numbers of small deposits from Individual investors who thought that they were depositing to FTX. It is highly unusual for a hedge fund like Alameda to receive large numbers of small deposits and miscellaneous amounts. Silvergate never reported anything to The Regulators instead allowing FTX and Alameda to continue using their bank accounts until the fraud imploded in November of 2022.. up until a few years ago, Silvergate was a tiny Community Bank in California With only a handful of branches and a few dozen employees and less than a billion dollars of deposits, they expanded rapidly to 500 employees and 13 billion dollars in deposits.

In hindsight, it looks like they were in way over their heads. They had no idea that one of their biggest customers was a massive fraud. Bernie Madoff used a Chase bank account to deposit the money he raised from his Ponzi scheme. JP Morgan was criminally charged with failing to do sufficient due diligence as required by the bank secrecy act.

Even though JP Morgan was not directly involved with the fraud, they still had to pay 1.7 billion dollar fine. JP Morgan could afford to pay that fine so the bank survived. Silvergate is not JP Morgan with their tangible Book value already down 90 percent, one large fine could destroy them. Even if Silvergate is not found criminally liable, it's unclear whether their business model will remain viable.

Silvergate was once a small but respectable and profitable community bank in California. Had they been content with being a normal bank, they could have continued to serve their Community for generations to come. They instead decided to go all in on crypto. while neglecting their traditional banking capabilities.

With the share price having declined by 90 percent, their business may prove difficult to salvage. All right guys, that wraps it up for this video. What do you think about Silvergate? let us know in the comments section below. As always, thank you so much for watching and we'll see you in the next one.

Wall Street Millennial Signing out.