Here’s the real challenge facing Silvergate and other ‘crypto banks,’ says this short seller

By Frances Yue

Hello! Welcome back to Distributed Ledger. This is Frances Yue, crypto reporter at MarketWatch.

Silvergate Capital Corp. shares (SI) closed down over 57% Thursday, after the crypto-friendly bank said in a regulatory filing Wednesday that it would not be filing its audited 2022 annual report on time and it is evaluating a series of events’ impact on its ability to continue as a going concern.

Several crypto companies, including Coinbase, Galaxy Digital, Paxos and Circle, said they would cease all or part of payment transactions with the bank.

In this installment, I’ll break down what it means for the crypto industry.

You know the drill — find me on Twitter at @FrancesYue_ to share any thoughts on crypto, this newsletter or your personal stories with digital assets.

The Silvergate problem?

Brad Lamensdorf, co-portfolio manager of Ranger Equity Bear ETF (HDGE), an active short-only exchange-traded fund, said the fund started shorting Silvergate stock when it was trading at around $50 and covered the position after it went down to $15, as it started to become “really expensive to borrow.”

Silvergate stock has lost over 97% of its value since it reached an all-time high at over $200 in November 2021, according to Dow Jones market data.

Lamensdorf said he has been bearish on Silvergate and some crypto native companies, namely because he thinks they won’t be able to compete with traditional finance heavyweights like Morgan Stanley(MS) or Goldman Sachs Group(GS), once they bulk up their offerings and as crypto regulation comes into play. Smaller banks and some crypto-native broker dealers “won’t be able to compete, because they don’t have the type of balance sheets that these other big banks have,” said Lamensdorf.

The smaller, crypto-friendly banks “are trying to house a lot of value in a capital banking base that is incredibly unstable,” said Lamensdorf. “The whole industry is just not set up to properly work the way Morgan Stanley or Goldman Sachs would work right now.”

For now, concerns around Silvergate are forcing crypto companies to concentrate more on other platforms, according to Lamensdorf. Banks have been traditionally reluctant to work with crypto companies due to the lack of regulation, and it means that crypto companies haven’t had many options in terms of where to store their deposits.

If Silvergate goes under, it would “narrow the opportunities of businesses for crypto companies,” said Julius de Kempenaer, senior technical analyst at StockCharts.com.

Silvergate declined to comment beyond its Wednesday regulatory filing.

It might come to point where “you have 90% of everybody at one place, which is terribly dangerous because if that one place goes down, you don’t have any diversification,” according to Lamensdorf.

Signature Bank, a different crypto-friendly bank, saw its shares down 2.7% Thursday, according to Dow Jones market data.

Still, major cryptocurrencies seem to be holding up well Thursday, with bitcoin trading above $23,000 and ether at slightly below $1,650.

FTX co-founder pleads guilty

Nishad Singh, co-founder and former head of engineering at bankrupt crypto exchange FTX, reportedly pleaded guilty to six criminal charges in New York, including conspiring to commit securities and commodities fraud on Tuesday, according to several media reports.

Singh has also agreed to cooperate against his previous boss Sam Bankman-Fried, former chief executive at FTX, according to a report by The Wall Street Journal.

“Nishad is deeply sorry for his role in this and has accepted responsibility for his actions. He wants to do everything he can to make things right for victims, including by assisting the government to the best of his ability in this case,” Andrew D. Goldstein and Russell Capone, lawyers at Cooley LLP representing Singh, wrote to MarketWatch in an email.

Meanwhile, in a civil action, the U.S. Securities and Exchange Commission on Tuesday charged Singh with defrauding investors in his role at FTX, according to a complaint.

According to the SEC’s complaint, Singh created software code that allowed FTX customer funds to be transferred to Alameda Research, a crypto hedge fund owned by Bankman-Fried and Gary Wang, co-founder of FTX.

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Cathie Wood roots for bitcoin

Cathie Wood, chief executive at ARK Invest, reiterated her support for cryptocurrencies such as bitcoin and ether on Monday, despite several digital asset companies collapsing last year and fresh signs that U.S. regulators want to tighten their control over the industry.

Wood called the Bitcoin network “completely decentralized and transparent,” but said bankrupt crypto companies FTX, Celsius and Three Arrows were “completely opaque and centralized,” in an interview with CNBC on Monday. “Those were the companies that went under,” she said.

Crypto in a snap

Bitcoin lost 2.3% in the past week and was trading at around $23,472 on Thursday, according to CoinDesk data. Ether edged up 0.2% in the same period to around $1,648.

Biggest Gainers    Price    %7-day return 
SingularityNET     $0.53    33% 
Stacks             $0.94    27.8% 
Maker              $886.33  16.6% 
Synthetix Network  $2.91    16.5% 
Bitget Token       $0.43    10.8% 
                            Source: CoinGecko 
Biggest Decliners  Price  %7-day return 
Conflux            $0.22  -20.5% 
Tezos              $1.18  -18.4% 
Hedera             $0.07  -16.6% 
Klaytn             $0.26  -16.6% 
WEMIX              $2.14  -16.1% 
                          Source: CoinGecko 

Crypto companies, funds

Shares of Coinbase Global Inc. (COIN) gained 2.2% for the week to around $63.29. MicroStrategy Inc. (MSTR) lost 4.8% thus far on the week, to $252.01.

Crypto mining company Riot Blockchain Inc. (RIOT) dipped 3%, to $6.13 as of Thursday. Shares of rival Marathon Digital Holdings Inc. (MARA) tumbled 14% to $6.28 over the past week. Ebang International Holdings Inc. (EBON) declined 6.5% over the past week and was trading at $7.20.

Overstock.com Inc. shares (OSTK) dropped 9.3% to $18.77 over the week.

Shares of Block Inc. (SQ), formerly known as Square, went up 5.3% to $77.99 for the week thus far. Tesla Inc. (TSLA) shares went down 5.5% to $191.69.

PayPal Holdings Inc.’s (PYPL) stock slid 1.5% over the week to trade at around $74.08. Nvidia Corp.’s (NVDA) lost 1.5%, dropping to $232.94 for the past week.

Advanced Micro Devices Inc. (AMD) shares went up 0.9% to $80.15 for the week.

Among crypto funds, ProShares Bitcoin Strategy (BITO) dipped 2% over the week to $14.48 Thursday, while counterpart Short Bitcoin Strategy ETF (BITI) traded up 1.3% to $27.24. Valkyrie Bitcoin Strategy ETF (BTF) declined 1.4% over the past week to $9.25, while VanEck Bitcoin Strategy ETF (XBTF) lost 1.8% to $23.59.

Grayscale Bitcoin Trust (GBTC) dropped 2.3% over the past five days to $11.51 on Thursday.

-Frances Yue

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03-04-23 1403ET

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