Why Silvergate’s Crypto Business Was Destined to Fail

Silvergate Bank was one of the first banks to offer services to cryptocurrency companies, and as the industry exploded in popularity in late 2017, the bank’s deposits from crypto companies skyrocketed.

But as the industry crashed in late 2022, Silvergate’s core block of business crumbled, and the bank lost more than $8 billion in value.

Why Silvergate’s Crypto Business Was Destined to Fail
Why Silvergate’s Crypto Business Was Destined to Fail

The sudden evaporation of its deposit base was only one of several concerns for the La Jolla, California-based lender. The company has faced pressures from U.S. banking watchdogs that have been insisting that banks shouldn’t concentrate on crypto, and its disclosures this week revealed investigations from regulators and the U.S. Department of Justice. In addition, its auditor has suggested that the company may need to restate its financials.

Apart from all that, its one-time crypto strengths have been waning. The value of Bitcoin, for example, has plunged by two-thirds since December, and that has taken a toll on the company’s holdings.

The Silvergate Exchange Network saw its highest volume in the first half of 2021, with $406 billion in transfers. However, this number decreased to $230 billion by the second half of 2022, revealing that the institution may have peaked in 2021.

And the bank’s overall asset size also reached a high point in the fourth quarter of 2021, increasing by $4.6 billion to $16 billion. Its most recent report showed it at $11.4 billion. This downward trend could be indicative of a larger problem in the economy.

Despite its outsized reputation as a key player in the digital assets industry, the scale of this bank’s assets is very small – comparable in size to a mid-sized community bank. In California, a slightly larger bank would be Farmers and Merchants Bank of Long Beach.

Silvergate Bank is different from other Long Beach community banks in one key way: their capital. The crypto bank rapidly slid into the final quarter of 2022 to a so-called leverage ratio that revealed they only had 5.4% of capital against total assets.

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