This Cryptocurrency Focused Bank might be worth a look

Capital of Silvergate (NYSE: SI) it is not exactly a household name in banking, but has emerged as a solution to the banking needs of the rapidly growing cryptocurrency industry. With a client list that reads like a “who’s who” of major cryptocurrency exchanges, hedge funds, and other major industry players, Silvergate could be a big beneficiary if cryptocurrency adoption gains momentum.

Two of our banking experts recently decided to look at how Silvergate’s business works, and what an interesting investment opportunity it could be. In this November 30 Fool is Alive video clip, contributor, Matt Frankel, CFP, a Industry Focus host Jason Moser delves deep into what Silvergate does, how it makes its money, and what investors should remember about this unique bank stock.

Jason Moser: A recent question from a listener, Matt. Ben on Twitter (NYSE: TWTR) asks, “Hi Jason, any chance for an industry-focused episode on Silvergate Capital. It’s a bank with a platform for cryptocurrency called the Silvergate Exchange Network, the AAA, with lots of institutional transactions. Thank you and Matt financial discussion. interesting. ” I say, he concluded, “You and Matt make a financial discussion interesting” with the laughing face, with the small tears of laughter. I mean, maybe that’s LOL. It was a very thoughtful feeling and it sounds like we’re at least doing our job well enough. Let’s keep doing what we’re doing, Matt. But Ben, thank you very much for the question. I’ve never dug into Silvergate before. I had heard about it. A very small bank, of course. But not too small. That is, it’s just a small cap bank. An interesting one nonetheless. Looking a bit more into the Currency Exchange Network, especially in this age of digital currencies, this seems to be a bank that may become a little more relevant as time goes on. What do you think of Silvergate, Matt?

Matt Frankel: Yes. As you said, they are not a very big bank. They are big enough that we can talk about them, but not much more.

Jason Moser: About a $ 600 million market cap, something like that.

Matt Frankel: The Silvergate Exchange Network, which is currently the most interesting part of the business. I was reading that as a mediator it facilitated the transfer of funds from one cryptocurrency player to another. That sounded interesting enough. But then I start reading their customer list and Coinbase is one of their customers, Gemini is one of their customers. The use case is, usually if a customer buys Bitcoin in US dollars, because when you buy bitcoin, you use money. The exchange would have to transfer that somewhere, then it takes a couple of days. It will then be transferred to another exchange to buy crypto or something like that. What the Silvergate Exchange does, it facilitates these 24-7 real-time cash transfers between cryptocurrency exchanges and large hedge funds and other digital money players. There are mining operations that are customers of the bank. It’s an interesting case. They have over two billion dollars worth of cryptocurrency deposits. Most of their deposits are in cryptocurrency, not US dollars, which is an interesting case.

Jason Moser: You square that up to the balance sheet of squares with 50 million in bitcoin. That is, that can give you at least some context as to how big of a role crypto plays for a company like this.

Matt Frankel: This was not always a crypto bank. On their website, he said, they have been profitable for 21 years. So they’ve been around for at least that long. Their CEO has been there since 2008. They switched to crypto in 2013, good timing. There was a first for the party it sounds like.

Jason Moser: Perfect timing.

Matt Frankel: Coinbase, Gemini, those are some of the biggest players in the industry namely their customers that they use for their money transfers. It’s an interesting industry right now. It’s worth mentioning that there are two sides to their business as a bank. There are deposits and borrowing. Quite the exchange network and the crypto deposits. That’s the deposit side. On the lending side, they are a mortgage lender. That is interesting. Looks, most of their assets are either mortgage backed securities or so-called warehouse mortgages, which means credit lines for mortgage brokers. They are mortgage lenders. Their loan portfolio is actually quite high quality. I saw that their non-performing loan rate is currently 0.16 percent, which is very low if you look at some of the other banks right now.

Jason Moser: That is exceptional.

Matt Frankel: It’s interesting. That’s how they make their money; a combination of income from their lending portfolio, which are primarily mortgages of a commercial nature. Commercial mortgages and they make fee income from their cryptocurrency activity. Interesting bank. This is not investing in it Bank of America (NYSE: BAC) or even one of the smaller, more tech-focused banks like we’ve talked about on the show. It’s a play on the cryptocurrency industry. The more money flowing through cryptocurrency exchanges, the more they are going to make.

Jason Moser: I think you summed it up nicely there. That is, if you look at the way the stock has performed here so far, it was more or less tracking the market until October. But starting in October, shortly after they released their quarterly results, the stock went, as they like to say, parabolic, man. Just gone straight up. Stock so far has returned about 125 percent against the markets, close to 12 or something. Clearly, Silvergate is having a very good year. I can at least understand and when you look through the latest quarter transcript, customers completed over $ 36 billion in Silvergate Exchange Network transfers during the third quarter alone. Now that was more than $ 32 billion made all throughout 2019 combined. Obviously, the Silvergate Exchange Network is gaining a lot of traction and that may be the enthusiasm there. I can certainly understand it based on your description of how the company makes its money. I repeat, this is a small bank, a 600 dollar million market cap around. Also worth noting is that it has a very low float. There are a low number of shares outstanding, just under 19 million, it seems. Half of that is basically the open market float. My point is anytime you see a small cap bank like that with a low float, you’re usually going to see some hefty motion and ask spreads, and you’re going to see some pretty volatile movement from from time to time. All in all, if it’s a bank you’re interested in, it’s the kind of bank where I think a limit order makes a lot more sense if you’re interested in owning it.

Matt Frankel: Yes, for sure. I would tip this one out if you were interested in it.

Jason Moser: Yes.

Matt Frankel: I prefer to own real Bitcoin as an investment.

Jason Moser: Yeah, I was wondering about that really.

Matt Frankel: Like that mortgage side the business should provide a nice steady income and then the fee income side of the business is the growth path. It’s like a nice combination of revenue potential and steady, predictable, cyclical growth. But like I said, I like it better than investing in actual cryptocurrency, but like I said, this is not Bank of America nor Chase JPMorgan (NYSE: JPM), so we’ll be tipping carefully.