Here is a cryptocurrency stock to buy now
Whenever there is a high risk, there is almost always a chance of getting a high reward. At a time when regulators around the world are grappling with the burgeoning cryptocurrency space, there is a company that not only isn’t deterred by setbacks, but thrives. Of course i’m talking about Capital of Silvergate (NYSE: SI), whose share has returned 603.8% in the past year.
Heck, the cryptocurrency bank even broke Bitcoins by 477.4% over the same period. So why is Silvergate all of a sudden so popular? Let’s find out.
A unique bank
Silvergate is a gateway to the mysterious realm of cryptocurrency. The company has four main areas of activity:
- The Silvergate Exchange Network (SEN) which facilitates the transfer of USD between cryptocurrency exchanges and institutional investors
- Converting crypto backed by fiat money (stablecoins) to USD
- Access to low-interest USD asset loans as borrowers deposit their Bitcoin as collateral
- Secure storage of cryptocurrencies
The company currently provides such services to 93 cryptocurrency exchanges and 771 institutional investors such as hedge funds. Notable clients include Binance.us, Coinbase, Fidelity Digital Assets, Pay Pal, and CME Group. It also has 360 clients engaged in activities such as mining cryptocurrencies or building decentralized financial services.
During the second quarter of 2021, Silvergate facilitated $ 239.6 billion in transfers over its network, recognizing $ 11.3 million in revenue. Both represent significant increases from the $ 22.4 billion in SEN transactions and the $ 2.4 million in revenue it generated in the second quarter of 2020. Like any other bank, the company lends money while using only a portion of its deposit as collateral in a process called fractional reserve banking. Total indebtedness has more than increased tenfold in the past year to reach $ 258.5 million in loans in the second quarter.
Why invest now?
According to current international banking regulations (Basel III), a bank’s capital must represent at least 8% of its total risk-weighted assets (loans, mortgages, etc.). This is called the risk-based capital ratio (RBC). It ensures that a sudden liquidation of shares or a rise in default rates would not wipe out a bank’s capital due to bank leverage. The higher the ratio, the healthier the bank is, but the lower its profits are due to less leverage.
Large US banks typically have an RBC of 15% and have a Net Interest Margin (NIM) of between 2% and 5%. However, it is clear that Silvergate is a very conservative bank as its RBC stands at a whopping 48% while having a NIM of 1%. So there is certainly a lot of room for the company to leverage and strengthen its returns. In addition, its default rate is around 0%, compared to 0.05% for its competing banks.
With the $ 172.15 billion decentralized finance (DeFi) industry boom, investors now have more opportunities than ever to buy and hold cryptos and earn fixed income with them. As a result, expect continued massive demand for Silvergate’s fiat-crypto services. And also don’t forget its ability to expand its loan portfolio and increase interest profits. Overall, I would consider this to be a top-notch crypto stock to buy, even at 38 times the profits going forward.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.