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  • Frank Tian

Crypto Winter Froze Silvergate Bank

If you haven’t heard of Silvergate Bank, you are not alone.


It is a bank in San Diego, California.


I worked at San Diego for 5 years and never knew this bank - until May 2021. When I read the news it partnered with Meta, helping the previous Facebook to launch its US stablecoin Diem.


Later Meta abandoned its cryptocurrency ambition. Silvergate bought the remaining Diem assets for $200 million.


As a small bank, Silvergate wanted to ride the booming crypto wave to quickly scale up.


It provides deposit, fund transfer, security, and other services to many participants in the crypto ecosystem.


Everything went well per plan - until 2022.


A series of fast hikes in interest rate broke all bubbles of risky assets - including crypto.


The collapse of crypto entities, including the infamous FTX, eventually led to a bank run on Silvergate.


The last 2 months of 2022 saw an $8 billion fund outflow. The bank had to borrow an emergency fund from the Federal Home Loan Bank to stay solvent.


On Jan 17th, 2023, Silvergate reported a net loss of $1B in Q4 ‘22 - more than its total profit in the last 10 years.


It also wrote off the full value of the Diem assets acquired from Meta. Essentially Facebook created nothing from its 3-year crypto journey.


The Silvergate experience perfectly illustrates the risk of concentrating on a fast-growing but volatile business.


The upside potential is huge. So is the downside risk.


Note: Federal Home Loan Banks are 11 regionally-based, government-sponsored wholesale banks. They lend funds to financial institutions to support local housing, jobs, and economic growth.


Sources: BBC, Bloomberg




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