Why Coinbase, MicroStrategy, and Silvergate Capital Crashed This Morning

what happened

Several stocks in the crypto space cratered in Monday morning trading as investors braced themselves for what is expected to be another big interest rate hike from the Federal Reserve this week, but there were more crypto-specific issues dragging on them as well.

Shares of crypto exchange operator Coinbase (CORNER -14.90%) had fallen more than 18% as of 9:32 am ET. Business intelligence company and Bitcoin (BTC -18.09%) buyer MicroStrategy (MSTR -27.15%) had fallen by nearly 22%, and crypto-focused bank Silvergate Capital (IF -16.83%) was down by almost 13%.

So what

The price of Bitcoin was below $24,000 as of this writing, as cryptocurrencies tanked by a double-digit percentage over the weekend. The moves of crypto stocks usually correlate with the price of Bitcoin, so it is no surprise to see them struggling.

The broader stock market was down on Monday morning as well after the government’s monthly inflation report on Friday showed that the Consumer Price Index (CPI) had risen by 8.6% year over year in May, more than economists had been expecting. The CPI tracks the prices of a market basket of commonly purchased goods and services, and is a key metric used to gauge inflation.

Investors are now even more concerned that the US is headed for a recession, and possibly a period of stagflation. Many economists thought inflation might have already peaked, but May’s CPI data could suggest otherwise. The longer high inflation persists, the more aggressive the Fed will have to be about tightening up its monetary policy, which could continue to hurt riskier assets like cryptocurrencies. After the Federal Open Market Committee meets this week, it could raise its benchmark overnight lending rate by another 0.5 percentage points — or potentially even 0.75 percentage points.

Looking specifically at the issues MicroStrategy faces, the company has in the past couple of years acquired quite a lot of Bitcoin. Some of those purchases were financed with borrowed money, and in some cases, the company put up its own Bitcoin to back the loans. Management has said in the past that if Bitcoin drops to $21,000, that could trigger margin calls in which MicroStrategy would have to put up more Bitcoin to collateralize its loans. This latest plunge has put Bitcoin uncomfortably close to that level, and the prospect of those margin calls is likely spooking investors.

In fact, one of those loans — for roughly $205 million — was made by Silvergate Capital. Silvergate has built a real-time payments network to better facilitate crypto trading between institutional investors and crypto exchanges because much of the US banking system doesn’t operate in real-time. It also has started issuing loans collateralized by Bitcoin. At the end of the first quarter, the bank still hadn’t had any losses on those loans, nor had there been any forced liquidations on them. The loans are extremely well collateralized, and Bitcoin is a liquid asset, so I suspect Silvergate wouldn’t have any issues, but the current environment could still be a little nerve-racking for investors.

Now what

The price moves of Bitcoin and the broader crypto market are unpredictable, and I acknowledge that they certainly could fall further in the near term. Still, I am bullish on Bitcoin as a long-term holding, and believe it’s a good long-term buy at these levels for investors who can handle the volatility. And if you think Bitcoin will thrive, then I think Coinbase has upside as well as the largest crypto exchange in the US

Image source: Getty Images.

My favorite pick of this group of beaten-down assets, however, is Silvergate Capital. Its loans are well collateralized by Bitcoin and its trading platform brings in lots of zero-cost deposits from its many large clients. Silvergate will be able to invest these deposits into higher-yielding assets as interest rates rise.

In fact, Wells Fargo analyst Jared Shaw on Monday morning initiated coverage on Silvergate with an overweight rating and a $120 price target, implying significant upside from its current share price of just below $65. Shaw said that he thinks much of the bear case has been priced into the stock, and that the bank will benefit as crypto continue to become more mainstream.

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