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In This Issue:
This Blood Isn't Red, It's Silver
Bitcoin Thoughts And Analysis
Legacy Markets
Shanghai Delays
Michael Saylor Is Still In The Hot Seat
Voyager Update
Has Crypto Bottomed? David Duong, Dan Gunsberg, Mark Yusko
This Blood Isn't Red, It's Silver
The crypto world woke up yesterday morning to a horrific murder scene.
*Graphic imagery ahead*
Silvergate is currently lying on the floor nearly dead, gasping for air and gushing blood. There’s nothing we can do but watch in horror. This is crypto, so I don't think there will be anyone coming to help anytime soon.
Silvergate Bank has been left for dead.
This is the story of how crypto’s (once) most relied-upon bank died a sudden and painful death.
I have covered Silvergate numerous times in the past few months, but have yet to put together a full story. Well, now’s the time. Silvergate Capital (Silvergate) is the parent company of Silvergate Bank. Silvergate Capital Corporation - the full name of the company - is listed as SI on the stock exchange.
Let's take a look at what Silvergate claims to be in order to understand this company. According to their website: “We began pursuing digital asset customers in 2013 and have been deliberate in our approach to serving this community since then. We leverage our technology platform and our management team's expertise to develop solutions for many of the largest U.S. digital asset exchanges and investors around the globe.”
However, this summary now requires an update or post-mortem due to the dire situation that Silvergate currently faces. In just a matter of hours, the bank has lost nearly all of its crypto customers. As of yesterday, Coinbase, Bitstamp, Paxos, Circle, Crypto.com, Galaxy, Gemini, and the CBOE have all pulled away from Silvergate Bank. Ledger left last week, and Kraken left a while ago. In short, Silvergate no longer has any crypto customers left to serve. Additionally, a few months ago, they lost one of their largest customers, FTX, and likely other smaller bankrupt exchanges and funds that we may not even be aware of.
So why is this exodus happening?
Here is a list of everything that went wrong, which largely stems back to crypto contagion.
SI wrote off its acquisition of Diem.
A net loss of $1 billion was reported for Q4.
The Department of Justice initiated a fraud probe into the bank for its relationship with FTX.
SI was involved in suspicious Binance.US transfers.
A bipartisan group of Senators is investigating SI.
40% of the workforce was laid off.
Withdrawals spiked after FTX ($8.1 billion).
SI was forced to sell $5.2 billion in debt securities to counter the outflows.
A board member left.
SI became the most-shorted stock in the U.S.
There are multiple layers to the issues that have plagued Silvergate, but I will provide a broad overview of what went wrong. Despite the company's rot and decay, it seems that institutions saw something that we did not. Susquehanna Advisors Group invested $35 million for a 7.5% stake in Silvergate, and more recently, Ken Griffin's Citadel Securities purchased a 5.5% stake. BlackRock also increased its stake from 5.9% to 7.2% on January 31st, and State Street Bank holds the largest position at 9.3%. In hindsight, it appears that these non-crypto financial institutions felt compelled to make a bold move, but it does not look good now.
Although these shares were purchased at low prices in February, the stock has since plummeted. The news of the mass exodus caused Silvergate's stock to drop by more than 50% in one day, and there may be more skeletons in the closet. Upon reviewing some of Silvergate's old filings, this is what I found.
8-K Filing (Company Events) (A loan to MacroStrategy)
On March 29, 2022, Silvergate Bank, a subsidiary of Silvergate Capital Corporation (the "Company"), issued a press release announcing its issuance of a $205 million Bitcoin-secured term loan under its SEN Leverage program to MacroStrategy LLC, a subsidiary of MicroStrategy Incorporated (Nasdaq: MSTR). A copy of the press release is attached hereto as Exhibit 99.1. The press release is also available on the Company’s website at https://ir.silvergate.com in the Investor Relations section.
And here’s another one.
11-07-22 (Quarterly Financials) ((The possibility of more loans))
The outstanding balance of gross SEN Leverage loans was $302.2 million and $335.9 million at September 30, 2022 and December 31, 2021, respectively of the Company’s gross loans held-for-investment was collateralized primarily by bitcoin and U.S. dollars. Unfunded commitments on SEN Leverage loans were $1.2 billion and $234.6 million at September 30, 2022 and December 31, 2021, respectively.
There are two significant issues at play in the situation with Silvergate. Firstly, the company currently has a loan out to Macrostrategy, a subsidiary of MicroStrategy. If Silvergate is forced to claw back this loan to cover new expenses or losses, MicroStrategy may need to post more collateral or sell Bitcoin to return the loan. This could trigger wider panic selling and result in an even larger unwind for Silvergate or MicroStrategy. While it is not certain that this will happen, it is a possibility that needs to be considered.
To address concerns, MicroStrategy has tweeted that the loan from Silvergate is not due until Q1 2025 and would not accelerate due to Silvergate's insolvency or bankruptcy. Furthermore, MicroStrategy's BTC collateral is not custodied with Silvergate, and the two companies have no other financial relationship. However, the outcome of Silvergate's potential bankruptcy remains uncertain.
The second issue is that Silvergate has loaned money to more than just MacroStrategy, and its commitments for loans were massive as of September 2022. It is unclear if those commitments were funded, but if they were, this could add to Silvergate's financial troubles. Moreover, the company announced that it would not be able to file its quarterly reports on time, leaving investors in the dark and causing further concern.
Aside from its crypto holdings, Silvergate also has extensive real estate loans and positions, which are likely struggling due to the recent dip in the market. The company is now on life support, and its collapse could have significant implications for institutions that invested in it. While the crypto market is holding steady for now, if Silvergate goes down, it could set back the market's recovery clock.
The events surrounding Silvergate serve as a reminder that leverage in crypto markets does not always work. Silvergate has been heavily exposed to crypto markets and has freely handed out leverage, contributing to the collapse of FTX. While it dodged a bullet on that occasion, the contagion it helped create has come back to sign off on its death certificate.
It appears that Silvergate is on its last legs, and there is little that can be done to prevent its demise. As spectators, all we can do is watch and hope that the fallout from its collapse does not spread too far. Rest in peace, Silvergate.
Bitcoin Thoughts And Analysis
Bitcoin clearly did not enjoy the news of the demise of Silvergate Bank. In just under 30 minutes, price dropped over $1,200, to a low of exactly $22,000. Price has continued to chop above that level, but it’s impossible to guess what is likely to come next. Technically, when you see a big drop on huge volume, a slight bounce, then price chopping sideways on low volume, you expect continuation to the downside. This is usually how a bear flag or pennant is formed. But how many times have we seen a “Bart” or “Reverse Bart” pattern, where we get chop and then price retraces the entire move?
Although it does not feel like it, this is still chop in a sideways range, really the area between $25,212 and $21,473. What is slightly concerning is how easily the first retest of the 50 MA as support on the daily has potentially failed. I say potentially, because a move up today of about $500 would give us a close above that blue line as support.
Otherwise, the 50 MA technically becomes resistance again.
Let’s hope bulls have some balls today.
It is also worth noting that there is an options expiry today, which tends to bring volatility in the day before.
Legacy Markets
Global stocks rose at the start of March, with European shares up 0.6% and a 1% rise in Asian equities. Stocks have held up despite a shift to more hawkish rate expectations in March, with investors taking comfort in the underlying economic strength and strong corporate earnings. Meanwhile, US Treasury yields paused after a three-month high, and two-year Treasury yields rose above the Fed rate. Federal Reserve Governor Christopher Waller said he would favor raising interest rates even more than his current outlook if economic indicators continue to come in hotter than expected. In the crypto markets, Bitcoin fell to its lowest level in over two weeks, with investors assessing the fallout of Silvergate Capital Corp's troubles.
Some of the main moves in markets:
Stocks
The Stoxx Europe 600 rose 0.6% as of 9:52 a.m. London time
S&P 500 futures rose 0.1%
Nasdaq 100 futures rose 0.1%
Futures on the Dow Jones Industrial Average were little changed
The MSCI Asia Pacific Index rose 1.1%
The MSCI Emerging Markets Index rose 0.7%
Currencies
The Bloomberg Dollar Spot Index fell 0.3%
The euro rose 0.1% to $1.0610
The Japanese yen rose 0.4% to 136.16 per dollar
The offshore yuan rose 0.2% to 6.9079 per dollar
The British pound rose 0.3% to $1.1986
Cryptocurrencies
Bitcoin fell 4.4% to $22,378.41
Ether fell 4.5% to $1,567.81
Bonds
The yield on 10-year Treasuries declined five basis points to 4.01%
Germany’s 10-year yield declined four basis points to 2.71%
Britain’s 10-year yield declined four basis points to 3.84%
Commodities
Brent crude fell 0.1% to $84.65 a barrel
Spot gold rose 0.5% to $1,845.67 an ounce
Shanghai Delays
The planned Shanghai Upgrade for Ethereum withdrawals was originally scheduled for March but has been delayed slightly, with a new target date of April. It's important to note that the delay wasn't due to any issues, but rather a miscalculation of time. The final upgrade for the Goerli test network is set for March 14, and assuming it goes smoothly, developers will then set a mainnet date, allowing for a couple of weeks of preparation. Assuming the Goerli test is successful, we can expect withdrawals to be enabled in early April.
Michael Saylor Is Still In The Hot Seat
The lawsuit against Michael Saylor for tax evasion, filed by a D.C. court in 2022, is still ongoing, as the claims have not been dismissed. According to the lawsuit, Saylor failed to pay DC income taxes, and MicroStrategy allegedly conspired to help him evade taxes. The total amount owed is said to be $25 million, with potential penalties increasing the bill up to $100 million if MicroStrategy is found to be involved.
Voyager Update
Yesterday, the bankruptcy court held a key hearing in the Voyager case. The tweet thread above is a good summary of the outcome, which was shared in real time. You should read it all.
While there is quite a bit of info to glean, this was by far my favorite part:
The judge absolutely annihilated the SEC over their objection to the Binance.US buyout. He went on further to say that he was "absolutely shocked' by the SEC's objection to the Voyager-Binance US deal, saying the regulator has not provided much guidance to explain its concerns.
The situation is still iffy at best. Voyager creditors are awaiting decisions on potential clawbacks of some retail funds and on a clawback case with Alameda that could materially affect the amount of the payout.
Has Crypto Bottomed? David Duong, Dan Gunsberg, Mark Yusko
This was one of the best roundtables that I have ever hosted, with David Duong (Head of Institutional Research at Coinbase), Dan Gunsberg (Founder of Hxro), and Mark Yusko (Founder of Morgan Creek Capital). Must listen.
The views and opinions expressed here are solely my own and should in no way be interpreted as financial advice. Every investment and trading move involves risk. You should conduct your own research when making a decision. I am not a financial advisor. Nothing contained in this e-mail constitutes or shall be construed as an offering of financial instruments or as investment advice or recommendations of an investment strategy or whether or not to "Buy," "Sell," or "Hold" an investment.