Silvergate Becomes One of the Most Shorted Stocks – Here is Why
Silvergate Capital Corp. (SI) is a significant banking institution in the crypto market. Recently, it was reported that 72.50% of its shares had been shorted to FINRA, making it the second most shorted stock in the US.
MarketWatch rates it as first, with 73.08% of float shorted. Short interest reporting by FINRA is important as a rise in short interest can indicate investor confidence in the stock, but in Silvergate’s case, it could mean that the stock may decline further.
Short sellers borrow shares to sell, making them “short,” hoping to buy them back at a lower price to pocket the difference. Silvergate’s stock has declined by 87% YoY, with daily short volume increasing at the end of 2022.
Silvergate Bank has been regulated by the Federal Deposit Insurance Corp. (FDIC), the Federal Reserve, and the California Department of Financial Protection and Innovation.
It has provided payment services to the most significant crypto exchanges and relies on real-time payment rails via the Silvergate Exchange Network (SEN).
This allows for fiat-to-crypto trading 24/7, which traditional banking could not offer. The business model of Silvergate depends on the overall volume of crypto trading.
In addition to holding deposits like other banks, Silvergate’s SEN Leverage service enables institutional investors to take loans with Bitcoin as collateral. Following the FTX exchange crash, Silvergate reported a $1 billion net loss for Q4 2022 and experienced a significant drop in deposits.
The bank borrowed $4.3 billion from the Federal Home Loan Bank (FHLB) of San Francisco and used its securities as collateral, which continue to depreciate. SI stock is down by 10.54% YTD. Moody’s Investors Service downgraded Silvergate Capital and the bank to ‘junk.’
In addition to financial struggles, Silvergate Bank is facing legal challenges following a class-action lawsuit for allegedly aiding and abetting FTX’s fraud and breaches of fiduciary duty. Moreover, the Department of Justice is investigating Silvergate’s FTX dealings.
On the other hand, Citadel Securities and BlackRock have shown interest in Silvergate, with Citadel Securities revealing a 5.5% stake in the bank and BlackRock increasing its stake to 7.2%.
These investments may help Silvergate to become a banking rail for the Wall Street-backed crypto exchange EDX Markets, which Citadel Securities and Charles Schwab announced.