Explainer: Real problem with Silvergate based on deposits

If Silvergate Capital fails, it could be the first bank to be brought down by bad liabilities rather than bad assets. The bank warned in a filing last week that it might not be able to stay in business. The news pushed depositors to move their money elsewhere.

Fears, under normal circumstances, could be everywhere that it has made loans so terrible that the losses would eat into its customers’ savings. But, it is a different story in the case of Silvergate. Shares of Silvergate Capital Corp retreated by 10% in early trading on Monday after the bank suspended its crypto payments network and expressed doubts over the viability of its business.

The crypto-focused bank said late on Friday that it had made a “risk-based decision” to discontinue the Silvergate Exchange Network (SEN) effective immediately.

The discontinuation could signal that Silvergate may consider winding down its operations. Shares of crypto lending peer Signature Bank (SBNY.O) also fell roughly 2.5% in morning trade, while crypto exchange Coinbase Global (COIN.O) was down nearly 1%. Crypto firm Riot Platforms Inc (RIOT.O), and BTC mining machine makers Ebang International and Canaan Inc (CAN.O) drop between 1% and 2%.

The crypto market reacted to the negative news from Silvergate Bank, with both bitcoin and ethereum down about 4.8% for the week. Shares of Silvergate hit a record low of $4.86 on Friday, shedding nearly 98% of their value since an all-time high close in November 2021 and wiping out more than $7 billion from the company’s market capitalization.

Analysts believe a receivership/liquidation scenario is a distinct possibility and arrive at a liquidation value of $5 per share. The firm has been struggling to stay afloat after the collapse of Sam Bankman-Fried’s crypto exchange FTX in November drove investors to pull out $8 billion in deposits from the bank in the last three months of the year.