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This year, 2021, Silvergate stock hit a high of $176 and then plunged to $81 with the sell off of the entire technology and growth sector. However, recent signs in the market indicate that tech is roaring back with a vengeance.  

Today, at below $100, Silvergate has been oversold and it is now at almost 50% discount to its all time high which makes it at a compelling price to enter right now.

Silvergate has been battered and hidden under the radar, as compared to other crypto plays like Coinbase which have enjoyed much more media exposure and analyst coverage. However, Silvergate is the market leader steadily powering the network behind the scenes. It is only a matter of time before the market wakes up and sends the stock price back to and beyond the previous all time high. 

The Silvergate Flywheel

Have you heard of the Amazon Flywheel? It is Jeff Bezo’s blueprint that drove the spectacular growth story of Amazon. A flywheel is a virtuous cycle in which each component of a business contributes to reinforce and increase the growth momentum of the entire operations. This continues endlessly, resulting in the whole business enjoying exponential growth.

It has been a year since Silvergate started building its magic flywheel. In June 2020, it reported its first SEN Leverage loan balance of $20m which by March 2021 had grown to $117.3m.

SEN Leverage

The main mechanism of the Silvergate Flywheel is SEN Leverage. Silvergate issues U.S. dollar fiat loans to institutions, taking Bitcoin as collateral. The Bitcoin is held safely in cold storage by partner digital currency exchange custodians (eg Bitstamp, Coinbase Custody, Fidelity Digital Assets) who benefit by expanding their portfolio of institutional clients. Borrowers pay Siilvergate monthly interest on the loans.

SEN Leverage has seen remarkable growth as it allows clients to kill two birds with one stone - they enjoy the capital appreciation of their Bitcoin being held in cold storage while leveraging it for a larger amount of fiat that they can use to scale their business operations.

Bitcoin on corporate balance sheets is picking up
As the digital currency industry matures, and it is doing so at a rapid rate, more institutions are warming up to Bitcoin and investing their cash holdings into it. High profile corporate purchases of Bitcoin recently include MicroStrategy ($2.25b), Square ($50m+$170m) and Tesla ($1.5b). Bitcoin is a strategic allocation in portfolios as a financial risk hedge and for companies to prepare for future blockchain expansions of their company operations. Some of this corporate Bitcoin will inevitably flow to SEN Leverage.

Retail interest in cryptocurrency

This year, major cryptocurrencies like Bitcoin and Ethereum hit their all time high. Not only are institutions jumping on board the bandwagon, retail investors are joining in the party too. New cryptocurrency trading platforms are sprouting up, existing trading platforms (Robinhood, Cash App) are expanding their products to include cryptocurrency counters, payment processing platforms (PayPal, Square) are accepting cryptocurrency as payment and even traditional big name retailers (Microsoft, Starbucks, Whole Foods, Home Depot) are accepting Bitcoin as payment.

All these trades contribute to the number of transactions and the transaction dollar amount of the Silvergate Exchange Network (SEN) jumping up with each quarterly report, and will likely continue at an increasingly faster pace.

People are speculating when Apple Pay and Amazon will start accepting Bitcoin. When they inevitably do, they will definitely not be letting their Bitcoin holdings sit idle. They will likely convert a portion back to Fiat with SEN (transactions fees for Silvergate) and channel the balance to SEN Leverage (transaction fees plus interest for Silvergate).

Facebook’s Diem

Apple and Amazon might be biding their time to enter the crypto world, but Facebook certainly is not waiting around. In May last month, Facebook announced that Silvergate will be the exclusive issuer of the Diem stablecoin which is planned to be launched this year 2021. At the moment, people have no idea just how big this is.

Firstly, Facebook is not just Facebook. The Facebook platform alone has multiple ways to integrate the Diem digital currency, each of which is hugely scalable, like e-commerce transactions through Facebook Shops, peer to peer transfers through Facebook Messenger and accepting Diem as payment for Facebook ads. Then, under the Facebook umbrella, there is also Instagram, on which merchants from international brands to home businesses are using to showcase and sell their goods and services on Shops on Instagram. Facebook also owns Whatsapp, the most popular messaging app in the world. It recently launched the Whatsapp Payment feature in Brazil which is just the first step in its mission to first reach the world’s unbanked (which is an enormous, untapped market) and then also to convert the banked. Not forgetting Oculus, which Facebook is using to build Facebook Horizon, a virtual reality metaverse, in which guess what currency will likely be used to purchase avatars, abilities and other premium features? Just look at Roblox and Robux for a gauge.

Secondly, Diem is not just Facebook. The Diem members include big players like Shopify, Uber, Coinbase and Spotify, each of which have existing global operations which would save them a lot of money in international transfer bank fees and foreign exchange costs, plus onboard new customers from the worldwide unbanked community, with Diem.

Behind all this, the biggest winner of all, Silvergate, will be quietly benefiting from each and every transaction made on the network, earning revenue from transaction fees and the maintenance of the Diem infrastructure.

Bitcoin is legal tender in El-Salvador

Early this month, June 2021, El-Salvador made Bitcoin legal tender. Bitcoin transactions in El-Salvador are made through a local app called Strike, which is partnered by Bittrex, which is a client of Silvergate.

Other countries with low banking penetration rates or unstable currencies are likely to follow suit in embracing Bitcoin in the very near future.

Silvergate Exchange Network (SEN)

Every flywheel needs a protective moat. The Silvergate Exchange Network (SEN) is Silvergate’s powerful moat. Silvergate has been in the cryptocurrency scene since 2013. It launched the SEN in 2017 which has since onboarded a formidable customer base with its first mover advantage. The transaction volumes of major players in the network like Coinbase and Bitstamp make strong network effect advantages and economies of scale for Silvergate’s liquidity and costs.

These advantages attract new clients who in turn contribute to strengthening the existing network even further which makes it even more sticky for existing clients and attractive to potential clients. Each new client brings new deposits for Silvergate to use to provide traditional loans and SEN Leverage loans and earn interest income. And the Silvergate Flywheel spins on.

Digital currency is just only starting to grow

ARK Invest predicts Bitcoin will hit a price of $500,000. J.P. Morgan says it will be $130,000. Goldman Sachs is now trading Bitcoin futures. The future of cryptocurrency looks very bright. At the moment, there is no meaningful competitor of Silvergate. That means, Silvergate has established a monopoly. In the fiat currency world, it has a traditional banking license and at the same time it is a leading player in the digital currency world. It is like a bridge or a toll gate that simply collects a fee whenever people cross it. Except that this toll master goes a further step by lending out this amount collected to rocket power its growth even further. And why not? It is a bank and thus can loan out money within the reserve ratio.

Of the leading traditional international banks, JP Morgan has been most active in entering the cryptocurrency scene, followed by Goldman Sachs. Morgan Stanley has been making less of its own initiatives but has been investing in Silvergate and last month had more than doubled its stake, according to SEC filings. If any bank wants to buy an immediate competitive advantage and a team of experienced talents in the industry, Silvergate is an ideal takeover target.

Silvergate, an established pioneer in the industry with an excellent reputation and a wide network of existing clients will be enjoying spectacular growth. For investors who wish to diversify into cryptocurrency with low risk and high growth, Silvergate is an excellent choice. 

The P/E ratio of Silvergate is now at 60. In comparison, Coinbase is at 97.63 and Argo Blockchain is at 290. If the P/E of Silvergate were to reach the same as Coinbase and Argo, the price would be $161 and $483 respectively.
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