Why Shares of This Crypto Bank Collapsed This Week

Silvergate Capital Corporation is getting hit hard by the latest crypto crisis.

Why Shares of This Crypto Bank Collapsed This Week

Shares of Silvergate Capital Corporation (SI -42.73%) declined by as much as 36% this week, according to data from S&P Global Market Intelligence. In fact, as of this writing, the bank -- which focuses on cryptocurrencies -- is down a whopping 43% just on Thursday, Jan. 5, accounting for more than its entire decline this week. The company just released a preliminary update for its fourth-quarter results, and things look ugly.

So what

Before the market opened on Jan. 5, Silvergate posted a press release to its website updating investors for the three months ending in September. The bank, which targets the cryptocurrency market, has been hit hard in recent months when FTX, one of its largest customers, filed for bankruptcy amid one of the largest financial scandals in history.

On Dec. 31, Silvergate had $3.8 billion in deposits from digital (otherwise known as crypto) customers. This was down sharply from $11.9 billion at the end of September, an $8 billion hole in just one quarter. Banks struggle when customers withdraw funds all at once, something known as a run on the bank.

In order to facilitate these withdrawals, Silvergate had to sell $5.2 billion in debt securities at a loss of $718 million. To save on expenses, it recently announced the firing of 40% of its workforce.

Clearly, things are not going well at Silvergate right now, so it's no surprise to see shares tanking. Over the last three months, shares are down 85%.

On top of all these business troubles, the U.S. government is investigating Silvergate's relationship with FTX and whether it knew about the fraudulent crypto-exchange stealing from customers. While nothing definitive has come out yet, any sort of legal trouble around FTX would be detrimental to Silvergate's business and likely get its bank charter revoked. A revoked bank charter would likely mean filing for bankruptcy and equity holders getting wiped out to zero.  Now what

Investors are clearly worried about a run on the bank at Silvergate. And you should be, too. There's no reason to mess with the opaque and risky crypto markets, especially with what happened to FTX, Luna, Three Arrows Capital, and other organizations in 2022.

It's not a guarantee that Silvergate will file for bankruptcy, but even if it doesn't, this is going to be a much smaller business heading into the next few years, which warrants the recent drop in its stock price.

Brett Schafer has no position in any of the stocks mentioned. The Motley Fool recommends Silvergate Capital. The Motley Fool has a disclosure policy.