Silvergate Capital Corp., a crypto bank, is currently the second most heavily shorted stock in the US. According to recent data from FINRA (Financial Industry Regulatory Authority), 72.5% of its outstanding shares have been sold short – meaning that investors and traders believe they will profit when the price drops. Thus far, this has proven to be true; Silvergate’s value continues to decline as expectations remain low for future growth opportunities.
Silvergate Dropped Nearly 90%
With shares of Silvergate (SI) dropping by a whopping 87% over the past twelve months, it’s no surprise that many investors have been discouraged from investing in this company. After all, its recent earnings report has only further exacerbated an already tenuous situation due to ongoing legal fights regarding its relationship with FTX and Alameda Research – both of which are now bankrupt.
On January 17, the bank revealed that common shareholders had suffered a staggering $1 billion net loss in the fourth quarter of 2022. In accordance with an SEC report, Silvergate experienced substantial deposit withdrawals during this period and thus resorted to acquiring wholesale financing and trading debt securities to guarantee liquidity.
Was Being Investigated for Helping FTX
Silvergate was purported to have taken a loan of $3.6 billion from the US Federal System of Mortgage Loan Banks to ease the pressure created by an abrupt influx of withdrawals after cryptocurrency exchange FTX’s downfall in November 2022. The bank is now facing allegations and being subject to inquiries as well as lawsuits, with claims that Silvergate abetted FTX’s deceitful practices, such as lending money and mingling user funds together. Furthermore, people assert that Silvergate infringed upon the Securities Exchange Act of 1934 by acting like “accomplices for fraud” concerning investments within FTX. The Justice Department has also initiated its own inquiry into the company’s role concerning FTX operations.
According to Silvergate, Alameda opened an account with the bank in 2018, before the launch of FTX has vouched that they conducted due diligence and kept a tab on the situation at all times. Consequently, Moody’s Investors Service took this into consideration and downgraded Silvergate Capital Bank to “junk” status with an unfavorable outlook for both entities.
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