Here’s What You Missed in Crypto This Week

Senators request info from Silvergate as Signature Bank plans to offload up to $10B in crypto-linked deposits

As bitcoin, ethereum and other cryptocurrencies get increasing attention from investors, Wall Street and its traditional banks continue to adjust to the shift. Catch up on this week’s top stories highlighting the intersection of these old guard and new school areas of finance with this recap compiled by The Fly.

SENATORS REQUEST INFO FROM SILVERGATE ON FTX DEALINGS: U.S. Senator Elizabeth Warren and two of her Republican colleagues have sent a letter to Silvergate Capital (SI) CEO Alan Lane requesting more information about the bank’s relationship with FTX and Sam Bankman-Fried, NBC’s Gretchen Morgenson reported Tuesday. The letter had stated that "In the weeks since FTX’s shocking collapse, new and disturbing allegations about the company’s business practices have continued to surface, including the reports that Mr. Bankman-Fried ‘secretly transferred some $10B of customer funds to his trading vehicle, Alameda Research,’ to fund ‘risky bets,’ violating both U.S. securities laws and FTX’s own terms of service. We are concerned about Silvergate’s role in these activities because of reports suggesting that Silvergate facilitated the transfer of FTX customer funds to Alameda."

Additionally in a Monday 8-K filing, Silvergate Capital CEO Alan Lane wrote: "It has been a very difficult few weeks for the digital asset industry, as we have all come to terms with the apparent misuse of customer assets and other lapses of judgment by FTX and Alameda Research. There has also been plenty of speculation – and misinformation – being spread by short sellers and other opportunists trying to capitalize on market uncertainty. As always, over the past few weeks Silvergate’s first priority has been serving our customers as they navigate this incredibly volatile environment. I’m proud that all of our customers continue to have access to their U.S. dollar deposits when they need them and that the Silvergate Exchange Network has continued to operate uninterrupted throughout this period. I wanted to take this opportunity to set the record straight about Silvergate’s role in the digital asset ecosystem and what we have always done, and continue to do, to ensure our customers act in accordance with our robust risk management controls. We take risk management and compliance extremely seriously…We conducted extensive due diligence on FTX and Alameda Research. Silvergate conducted significant due diligence on FTX and its related entities including Alameda Research, both during the onboarding process and through ongoing monitoring, in accordance with our risk management policies and procedures.”

SIGNATURE BANK TO OFFLOAD UP TO $10B IN CRYPTO-LINKED DEPOSITS: Signature Bank (SBNY) intends to offload as much as $10B in deposits linked to the crypto industry, the Financial Times’ Joshua Franklin reported Tuesday. The plans come amid turmoil in the cryptocurrency sector following the bankruptcy of FTX and in the wake of declining token prices. Signature COO Eric Howell told an industry conference that it is seeking to reduce the crypto share of its total deposits from 23% to less than 20% and eventually less than 15%. "We’re not just a crypto bank and we want that to come across loud and clear," he said.

On Wednesday, Raymond James analyst David Long downgraded Signature Bank to Market Perform from Strong Buy without a price target. While he remains bullish on the bank’s long-term prospects to produce superior loan growth, operating efficiency, and credit metrics, the analyst sees near-to intermediate-term headwinds related to its balance sheet initiatives. Signature disclosed plans to diversify its business model, which will likely result in slower growth and net interest margin compression, Long said. The analyst now believes the shares are "fairly valued at a discounted valuation."

Additionally on Wednesday, BTIG analyst Mark Palmer noted that Signature Bank CEO Joseph DePaolo stated during a conference presentation that the bank would reduce its crypto deposits by $8B to $10B, thereby reducing the portion of its total deposits that they represent from 23.5% to under 15%. He also noted that Signature Bank was looking to exit its business of providing services to stablecoin issuers. The analyst believes Silvergate Capital is well positioned to benefit from Signature Bank’s pullback from the crypto space, as he expects platforms that find themselves no longer welcome to use Signet because of its newly imposed deposit limits are likely to turn to Silvergate as an alternative. Signature Bank’s pivot away from crypto is also likely to have a negative impact on the network effects that Signet offers, as the value of such a network to crypto platforms is driven in large part by the number of their counterparties that also belong to it. Palmer has a Buy rating on Silvergate’s shares with a price target of $51.

On Friday, Maxim analyst Michael Diana lowered the firm’s price target on Signature Bank to $250 from $350 but kept a Buy rating on the shares. The analyst cited the company’s management providing an intra-quarter update on its deposit balances this week, indicating that it was strategically decreasing its crypto-related deposits by at least $8B. Diana added that he is lowering his 2023 earnings view to $18 from $25 due to a combination of lower earning assets from the runoff of deposits funding these earning assets and a lower net interest margin, though he also believes that Signature Bank shares have unduly identified with significant crypto risk and have been depressed "more than warranted".

COINBASE DOWNGRADE: Mizuho analyst Dan Dolev downgraded Coinbase (COIN) on Friday to Underperform from Neutral with a price target of $30, down from $42. Interest income from Circle’s U.S. dollar coin has been increasingly important for Coinbase amid deteriorating crypto sentiment and trading volume, Dolev said. The analyst estimated it accounted for 10%-15% of the company’s Q3 revenue. Dolev expects "depressed" crypto volumes in 2023 and 2024. He reduced his 2024 revenue and EBITDA estimates by 18% and 64%, respectively, and believes 2023 revenue estimates are "too optimistic." The analyst wonders if Coinbase’s interest income is the "next shoe to drop."

Additionally on Wednesday, Coinbase CEO Brian Armstrong said during an interview on Bloomberg’s "David Rubenstein Show: Peer-to-Peer Conversations" when asked about the company’s revenue: "Last year in 2021, we did about $7B of revenue and about $4B of positive EBITDA, and this year with everything coming down, it’s looking, you know, about roughly half that or less." In additional comments provided after the interview, a Coinbase spokesperson clarified that the company expects 2022 revenue to be less than half of 2021 revenue.

Meanwhile on Monday, Atlantic Equities analyst Simon Clinch lowered the firm’s price target on Coinbase to $46 from $67 and kept a Neutral rating on the shares. The "shocking collapse" of FTX "could be the pinnacle event that extends the duration and downside risks of the prevailing crypto winter," Clinch said. The analyst believes the crypto economy is now "following a similar path to technology stocks in the aftermath of the dotcom bubble in the late 1990s/ early 2000s." The fall of FTX and its founder Sam Bankman-Fried adds further downside pressures "by eroding trust of consumers, regulators, and politicians, and raising the risks of additional contagion effects," Clinch wrote. He believes Coinbase is well positioned to "both survive and benefit from these events." However, the "overwhelming headwinds" from a prolonged crypto winter cause him to lower the company’s forward estimates significantly. Clinch dropped Coinbase’s fiscal 2023 2024 net revenue estimates by 30% and 44% respectively, with more than 50% reductions to EBITDA estimates.

CLEANSPARK INITIATED AT OVERWEIGHT: Cantor Fitzgerald analyst Josh Siegler initiated coverage of CleanSpark (CLSK) on Friday with an Overweight rating and $5 price target. CleanSpark is a sustainable bitcoin mining company that operates over 55,000 mining rigs through its subsidiaries, ATL Data Centers and CleanBlok, Siegler said. Despite being poised to further increase market share, CleanSpark shares have fallen nearly 80% over the last year given bitcoin and token’s recent weakness, said the analyst. He believes investors may be overlooking CleanSpark’s "differentiated positioning" within the bitcoin mining industry. While many miners struggle with significant debt loads and poor liquidity, CleanSpark has maintained a "healthy balance sheet, which will be key in supporting its next phase of growth," wrote Siegler.

BITNILE ENTERS HOSTING AGREEMENT WITH AGORA: BitNile Holdings (NILE) announced Wednesday that its wholly owned subsidiary, BitNile, has entered into a hosting agreement securing up to 78 megawatts of power with Agora Digital Holdings, a majority-owned subsidiary of Ecoark Holdings (ZEST). Agora Digital will initially provide up to 12 MW of electricity at their digital asset mining hosting facility located in Texas for BNI’s use. At BNI’s direction and Agora Digital’s expense, an additional 66 MW of power can be made available to BNI as determined by BNI, Agora Digital and the electricity provider. Agora Digital is required to raise at least $5M to fulfill obligations under the agreement to enable the build out of the hosting facility including the initial 12 MW of power. In conjunction with the ongoing expansion of BNI’s site in Michigan, the new hosting agreement is intended to maintain BNI’s plan to promptly install and operate the bitcoin miners delivered by Bitmain Technologies. BNI believes that the agreement will enable it to initially power approximately 3,750 S19j Pro miners in 1Q23.

CRYPTO STOCK PLAYS: Cryptocurrency revenues have been pointed to as reasons to be bullish on Advanced Micro Devices (AMD) and Nvidia (NVDA) in select research. Ideanomics (IDEX), Riot Blockchain (RIOT), Overstock (OSTK), Pareteum (TEUM) and SRAX (SRAX) are other stocks that have been touted, or promoted themselves, as a way to play the crypto theme.

PRICE ACTION: As of time of writing, bitcoin rose roughly 1% this week to $17,146 in U.S. dollars, according to TradeBlock.

Keywords: bitcoin, ethereum, dogecoin, litecoin, crypto, cryptocurrency, cryptocurrencies, token, stocks, blockchain, stablecoin, regulation