Mad Hedge Technology Letter
March 10, 2023
Fiat Lux
Featured Trade:
(TECH FUNDING TAKES A HIT)
(SIBV), (SI)
Posts
The famous bank for tech startups, Silicon Valley Bank, is creating a bit of chaos, triggering a large selloff in banking shares on Thursday.
Friday has been up and down, and the volatility has overflowed into today’s trading.
It won’t trigger a larger credit event, but shows investors the perils of mismanagement at an institution that was hailed as the lifeblood of small tech firms in California.
My bet is that boutique banks like Silicon Valley Bank (SIBV), exposed to startups that don’t make money, could get dragged into this risk-off move.
The big banks should be just fine, which is why this could present a nice buy-the-dip moment.
Silicon Valley Bank was founded in 1983 and over the decades became the habitual financial institution for startups.
Today, it’s a household name in Bay Area finance, deeply entrenched in tech companies’ networks and infrastructure.
The commotion about the company is more or less about a routine bank run as many cash burn heavy tech investors started to pull funds from SIBV to cover the losses of other tech companies.
The bank was too leveraged with other capital tied up in longer duration bonds and at the worst possible time, they had an insurmountable liquidity requirement which they are having trouble meeting.
Of course, tech investors don’t want to be the last investors withdrawing funds.
The bank is now looking at selling its carcass to bigger hitters that can easily save this bank.
The bank only needs $2 billion in capital to stay solvent, which is a drop in the bucket to the likes of bigger banks like JP Morgan or Bank of America.
SIVB disclosed a $1.8 billion loss showing the treacherous nature of being the famous lender to tech startups in Silicon Valley at a time when this type of business is doing poorly.
Rising interest rates have left banks laden with low-interest bonds that can’t be sold in a hurry without losses. So if too many customers tap their deposits at once, it risks a vicious cycle.
A key takeaway from growth tech stocks is to avoid buying and holding for the time being because in the light of possible contagion to the subsector, the weakest of the names get hit the hardest. Any position should be a quick in and out, taking profits before positions sway violently the other way.
This also highlights the ongoing problems in the start-up scene, with tech ideas not getting funded because the debt markets aren’t offering the same type of incentive they used to.
Leverage can be good or bad and in this case, when assets aren’t matched on par with liabilities, these types of credit events or liquidation occurrences happen especially amid the negative backdrop we find ourselves in.
Remember that crypto bank Silvergate (SI) just liquidated after a roaring contagion in the crypto sector.
SI customers pulled their money in the panic that followed the 2022 collapse of the cryptocurrency exchange FTX. Silvergate said in January that it had realized losses of $886 million from selling securities as deposits fell.
This also validates my thesis that we are squarely in a trader's market with volatility working for and against traders and their trades.
The time of buy and hold with a vanilla tech ETF with the traditional tech titans is long gone, and if this isn’t a wake-up call then I don’t know what is.
Right now counting on my expertise as a trader is a must if you plan to survive these hostile and unpredictable markets.
On the bright side, this could offer a timely entry point into some other more solid tech names as I don’t believe this contagion will spread to the heavyweight tech stocks.
Mad Hedge Bitcoin Letter
November 4, 2021
Fiat Lux
Featured Trade:
(WELCOME THE CONCIERGE BANKER TO THE CRYPTO INDUSTRY)
(SI)
If you want to insulate yourself from the daily gyrations of cryptocurrency but still benefit off the massive phenomenon known as cryptocurrency, then I have the perfect stock for you that trades on the New York public markets.
You don’t even need to open a cold wallet on a crypto exchange to partake.
Silvergate (SI) provides fiat-money services for the world’s biggest cryptocurrency exchanges and financial institutions.
It’s been the personal banker for the digital currency industry for eight years already.
So I just want to remind readers that this isn’t just some flash in the pan type of operation and they possess an official bank charter.
Many people have been coming around to the conclusion that digital asset — this digital currency market is here to stay.
It's not going away.
What does that mean for Silvergate?
Well, first, the stock is up over 600% this year as the price of Bitcoin has exploded to the upside.
Second, SI customers are going to maintain deposits on Silvergate’s platform because of the health of the industry and the services SI provides in order to take advantage of the opportunities they hope to pursue.
It’s satisfying that a stronger balance sheet coincides with a net interest income up 24% compared to last quarter and up 99% compared to the same period last year.
SI’s moat is as strong as ever.
The Silvergate Exchange Network (SEN) is a division that facilitates USD transfer between cryptocurrency exchanges and institutional investors.
And if you look at the SEN activity in the third quarter, its conservative leverage and skyrocketing consumer demand make the stock an ideal buy.
Let’s peel back the layers a little.
One of the great things about the Silvergate Exchange Network, the platform that they have developed, is the network effect and the fact that, as they onboard customers and continue to add products and services, those customers just become stickier.
Since the accumulation of more customers, there is a natural kind of lag between adding a customer and when they get their funding and start using the SEN and other SI products.
Usually, it takes about 1 to 2 quarters to ramp up their product usage and so I do expect the next earnings to be great.
But the real story this past quarter is the continued growth of SEN Leverage.
And in a market that was, you look at the bitcoin price throughout the quarter and you look at the trading volumes which correlate to maintaining a high average deposit, and then start to deploy those deposits in SEN via higher leverage.
Obviously, when the price of crypto is higher than the previous quarters, there is more capital flowing through the SEN.
The cherry on top is the leverage which this bank can supercharge profits — rinse and repeat.
The company currently provides such services to 93 cryptocurrency exchanges and 771 institutional investors such as hedge funds.
Noteworthy clients include Binance.us, Coinbase, Fidelity Digital Assets, PayPal, and CME Group. It also has 360 customers engaged in activities such as crypto mining or building decentralized finance services.
Like any other bank, the company lends out money while only using a portion of its deposit as collateral in a process called fractional reserve banking.
With the rise of the $172.15 billion decentralized finance (DeFi) industry, there are now more opportunities than ever for investors to buy and hold cryptos and earn fixed income with them.
As a result, expect heightened demand for Silvergate’s fiat-crypto services as the crypto and DeFi industries develop.
The stock is a little long in the tooth, but it just demonstrates the belief in the industry and SI has a massive head start over traditional banks who are hesitant about diving deep into the crypto space and funding crypto.
Naturally, that is the caveat about this stock, and banking is not a monopoly which could easily see the JP Morgan’s and Morgan Stanley’s infringe on SI’s turf.
A wave of competition could see net interest income diminished, SEN damaged, and deposits lessened, but I don’t anticipate a full steam ahead type of pivot into crypto from the traditional banking system because their CEOs are not on board.
These CEOs have shown they are willing to go as far as “fintech” but don’t have the stomach for funding crypto.
Old habits die hard.
Use large dips of 10% to add to this unique banking name.
