Silvergate Bank’s Cryptocurrency Strategy Falters with Long-term Investment in Bonds

03/06/2023 07:36 • Blockchain Briefs • 85 views

It is reported that Silvergate Bank, a cryptofriendly bank, invested most of its new funds into longer-term bonds. Before its deposits began to shrink rapidly at the end of the third quarter of last year, only 11% of its liquid assets were cash stored in the Federal Reserve Bank of the United States and other banks, and the rest were securities. Only 11% of these securities are U.S. treasury bond, and most of the rest are mortgage-backed bonds with a contractual maturity of more than 10 years. Therefore, before they began to sell these securities to meet their withdrawal needs, their bond holdings had suffered a fair value loss of $1 billion.

Only 11% of the liquid assets of Silvergate Bank before the deposit shrinkage were cash

Analysis based on this information:

Silvergate Bank, a prominent crypto-friendly bank, seems to have made a misstep by investing most of its new funds into longer-term bonds. Despite its reputation as a leading institution in the cryptocurrency space, the bank suffered significant losses due to its over-reliance on a risky strategy that fell short of expectations.

Before the end of the third quarter of 2019, Silvergate Bank had invested only 11% of its liquid assets in cash stored in the Federal Reserve Bank of the United States and other banks. The remaining 89% of its assets were invested in securities, with only 11% of these being U.S. Treasury bonds. Instead, the majority of Silvergate’s bond holdings consisted of mortgage-backed bonds with a contractual maturity of more than 10 years.

Unfortunately, these long-term investments did not pay off for Silvergate Bank, as the value of its bond holdings took a significant hit. By the time the bank needed to sell these securities to meet withdrawal needs, its bond holdings had suffered a fair value loss of $1 billion. As a result, the bank struggled to manage its deposits, which began to shrink rapidly towards the end of 2019.

Despite its reputation for being cryptofriendly, Silvergate Bank’s investment strategy was relatively traditional and heavily reliant on the bond market. This approach was less favorable to the more volatile nature of the cryptocurrency market, where asset values can change rapidly and unpredictably.

The lesson learned from Silvergate Bank’s experience is that even as a reputable crypto-friendly institution, a bank’s investment strategy can make or break its success. While long-term investments in the bond market may seem more stable, security comes at a cost, especially when compared to the promising returns of the rapidly growing cryptocurrency market.

In conclusion, Silvergate Bank’s decision to invest in longer-term bonds proved detrimental to the bank’s bottom line. Even as a leader in the crypto-friendly banking sector, the institution should re-evaluate its investment strategy and consider more strategic allocations across different asset classes to reduce the risks of future losses.

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Silvergate Bank’s Cryptocurrency Strategy Falters with Long-term Investment in Bonds

Only 11% of the liquid assets of Silvergate Bank before the deposit shrinkage were cash

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