Silvergate Capital (SI) stock fell 41% at the open of Thursday's trading day after the bank announced it would wind down operations and liquidate its bank.
Silvergate shares closed trading at $2.84.
Shares of its crypto-friendly peer, Signature Bank (SBNY), were also volatile Thursday morning. They were down 12.18% as of Thursday's close.
Silvergate announced its voluntary liquidation and wind down of its business late Wednesday afternoon.
The total market capitalization for all crypto assets as measured by Coinmarketcap fell below $1 trillion early Thursday morning. It is currently valued at $994 billion, down more than 6% over the past 24 hours as of 5 p.m. New York time.
Bitcoin (BTC-USD) is changing hands at $20,300, down 8% to a seven week low.
Silvergate's shutdown raises new doubts about the relationship between traditional banks and the cryptocurrency world, said one observer.
"One of the crypto industry's favorite narratives has always been that it would overwhelm traditional banks by providing superior services," said John Paul Koning, author of the financial blog Moneyness. "Well, crypto has finally overwhelmed its first bank, not because crypto was superior," he added.
But one analyst, Conor Ryder with Kaiko, said Thursday that there is still "glaring" evidence of the need for a crypto-friendly bank. "The next best contender will likely be a smaller bank raising their hand to take on the risk of crypto in search of a wave of new deposits," Kaiko's Ryder added in a research note.
Silvergate's decision to liquidate came one week after it said Silvergate faced business and regulatory challenges causing the company to weigh its "ability to continue as a going concern for the twelve months."
That notice spooked crypto-related firms using the bank such as Coinbase, Paxos, Galaxy Digital and others that chose to distance themselves from Silvergate last Thursday, hastening further withdrawals.
"The Bank's wind down and liquidation plan includes full repayment of all deposits. The Company is also considering how best to resolve claims and preserve the residual value of its assets, including its proprietary technology and tax assets," Silvergate said.
Silvergate Bank, a state-chartered bank, is jointly regulated by the Federal Reserve and the state of California. Its holding company, Silvergate Capital, is also regulated by the Federal Reserve.
California's Department of Financial Protection and Innovation is monitoring the situation according to a statement from its commissioner, Clothilde Hewlett.
The bank added that it intends to repay depositors in full and has hired financial advisors, Centerview Partners LLC, legal advisors, Cravath, Swaine & Moore LLP, and Strategic Risk Associates for "transition project management assistance."
Silvergate became a regional bank in 1996, but it wasn’t until 2014 that CEO Alan Lane chose for the company to begin servicing crypto clients like the now-bankrupt Genesis.
It carved out a niche for itself by giving banking access to a growing number of crypto startups. Those offerings evolved into the SEN, where 24/7 operating crypto depositors could make U.S. dollar transfers and loans outside traditional banking hours. Silvergate suspended its SEN platform last Friday.
Silvergate held $1.8 billion in total deposits and $2 billion in assets at the end of its 2018 fourth quarter. By crypto's peak in 2021, its total deposits and assets had risen to $14.3 billion and $16 billion, respectively.
Following the bankruptcy of crypto exchange FTX, Silvergate's total deposits and assets fell to $6.2 billion and $11.3 billion by the end of last year's fourth quarter. To repay those withdrawals, the company sold its fixed income portfolio, taking mark to market losses on the investments in a high interest rate environment.
Like Silvergate, New York-based Signature Bank also attracted a growing number of crypto depositors in recent years with Signet, its own 24/7 USD transfer platform.
Now it is pulling back its crypto exposure. In a mid-quarter update, Signature showed its spot deposit balances through January and February were $826 million lower, driven by a $1.5 billion decline in digital asset deposits as part of a planned reduction announced last November.
JPMorgan's North American equity research team said in a Monday research note that Signature can "thread the needle" on cutting its exposure to the industry's firms. On Thursday, Signature published updated financials showing it continues to reduce its loan balances. JPMorgan's steam said they maintain their "overweight" position on the bank.
David Hollerith is a reporter for Yahoo Finance. Follow him on Twitter @DSHollers
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