Silvergate Bank’s Investment Strategy Revealed

03/06/2023 07:36 • Metaverse & Beyond • 70 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

Interpretation of the news:

Silvergate Bank, a leading crypto-friendly bank, recently revealed its investment strategy which showcased its preference for long-term bonds. Reports suggest that the bank invested most of its new funds into these bonds, which have a contractual maturity of over 10 years. Before the end of the third quarter last year, only 11% of its assets were kept in cash in the Federal Reserve Bank of the United States and other banks. The remaining assets were in the form of securities, with just a small percentage comprising of U.S. treasury bonds, and the rest being mortgage-backed bonds.

However, due to the rapid decrease in deposits towards the end of the third quarter of 2020, the bank had to sell these securities to fulfill its withdrawal requirements. This, in turn, resulted in a fair value loss of a staggering $1 billion on their bond holdings.

Silvergate Bank’s investment strategy showcases a significant element of risk despite its success in the cryptocurrency market so far. In contrast to other traditional banks, they have preferred to invest in long-term bonds rather than keep their assets in cash with the federal reserve. Experts suggest that this investment strategy is due to the bank’s confidence and long-standing relationship with the crypto market’s leading players, which provides a stable inflow of deposits.

However, this investment strategy has the potential to backfire. Long-term bonds are more susceptible to fluctuations, and their value depends on various market factors. If the market experiences significant shifts, these bonds’ value can decrease, resulting in losses for the bank. Additionally, the bank’s decision to invest a massive portion of its funds into these bonds can make it difficult for them to meet withdrawal needs without selling these securities, as was evident in the third quarter of 2020.

In conclusion, Silvergate Bank’s investment strategy has been revealed to the public, with reports suggesting their preference for long-term bonds. However, this investment style is not without a considerable portion of risk. The bank’s success in the cryptocurrency market provides some stability, but any significant market shifts can impact their investments’ value.

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Silvergate Bank’s Investment Strategy Revealed

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

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