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Why MicroStrategy, Coinbase, and Silvergate Capital Are Falling Today

The Motley Fool logo The Motley Fool 5/20/2022 Bram Berkowitz

What happened

Shares of several stocks in the crypto space fell today along with broader markets and the price of Bitcoin (CRYPTO: BTC), to which these stocks have at least some correlation.

As of 2:45 p.m. ET today, shares of business intelligence company MicroStrategy (NASDAQ: MSTR) had fallen roughly 9%, crypto exchange Coinbase (NASDAQ: COIN) stock was down nearly 6%, and Silvergate Capital (NYSE: SI) shares traded nearly 7.5% lower.

Person holds head in dismay while watching red squiggly line fall. © Getty Images Person holds head in dismay while watching red squiggly line fall.

So what

Over the past 24 hours, the price of Bitcoin has fallen more than 4% as the market continues its Jekyll and Hyde ways, trading with lots of volatility and struggling to gain any sort of momentum. As a risky asset, Bitcoin has struggled as the Federal Reserve raised its benchmark overnight lending rate, making the returns on safer assets more appealing. As the Fed begins to unwind its $9 trillion balance sheet, effectively pulling liquidity out of the economy, that could leave fewer funds to flow into the likes of Bitcoin and other cryptocurrencies.

As Bitcoin is the world's largest cryptocurrency and a pioneer, its price tends to pull most of the industry with it to some degree. Interestingly, MicroStrategy, Coinbase, and Silvergate aren't cryptocurrencies per se, but all operate and support the crypto industry.

MicroStrategy, according to its website, is "the largest independent publicly traded business intelligence company," but it also buys and holds a lot of Bitcoin. At the end of the first quarter, the company held 129,218 Bitcoin, then valued at close to $5.9 billion. Naturally, as the price of Bitcoin falls, the stock is likely to follow suit.

Coinbase is the largest cryptocurrency exchange in the U.S. and helps facilitate trades for retail investors. Because crypto trading volume has significantly slumped this year, so too have revenue and earnings at Coinbase, which has sent the stock sputtering.

Video: Bitcoin set for record losing streak as 'stablecoin' collapse crushes crypto (Reuters)


And then Silvergate Capital has built a real-time trading platform that can clear and settle transactions instantly. This is beneficial for institutional crypto traders and exchanges because cryptocurrencies trade around the clock. As a bank, this platform has helped Silvergate bring in lots of deposits that it doesn't pay any interest on. The bank has actually had a nice year, but investors may be worried about what would happen to deposit flows if Bitcoin continues to fall to lower levels.

Interestingly, Silvergate has issued a $205 million loan to MicroStrategy, which is collateralized by Bitcoin. If the price of Bitcoin drops below $21,000, there could be a margin call on that loan.

Now what

The fact that Bitcoin is down nearly 40% this year is the big reason these stocks have struggled. I am not sure when or at what price Bitcoin will bottom, but I do think it and many other cryptocurrencies are here for the long haul.

Of these three, Silvergate is by far my favorite. The trading platform creates a tremendous deposit base, which has made the bank a huge beneficiary of rising interest rates. It is also planning to eventually issue a stablecoin, which I think will be the most legitimate one yet because it is being launched by a highly regulated financial institution with tremendous technology.

I also think Coinbase has long-term potential, although I would like to see it get less dependent on pure trading volume. If Bitcoin is here long term, then MicroStrategy will be fine if the price rebounds. But I don't really love the combination of buying and holding Bitcoin with a completely different business because it distracts from that business, so I'm less of a fan of the company.


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Bram Berkowitz has positions in Bitcoin and Silvergate Capital Corporation. The Motley Fool has positions in and recommends Bitcoin and Coinbase Global, Inc. The Motley Fool recommends MicroStrategy and Silvergate Capital Corporation. The Motley Fool has a disclosure policy.


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