Q: Is Silvergate done?
Banking is a game of confidence and today was the day that Silvergate lost the confidence of both the market and (more importantly) its customers.
Silvergate explained in a filing last night that its 10-K SEC filing would be delayed "as a result of operational delays related to agent banks of fund banking participations."
That word-salad of an explanation reassured no one. But a more cogent one would not likely have done any better: if you're explaining, you're losing — especially in banking.
When a bank invokes the dreaded "going concern" in a filing, you have to assume they're, well, gone. Which is what Coinbase and Circle, presumably two of Silvergate's most important customers are doing: Both announced today that they're cutting ties with the bank.
I'm sure they are doing that most reluctantly, considering that leaves just one US bank, Signature, providing a 24/7 mint-and-redeem service to stablecoin issuers.
And since Signature has made public its intent to reduce its crypto exposure, we have to start thinking about what the stablecoin market would look like without 24/7 minting and redeeming.
Without Silvergate or Signature, stablecoins would presumably have to be minted and redeemed the old-fashioned way: by bank wire.
Wires, in addition to being excruciatingly slow, are only available on holidays, Monday to Friday, 9-5.
And that could make things interesting: If a large USDC holder wanted to redeem on a Friday night, my guess is their only option would be to find a market maker willing to buy.
In return for the risk of holding the position until Monday morning — when banks reopen and the USDC can be redeemed for $1 — that market maker would demand a haircut.
In normal times, I'm sure the haircut would be small — like, half a cent or something.
But things are never normal for long in finance. So, what happens in the next financial panic when risk limits are hit, when there's no market makers bidding for USDC on a nervous Friday night?
Without Silvergate, it'll be interesting to find out.
Q: So maybe TradFi is not so clueless about crypto after all?
My old TradFi friends are having a hearty laugh at the expense of my new crypto friends today: Short interest in Silvergate stock was a whopping 73%, making it one of the biggest shorts on Wall Street.
Just last week, it was crypto that was laughing at TradFi: Based on the stock market's tepid reaction to the news from Coinbase that it was launching a layer 2 blockchain (the stock has barely budged since the news), crypto natives were sure that Wall Street is still hopelessly ignorant of crypto.
I agree that hardly anyone in TradFi could tell you what a layer 2 blockchain is. But I also think that it's not on them to figure it out: Instead, it's on Coinbase to demonstrate how they plan to make money from it, which (to my knowledge) they have not yet tried to do.
I'm guessing they have not bothered to try because if they do book significant profits thereof, it'll be beyond Wall Street's normal investment horizon: Analysts don't bother building earnings models more than three or four years out, simply because things get too uncertain beyond that.
And things are even more uncertain in crypto — do we have any idea what DeFi will look like in five years?
Layer 2 blockchains like Coinbase's Base are all the rage right now, but it's still anybody's guess where we go from here: The hope is that layer 2s become seamlessly interoperable with one another, but we don't exactly know how. And if we don't figure it out soon, layer 2s could end up fragmenting crypto's already limited liquidity, leaving us worse off than where we started.
Before layer 2 tech is fully solved, it's not impossible that the Ethereum Foundation would change its mind about scaling and decide that everything should move back to the L1 level.
Or we might get a new, next-generation L1 that's better than both Ethereum and its L2s — possibly powered by zero-knowledge technology, which, depending on who you talk to, might be on the cusp of changing everything.
Or still many years out. Or doomed to flop, whenever it gets here.
I don't understand the underlying tech well enough to judge, but the first thing to know is that the basic infrastructure of the blockchain ecosystem is not yet decided.
And that makes investing in crypto about like investing in internet stocks before the TCP/IP networking standards had been agreed upon.
Which is to say, investing in crypto is extremely speculative.
Q: Did anyone invest in internet stocks before TCP/IP standards were agreed?
TCP/IP was agreed in 1983, so, no, they did not.
Investing in crypto at this stage is therefore, I believe, unique in the history of investing.
The nearest comp is to call it venture capital investing, but liquid (i.e., tradeable).
Liquid venture capital is not a great idea — price discovery is erratic, at best, and incentives between builders and investors are misaligned.
But the fact that crypto is tradeable is why it gets so much attention (I don't think you read this newsletter just for the jokes).
I liken it to sports, which nobody watches for the Xs and Os. How many people can look at a basketball game and tell you what plays the offense is running?
Approximately none: We're all just in it for the buzzer beaters.
The same goes for crypto: how many people can possibly have an opinion about things like danksharding and building a shared liquidity layer?
Outside of Blockworks Research, not many.
For the rest of us, crypto is about the drama of booming and busting prices and the stories of who's winning and who's losing.
This week's loser is Silvergate.
Tune in next week for the latest drama of whatever loser is on deck.
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