Why MicroStrategy, Coinbase and Silvergate Capital are falling today


What happened

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

At 2:45 p.m. ET today, shares of a business intelligence firm MicroStrategy (NASDAQ: MSTR) had fallen around 9%, the crypto exchange Coinbase (NASDAQ: CURRENCY) the stock was down nearly 6%, and Silvergate Capital (NYSE:IF) shares traded down almost 7.5%.

Image source: Getty Images.

So what

Over the past 24 hours, the price of Bitcoin has fallen over 4% as the market continues its Jekyll and Hyde ways, trading with a lot of volatility and struggling to gain any kind of momentum. As a risky asset, Bitcoin struggled as the Federal Reserve raised its benchmark overnight lending rate, making returns on safer assets more attractive. As the Fed begins to unwind its $9 trillion balance sheet, removing cash from the economy, it could leave fewer funds to invest in companies like Bitcoin and other cryptocurrencies.

As Bitcoin is the largest cryptocurrency in the world and a trendsetter, its price tends to drag most of the industry with it to some degree. Interestingly, MicroStrategy, Coinbase, and Silvergate are not cryptocurrencies per se, but all of them work and support the crypto industry.

MicroStrategy, according to its website, is “the largest publicly traded independent business intelligence firm,” but it also buys and holds a lot of Bitcoin. At the end of the first quarter, the company held 129,218 bitcoins, then valued at nearly $5.9 billion. Naturally, as the price of Bitcoin declines, the stock should follow.

Coinbase is the largest cryptocurrency exchange in the United States and helps facilitate transactions for retail investors. Since crypto trading volume has dropped significantly this year, Coinbase’s revenue and profits have also fallen, which has dragged the stock down.

And then Silvergate Capital built a real-time trading platform that can clear and settle trades instantly. This is beneficial for traders and institutional crypto exchanges because cryptocurrencies are traded around the clock. As a bank, this platform has helped Silvergate bring in many deposits on which it pays no interest. The bank has actually had a great year, but investors may be concerned about what will happen to deposit flows if Bitcoin continues to fall to lower levels.

Interestingly, Silvergate provided a $205 million loan to MicroStrategy, which is secured by Bitcoin. If the Bitcoin price falls below $21,000, there could be a margin call on this loan.

Now what

The fact that Bitcoin is down almost 40% this year is the main reason why these stocks have struggled. I don’t know when or at what price Bitcoin will bottom, but I think this and many more cryptocurrencies are here for the long haul.

Of these three, Silvergate is by far my favorite. The trading platform creates a huge deposit base, which has made the bank a huge beneficiary of rising interest rates. He also plans to eventually issue a stablecoin, which I believe will be the most legit yet as it is launched by a highly regulated financial institution with great technology.

I also think Coinbase has long-term potential, although I would like it to become less reliant on pure trading volume. If Bitcoin is there for the long haul, then MicroStrategy will be fine if the price rebounds. But I don’t really like the combination of buying and holding bitcoin with a completely different company because it distracts from that company, 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 holds and recommends Bitcoin and Coinbase Global, Inc. The Motley Fool recommends MicroStrategy and Silvergate Capital Corporation. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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