Brokerage firm research reports from Wall Street may not always line up with the theme of collectibles as an alternative asset class. That said, cryptocurrencies and digital assets are another alternative asset class which Collectors Dashboard treats no differently than other alternatives. The research team at BofA Securities has highlighted a backdoor play into crypto with a new “Buy” rating and the firm has offered up a research report that is predicting close to 50% upside if its thesis pans out. That report, of course, comes with no guarantees.

Silvergate Capital Corporation (NYSE: SI) is that opportunity. BofA’s Brandon Berman has initiated coverage on Silvergate with a Buy rating and the $200.00 per share price target would represent 45.6% upside from the most recent $137.30 closing price. Berman and his team see Silvergate as an alternative way to gain exposure to crypto.

DISCLAIMER: As with all brokerage reports, investors should do their own due diligence to derive their own conclusion. Collectors Dashboard is not endorsing nor opposing the views offered by BofA in this report.

When investors hear 50% upside potential they sometimes get excited. Other investors might become cautious. After all, it is not unusual to see “to the moon” for price targets and unhinged upside calls all over social media for Bitcoin, Ethereum and any other cryptocurrency or digital asset imaginable. BofA isn’t exactly projecting an immediate run higher, and of course is not offering any guarantees. It even laid out what can go wrong here.

According to the report, Silvergate’s alternative exposure to crypto is via the growth of the digital asset ecosystem rather than owning actual digital assets (such as a Bitcoin). Silvergate’s intellectual property that was acquired from Diem Group also makes it one of the best positioned companies to benefit from the expanding use of stablecoin for payment, commerce, and remittance. Another boost for Silvergate is that the company is said to be better prepared to navigate the complex and evolving regulatory environment around the digital currency industry.

As for the path to $200 per share, Brandon Berman’s report said:

Near term volatility is likely to be expected given shares are highly correlated to the price of Bitcoin. However, as Silvergate further expands its product and service capabilities, we expect shares to trade more on fundamentals…

The formal $200 price objective was based on a price-to-earnings-growth, which is not the firm’s usual metrics when valuing banks. Berman sees fiv-times normal growth in sales versus average banking players here over the next 3 years. Silvergate Capital provides infrastructure solutions and services to exchanges, global investors and other participants within the digital currency space. The Silvergate Exchange Network is a proprietary global payments network which allows clients to settle fiat-denominated transactions instantly.

Berman noted that Silvergate’s management “saw the future and pivoted into a digital-currency-focused bank and settlement network” and believes that Silvergate has the first mover advantage — with approximately $790 billion transferred over the Silvergate Exchange Network. Increasing institutional adoption should also provide a long runway for continued client and earnings growth.

As for tying this to traditional banks and traditional banking metrics, BofA’s report noted that Silvergate’s deposit and revenue growth are tied to the growth in institutional adoption of the broader crypto ecosystem rather than the underlying (crypto) asset value. The report further said:

As more users join the Silvergate Exchange Network (SEN), its value to existing digital users increases. Silvergate and its customers alike will benefit as digital currency adoption grows. We have already seen some companies add digital assets to the balance sheet as short-term investments in addition to cash, including Telsa, and MicroStrategy. Furthermore, should accounting standards for bitcoin change, from classifying the currency as an intangible asset (where a company would take an irreversible impairment charge if the value of its cryptocurrency holdings declines) to fair value accounting, we could see an increase in adoption among companies accelerate.

BofA did note that Silvergate’s stock price has fallen about 40% from last November’s highs (also around the Bitcoin peak) and that the valuation of 20-times the firm’s 2023 earnings expectations can easily make this stock look overvalued versus traditional bank stocks. The firm just isn’t seeing Silvergate in the same bucket as traditional banking providers.

This is the “power of SEN” that BofA outlines for the expected growth ahead. The SEN enables real-time transfers of fiat USD and Euros 24/7/365 between its customers (crypto exchanges and institutional investors) for free. Here are some instances:

• One example is that its SEN allows Coinbase and Genesis, two separate digital currency exchanges, to “talk” to each other and seamlessly allows the transfer of money in real-time.
• One banking friction is that prior to the launch digital currency market participants were spending “50% of their time” making sure they had the right amount of USD on the right platform to be able to take advantage of digital asset trade opportunities.
• The second banking friction that was solved is that the SEN allows traders to transfer capital between exchanges instantly without using SWIFT or FedWire. BofA notes that these are both quite slow in comparison (could take several hours or even days to settle, and only during the 40 hour work week).

The potential for a Stablecoin offers material upside potential. The report said:

Currently, Silvergate provides each of the four regulated USD-based stablecoin issuers – USDC ($52.4 billion market value), TrueUSD (TUSD, $1.5 billion), Pax dollar (USDP, $946 million), and Gemini dollar (GUSD, $251 million) – with mint and burn capabilities over the SEN (i.e. create and destroy USD-backed tokens programmatically). Beyond trading, stablecoins represent a compelling option for digital payments. This is where Silvergate expects to add value… once they issue their own stablecoin later this year. (Note: the timing and the scope of the rollout will depend on regulatory approval).

This report also specified:

The President’s Working Group (PWG) on Financial Markets essentially handed Silvergate (and other banks) a “clear lane” to launch its own branded stablecoin… the PWG recommended Congress pass legislation that creates a supervisory infrastructure for stablecoin issuers, and legislation that requires stablecoin issuers to be insured depository institutions (i.e. banks).

BofA sees a stablecoin issued by Silvergate offering quicker consumer adoption than some outside efforts given its relationship with consumer-focused companies. Several bank-focused efforts are already out to use or issue stablecoins that could compete against Silvergate:

• a group of US banks (NYCB, SNV, etc.) formed a group to offer USDF stablecoin;
• JPMorgan uses its own coin for settlements of customer transactions within the bank;
• and PayPal has officially confirmed that it was “exploring a stablecoin” that could be called PayPal Coin.

The BofA report further identified 3 ways that Silvergate can monetize a stablecoin infrastructure:

• Earn interest on the reserves it will hold as collateral in support of the stablecoin.
• Charge a transaction fee.
• Earn a fee for issuing/redeeming stablecoins.

Lastly, Brandon Berman’s downside risks to Silvergate’s potential investment upside include regulation that inhibits growth of the digital asset ecosystem and/or increases capital requirements, and increased competition.

As a final reminder, any investor or speculator needs to do their own research before making any conclusions. Wall Street analysts often have access to only the same information that is available to the public and they often make assumptions that simply do not come to fruition. Here are some additional stories from Collectors Dashboard regarding crypto and digital assets:

13 Things to Know About Bitcoin (& Gold) During Actual Warfare

How a U.S. Central Bank Digital Currency Will Impact Bitcoin & Crypto