Massive Squeeze Sends "Crypto Bank Like No Other" Silvergate Soaring

Tyler Durden's Photo
by Tyler Durden
Tuesday, Oct 05, 2021 - 04:30 PM

One week ago we were gratified to see that none other than Morgan Stanley had noticed one of our favorite under the radar (and udnervalued) stocks, when analyst Ken Zerbe initiated on Silvergate Capital (SI) with an Overweight, calling the company a "crypto-focused bank like no other."

And indeed it is: not only does the company sport fundamentals which make it among the cheapest banks - in either the conventional or crypto universe...

... but the endgame for the $4BN market cap crypto intermediary which was recently picked by Facebook to be the issuer of its stablecoin, Diem, is a likely acquisition by either Facebook (where even a 100% acquisition premium is pocket change) or a major crypto-focused player.

And while there was much more in the full Morgan Stanley report (available to pro subs in the usual place), last week we noted another key reason why "we think this stock could grow substantially from here: with a very modest market cap (below $3 billion), the stock which is quite illiquid has seen its short interest surge to record highs."

This, as we explained, means that "in keeping with other heavily shorted stocks, it wouldn't take much of a move to start a squeeze especially if it is compounded with Silvergate becoming a meme stock du jour (or longer) for the reddit daytrading crowd, an outcome we expect is inevitable as more big banks follow Morgan Stanley in initiating bullishly in the name."

There was more good news for the bullish thesis last Friday when we learned that the Treasury plans on regulating stablecoin issuers like regular banks. This is what we said then:

One company - which is already a bank and is certain to have a substantial advantage over its peers when the new regulation is implemented - will be Silvergate Capital, a bank which as Morgan Stanley dubbed earlier this week when it initiated coverage dubbed "a crypto bank like no other." Furthermore, the fact that Silvergate will be the issuer of Facebook's upcoming stablecoin, Diem - and one can be absolutely certain that once cleared, Facebook will seek to not only capitalize the ongoing shift to digital currencies but monopolize as much of it as it can - only assures that when the administration does move on with its treatment of stablecoins, SI will be one of the biggest winners. And, with a market cap of just $3 billion, we fully expect the company to be acquired by either its JV partner Facebook or some other major bank at multiples of its current market value.

So fast forward to today when the stock - which we said is set for a "big squeeze" and which have been discussing in depth on both our regular...

... and our premium twitter feed - just closed at $153, some 43% higher in just one week...

... as the thesis we laid out is starting to play out as expected.

And since 10% of the float remains short - and trapped - in this highly illiquid name, we expect that all that would take for it to explode higher and take out its all time highs in the coming days, is for the momentum chasing apes over at WSB to notice what's going on and make this into the next meme stonk. So far they haven't but we anticipate that will change shortly.

But perhaps most importantly, what is coming next is not just a squeeze but a gamma squeeze - the same option-driven melt up that sent TSLA from $100 to $800 in 2020: trading in the company's call options was five times the average (9,992 contracts, compared with the average of 2,105 over the past 20 days, compared to just 3,125 puts) on Tuesday with total trading volume quadruple the average for this time of day. Expect much more fireworks.