Silvergate Soars: Our Top Crypto Name From May Spikes On Short Squeeze, Positive Crypto News. How To Lock In Gains.

Ed Carpenter Racing's Bitcoin-sponsored number 21 Chevrolet came in 5th in this year's Indy 500.

Short Squeeze, Crypto News Boost Silvergate

Shares of Silvergate Capital Corporation SI spiked more than 12% on Tuesday, as Bitcoin broke above $51,000. As ZeroHedge noted ("Massive Squeeze Sends 'Crypto Bank Like No Other' Soaring"), Silvergate shares were also buoyed a short squeeze, and by recent news that the U.S. Treasury Department planned to regulate issuers of stablecoins as banks: 

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.

A Top Name Of Ours Over The Summer

Regular readers may remember that we mentioned Silvergate Capital was one of our top names this past summer. For example, we pointed out it was one of our top ten names when Bitcoin was trading below $40,000 at the end of May ("A Hedged Bet On A Bitcoin Bottom"): 

On Friday, we had a new Bitcoin-related name hit our top ten: the miner Marathon Digital Holdings, Inc. MARA.

Screen capture via Portfolio Armor on Friday, 5/28/2021.

MARA joined Riot Blockchain, Inc. RIOT and Silvergate Capital as the other Bitcoin-related names.

Since then, MARA and SI have posted attractive returns, while RIOT has lagged so far. 

Incidentally, MARA and SI are now in business together:

If you're long SI and you're worried it might give back some gains in the near term, below are a couple of ways of adding some downside protection to it now. 

Adding Downside Protection To Silvergate

On Tuesday, if you were looking to hedge 500 shares of SI against a greater-than-24% decline over the next several months, here were two ways of doing so. 

Uncapped Upside, High Cost

Silvergate was extremely expensive to hedge with puts on Tuesday, as you can see below. 

This and subsequent screen captures are via the Portfolio Armor iPhone app.

The cost of this protection was nearly as large as our decline threshold: 23.99%. 

Capped Upside, Negative Cost

If you were willing to cap your possible upside at 24% over the same time frame, this was the optimal collar to hedge against a >24% decline:

Here the cost was negative, meaning you would have collected a net credit of $3,800, or 4.97% of position value, when opening the hedge. To be conservative, that cost assumes you placed both trades (buying the puts and selling the calls) at the worst ends of their respective spreads. 

Eliminating Your Upside Cap

In the event Silvergate pulls back significantly, an investor hedged this way may be able to buy-to-close the call leg on his collar for a fraction of the net credit, eliminating his upside cap. Alternatively, if you think Silvergate might get acquired for a large premium before next May, you can try scanning for a hedge expiring sooner in the event there's a crash within the next few months.