Silvergate Contrarian Bet Soured for Peter Thiel-Backed Block.one, Bill Miller

(Bloomberg) — Just months before Silvergate Capital Corp. announced that it was winding down, banking’s first casualty from the crypto industry’s implosion, a company called Block.one was boosting its investment.

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Silvergate’s stock was plummeting, depositors were fleeing and the short-sellers were circling — but Block.one and its chief executive officer Brendan Blumer were big buyers. In November, they purchased stock amounting to a 9.27% stake in the lender, according to a statement late that month. By the end of December, the firm, whose long-time backers include Peter Thiel and Alan Howard, had boosted that position so that Block.one, together with Blumer, became Silvergate’s biggest holder with a combined 9.9% holding.

“Silvergate’s current equity prices do not accurately reflect their strong balance sheet, their strategic positioning, or their market-defiant growth trajectory, and therefore offers a unique investment opportunity,” Block.one said in the November statement disclosing its initial purchase. “We are excited to be a new passive shareholder.”

Block.one wasn’t alone. Miller Value Partners LLC, the money manager founded by legendary investor Bill Miller who ran value investing strategies for decades at Legg Mason, also increased its stake in the fourth quarter, documents on its website showed.

It might have been a shrewd contrarian bet if Silvergate were able to weather the downturn. But that didn’t happen. Silvergate held deposits for FTX, the crypto exchange whose bankruptcy earlier in November convulsed a market already bruised from crises in the spring and summer. FTX’s collapse triggered a run on deposits at the bank and a stampede out of its stock, as well as regulatory scrutiny, sending Silvergate into a tailspin from which it was ultimately unable to recover. On Wednesday, the bank announced it was liquidating and winding down.

Silvergate Plans to Wind Down Bank Operations and Liquidate

When Block.one disclosed its initial 9.27% holding in a November statement — which has since been removed from its website — the stake was worth more than $90 million based on the share price at that time, according to Bloomberg calculations. By the end of December, its boosted 9.9% stake was worth $54.5 million.

Since the end of 2022, Silvergate’s stock has lost 70% of its value; its shares plunged more than 40% post-market on Wednesday alone after closing at $4.91 apiece. Block.one was along for most of that downward ride: It exited its stake only last week, after the bank failed to file its annual report on time and shut down a payments network that was once widely used by crypto firms.

“While we are disappointed with this outcome, we remain unwavering that banks and other financial institutions embracing the digital asset and cryptocurrency sectors are well-positioned to use technology to advance the capabilities of both the traditional financial services and the new burgeoning digital asset economy,” Block.one said in a statement Wednesday on its website. Representatives for Block.one and Silvergate didn’t respond to requests for comment.

In the case of Miller Value Partners, its Miller Opportunity Trust fund added more than one million shares of Silvergate in the fourth quarter, according to its filings. The $1.3 billion fund, which seeks to place contrarian bets for long-term returns, valued that stake at $22.6 million at the end of December, according to filings. Miller Opportunity Trust, managed by Samantha McLemore, began building its stake in Silvergate in the third quarter of 2022, the filings show. The fund, which plunged about 36% in 2022, is up about 15% so far this year. Its current position in Silvergate is unclear.

MacKenzie Bozel, a spokesperson for Miller Value, declined to comment.

“At the time, it looked like probably a smart move,” said Brock Pierce, a co-founder of Block.one, who stepped down several years ago after a short stint, his LinkedIn profile shows. “Obviously, the stock was way down. They always talk about trying to catch a falling knife. It’s a risky business and it appears what’s happened here is the downside of attempting to do that.”

For Block.one, the setback marks the latest turn of events in a history not without its blemishes. Backed by billionaire investors like PayPal Holdings Inc. co-founder Peter Thiel and hedge fund magnates Alan Howard and Louis Bacon, Block.one was started to launch a blockchain known as EOS. The company is best known for raising more than $4 billion from its initial coin offering between 2017 and 2018, the largest so-called ICO in history.

The EOS blockchain never took off in popularity and the company soon became mired in scandal. The US Securities and Exchange Commission fined Block.one $24 million in 2019 for failing to register its initial coin offering, which drew concerns over seemingly suspicious trades and potential price-pumping. The EOS token is currently down 95% from its all-time high of $23 in 2018, according to CoinMarketCap.

Block.one has since pivoted toward venture capital and has invested more than $4 billion in assets, according to its website. The firm has backed blockchain gaming startup Immutable, as well as Galaxy Digital Holdings Ltd. The company also launched crypto exchange Bullish in 2021 with Blumer as chairman and CEO, but the company’s ambitions of going public hit a speed bump when Bullish called off a $9 billion deal with special-purpose acquisition company Far Peak Acquisition Corp in December.

The impact from Silvergate investment is expected to be “immaterial” for Block.one, said Pierce. “It’s obviously not good, but relative to the overall business on its balance sheet, it is a non-event.”