Crypto bank deposits have dropped in this bear market. Why JPMorgan says it's a ‘small blip’ over the long term

Published Fri, Oct 21 20221:42 PM EDT

The outlook for crypto banks is surprisingly strong given a drop-off in customer deposits in the wake of depressed prices and low volatility , according to JPMorgan. Both Silvergate Bank and Signature Bank , two commercial banks that serve the cryptocurrency industry, reported their third-quarter financial results this week. On each bank's respective payments platform, there was a drop in customer deposits as well as transfer volumes thanks to the fall in crypto prices and activity over the last two quarters. However, both companies also grew their customer base in the most recent quarter, which should bring some comfort to the long and still uncertain journey ahead. "While the quarters ahead … are still hard to predict given the uncertain macroeconomic conditions, the continued additions of institutional crypto-related clients by both the banks signifies a positive catalyst for the longer term," JPMorgan analyst Steven Alexopoulos said in a note Friday. "The current dip in Silvergate and Signature's crypto-related business could just be a small blip in the strong growth story of this nascent and rapidly evolving space." Signature's crypto deposits fell 12% on a quarterly basis, but the bank added 116 digital currency clients, bringing its total crypto customer base to 1,677. Its crypto deposits tend to come from crypto exchanges and stablecoin companies. At Silvergate, crypto deposits decreased by 11%, and its crypto customer base increased by 92 to reach 1,439. Institutional investors make up 64% of Silvergate's crypto customers, though it also serves exchanges and other businesses. Sentiment among investors of risk assets has been bad all year, although some are finding comfort lately in crypto's uncharacteristically low volatility . Bitcoin has been trading in the $19,000 level for more than a month and on Friday its volatility fell below that of both the Nasdaq and the S & P 500 for the first time since 2020. For exchanges, however, low volatility often translates to low trading volume. Nevertheless, institutions' appetite for crypto is growing , even if they are holding off on making allocations until the market gets more clarity on central bank policy. Alexopoulos noted that with increasing regulatory clarity and institutional adoption, he expects the crypto-related banking and custody space to expand. "With several upcoming bills to be unveiled, 2023 and beyond could see increased growth in this new era of institutional crypto adoption, the beginnings of which can already be seen today," he said.