Is Circle, the "first stock" of stablecoin, worth buying?

Written by: Torus Finance

The United States is heavily promoting stablecoins, with various parties gathering strength, but the first to take the plunge is still the veteran Circle.

On June 5th, Eastern Time, following Coinbase, the most anticipated IPO in the market is coming. Circle will officially become the first stablecoin company to be listed on the New York Stock Exchange, marking a perfect conclusion to its 7-year IPO journey.

According to the latest data, Circle completed its IPO on the New York Stock Exchange at $31 per share, exceeding the original expected pricing range of $24-26, raising $1.1 billion, with the stock code "CRCL." Due to the surge in demand, the originally planned issuance of 24 million shares was also expanded to over 34 million shares.

The optimism in the capital market is self-evident, and for the industry, Circle's listing is far more than simply selling stocks.

Although Circle is already familiar in the cryptocurrency circle, it may still be a bit far away for those who are not in the circle. Founded in 2013 and headquartered in Boston, Circle was originally a consumer finance startup in the United States, initially mainly providing storage and national currency exchange services for the virtual currency Bitcoin, but as the market changed, the business changed again and again, from crypto wallets to exchanges, and finally to the core product of the big wave, only one USD Coin (USDC). As a home-grown USD stablecoin, USDC has relatively many compliance restrictions, and is more favored by locals than USDT, which is prominent in globalization. In the field of stablecoins, it has been ranked second for many years, and the total circulation of USDC is about $61 billion, accounting for 27% of the market share, second only to the leading leader USDT.

From the perspective of development alone, Circle can be regarded as a capital darling born with a golden key. As early as 2013, it was favored by General Catalyst when it first started, setting a record for a cryptocurrency company at that time with a $9 million Series A financing, and then attracted large capital such as Goldman Sachs, IDG, and DCG, and even Chinese capital once appeared, Baidu Ventures, Everbright Limited, CICC Jiazi, CreditEase have all participated in its Series D financing, and of course, due to subsequent well-known regulatory reasons, in 2020, Circle Tianjin Shike Technology Co., Ltd., the main business entity in China, was simply deregistered. Interestingly, after the news of Circle's IPO was released, China Everbright Limited's share price also rose by 44% in five days, which can be regarded as the tears of the era left by Circle in China.

Despite the support of luxurious capital, Circle's journey to going public has not been smooth sailing. In 2018, after completing a Series E funding round with a valuation of $3 billion, Circle had preliminary thoughts about an IPO, planning to stand out with "compliance + listing + transparency." However, less than a year into the warm-up, the sudden market crash in 2019 caused Circle's valuation to plummet from $3 billion to $750 million, shattering the dream of an IPO for the first time.

In 2021, Circle revisited its path to going public. To avoid compliance scrutiny, Circle planned to go public through a SPAC (Special Purpose Acquisition Company) Concord Acquisition Corp, with a valuation of $4.5 billion. However, the SEC intervened at this time, announcing an investigation into the securities characteristics of USDC, causing Circle's IPO to unfortunately collapse yet again.

Another 3 years later, in January 2024, Circle, after learning the lessons of all parties, submitted an unusually low-key and secret IPO to reduce inquiries and comments from regulators and outside media. Finally, on April 2 of this year, Circle filed an S-1 filing with the SEC, officially initiating the initial public offering process, and the company plans to list on the New York Stock Exchange. But interestingly, as recently as early May, Bloomberg also said that Ripple made a takeover request to Circle, which was ultimately rejected because the bid was too low. Shortly afterward, The Block also reported that Circle was actively looking to interface with Coinbase and Ripple to find a buyer at a valuation of at least $5 billion. Due to the continuous sale rumors, the market once speculated that Circle was walking on two legs, and the IPO and the sale were promoted at the same time, with the aim of taking advantage of the situation and the one with the highest price.

On May 27, Circle denied the rumors of a sale. On the same day, Circle officially submitted its listing application to the New York Stock Exchange. According to the prospectus disclosed at that time, Circle issued 24 million Class A shares, of which 9.6 million shares were issued by the company and 14.4 million shares were sold by existing shareholders, with an expected pricing range of $24 to $26 per share, to be underwritten by JPMorgan Chase and Citigroup.

On June 5, Circle will officially land on the New York Stock Exchange to make its trading debut. From the latest data disclosed, Circle was oversubscribed by 25 times, eventually increasing the number of shares issued from 32 million to 34 million. Priced at $31 per share, it is not only above the expected range of $27-$28, but also a significant jump from the initial $24-$26 range. At this price, Cirlce's total valuation is $6.2 billion, with a fully diluted valuation of approximately $7.2 billion after taking into account potential dilutions such as employee stock ownership plans, restricted stock (RSUs) and warrants. Although there is still a large gap compared to the $9 billion that the company envisioned in 2022, from the perspective of the market, in the crypto space, which is often valued at billions of dollars, even at the moment when liquidity is relatively tight, Circle's valuation looks relatively healthy.

The data from the prospectus also illustrates this point. As previously mentioned, Circle's USDC issuance scale is approximately $60 billion, which is significantly less than the $150 billion of USDT, but compared to the third position with a scale of less than $10 billion, it holds a clear advantage. In the context of the ongoing advancement of the stablecoin legislation in the United States, there is still long-term growth potential in this field.

However, from a business model perspective, Circle has obvious risks. In terms of revenue, Circle's total revenue in 2024 is projected to be $1.676 billion, a year-on-year increase of about 16%. Approximately 99.1% of the revenue comes from interest income generated by USDC reserve assets, reaching $1.661 billion, while other income amounts to $15.169 million. It is clear that the risk-free interest margin is essentially Circle's core source of income, but this is evidently based on the backdrop of macroeconomic tightening and high interest rates. If a rate-cutting cycle begins subsequently, its income will be affected. In other words, Circle is strongly correlated with systemic cycles, thus there is a possibility of systemic risk spillover.

On the other hand, despite the $1.6 billion in revenue, Circle only had $156 million in disclosed net income, and the middle $1.45 billion was missing precisely because of the seemingly insignificant issuance costs. Most people will believe that the cost of large-scale coin issuance on the chain is infinitely close to zero, but the cost of coin issuance is zero, and under the existing ecosystem, issuance is a technical activity that needs to be highly dependent on the network effect of large exchanges. Breaking down the cost of its issuance, Coinbase is the largest partner, and this alone has carved a share of Circle's profit of $900 million, accounting for 54.18% of Circle's annual revenue. At the same time, Circle partnered with Binance to allow USDC to participate in the Binance Launchpool at a one-time payment of $60.25 million, and as long as Binance holds at least $1.5 billion in USDC, monthly incentives will be issued based on its USDC custody balance over the next two years. It is enough to see that in the composition of profits, Circle's bargaining power is relatively insufficient, and profits are squeezed by friends such as exchanges.

However, valuation is subjective. Some believe that since 14.6% of Coinbase's revenue comes from USDC-related earnings, and considering Coinbase's current market value of approximately $65 billion, Circle's valuation should be at least above $10 billion. In fact, Circle itself seems to have this in mind, as it was reported in earlier rumors that Circle's intended offer when negotiating with Coinbase and Ripple was between $9 billion and $11 billion, but both parties clearly rejected this.

Overall, Circle's valuation is reasonable, and in this context, institutions are also vying to throw an olive branch. Cathie Wood's ARK Investment Management has expressed interest in buying up to $150 million in shares, according to a SEC filing. On the other hand, asset management giant BlackRock also plans to buy about 10% of the IPO shares. It should be reminded that the two have reached a cooperation as early as March this year, Circle will hand over at least 90% of its US dollar custody reserves (excluding bank deposits) to BlackRock management, BlackRock will not issue its own stablecoins in return, this move is actually very wise, not only has received strong support from traditional institutions, which is conducive to the opening of subsequent sales channels, but also cleverly avoids the possibility of competition in traditional asset management business with its own traffic.

On the other hand, Circle's listing obsession has also caused the market to hesitate to cash out, believing that Circle's move is only to allow large capital to exit calmly and benefit Wall Street capital, rather than really benefiting retail holders. For now, this is a bit thin. First of all, as early as 2018, Circle's valuation reached $3 billion, and the subsequent $440 million financing in 2021 was also based on a valuation of $4.5 billion. Second, unlike previous Coinbase direct listings, Circle has adopted a regular IPO approach, which means that early investors and insiders will not be able to sell their holdings for the first 180 days, at least for a short period of time. Judging from the speculation on the eve of the listing, most industry insiders believe that Circle will perform well against the backdrop of being oversubscribed.

Regardless of the performance, this is another milestone event for Circle and the industry. For Circle, going public not only alleviated financial pressure but also officially placed it in the capital game, creating a core driver for future operations and development, further achieving global expansion. It also allowed Circle to successfully seize an ecological position from the long-term predictable U.S. stablecoin landscape, gaining a first-mover advantage in cyclical benefits.

For the industry, the impact is even more far-reaching. What appears to be the listing of a stablecoin company is actually a concentrated embodiment of the U.S. response-first strategy. Of all the stablecoin issuers, Circle's compliance stands out, as evidenced by its previous BitLicense from the State of New York. Based on this standard, after this listing, USDC is expected to become the first stablecoin that meets the requirements of the U.S. Stablecoin Act, and further become a hard acceptance sample of fiat currency and stablecoin, so as to build a compliant circulation mechanism for stablecoins. In this context, the compliant stablecoin will be officially connected to the bank and Wall Street system, and the US dollar stablecoin will become the core carrier of the global crypto field, which is also the original intention of the United States to promote the stablecoin bill. In the long run, with the continuous development of stablecoins, it is possible for cross-border payments to be separated from the bank account system and rely on stablecoins to achieve liquidation, which may even potentially affect the existing global clearing system.

In addition, some analysts believe that Circle's listing has also stimulated the DeFi market. As Circle's valuation rises, businesses or projects closely related to stablecoins may also hope to achieve growth. In other words, Circle may become a valuation anchor in the DeFi sector.

The theoretical significance is a subjective product; the market's attitude is fundamental. Whether it is truly valuable or just capital realization can only be explained by Circle's curve on the first day of listing.