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

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

On June 5th, Eastern Time, following Coinbase, the most anticipated IPO 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 ($24-$26), raising $1.1 billion, with the stock code "CRCL." Due to surging demand, the originally planned issuance of 24 million shares was expanded to over 34 million shares.

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

Although Circle is well-known in the cryptocurrency circle, it may still feel a bit distant for those outside the circle. Circle was founded in 2013 and is headquartered in Boston. It originally started as a consumer finance startup in the U.S., primarily providing storage for the virtual currency Bitcoin and currency exchange services. However, as the market changed, its business evolved repeatedly, from a crypto wallet to an exchange, and ultimately, the only core product that survived the fierce competition is the USD Coin (USDC). As a homegrown U.S. stablecoin, USDC has relatively more compliance restrictions and is favored by local individuals compared to the globally prominent USDT. In the stablecoin sector, it has consistently ranked second, with a current circulation of approximately $61 billion, accounting for 27% of the market share, second only to the leader USDT.

From the perspective of its development path, Circle can be considered a capital darling born with a golden key. As early as its inception in 2013, it caught the attention of General Catalyst, setting a record for cryptocurrency companies with $9 million in Series A financing. It subsequently attracted large capital players such as Goldman Sachs, IDG, and DCG. Even Chinese capital made an appearance, with Baidu Ventures, Everbright Holdings, China International Capital Corporation, and Yixin participating in its Series D financing. However, due to well-known regulatory reasons, Circle's business entity in China, Tianjin Shike Technology Co., Ltd., was simply deregistered in 2020. Interestingly, after the IPO news of Circle was released, the stock price of China Everbright Holdings rose 44% in 5 days, marking a tear of the era left by Circle in China.

Despite the backing of luxurious capital, Circle's path to listing has not been smooth sailing. In 2018, after completing Series E financing with a valuation of $3 billion, Circle already had preliminary thoughts of an IPO, planning to stand out with "compliance + listing + transparency."However, the preheating period had not yet reached a year, and 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 the path to going public. To avoid compliance scrutiny, Circle planned to go public through 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 nature of USDC, and Circle's IPO was once again thwarted.

Three years later, in January 2024, after learning from various lessons, Circle submitted its IPO application in an unusually low-key manner to reduce inquiries and comments from regulatory agencies and the media. Finally, on April 2 of this year, Circle submitted its S-1 filing to the SEC, officially starting the initial public offering process, with plans to list on the New York Stock Exchange. Interestingly, in early May, Bloomberg reported that Ripple had made an acquisition request to Circle, which was ultimately rejected due to a low offer. Shortly thereafter, The Block also reported that Circle was actively seeking buyers in connection with Coinbase and Ripple, with a valuation of at least $5 billion. Due to the continuous rumors of sale, the market speculated that Circle was pursuing a dual strategy, advancing both the IPO and the sale simultaneously, aiming to capitalize on the situation to maximize value.

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 planned to issue 24 million Class A shares, of which 9.6 million shares would be issued by the company and 14.4 million shares would come from existing shareholders, with an expected pricing range of $24 to $26 per share, to be underwritten by JP Morgan and Citigroup.

On June 5, Circle will officially debut on the NYSE, completing its trading debut. From the latest disclosed data, Circle received 25 times oversubscription, ultimately increasing the number of shares issued from 32 million to 34 million. The expected price per share is $31, which not only exceeds the expected range of $27 to $28 but also represents a significant leap from the initial range of $24 to $26. Based on this price estimate, Circle's total valuation reached $6.2 billion, and if potential dilution factors such as employee stock ownership plans, restricted stock units (RSUs), and warrants are taken into account, the fully diluted valuation would be approximately $7.2 billion. Although there is still a significant gap compared to the company's envisioned $9 billion in 2022, from the market perspective, even in the currently relatively tight liquidity environment of the cryptocurrency sector, where valuations often reach billions of dollars, Circle's valuation appears to be relatively healthy.The data in the prospectus also illustrates this point. As previously mentioned, Circle's USDC issuance scale is approximately $60 billion, which, although significantly lower than the $150 billion of USDT, still holds a clear advantage compared to the third place, which is less than $10 billion. In the context of the ongoing advancement of the stablecoin legislation in the United States, there remains long-term growth potential in this field.

However, from a business model perspective, Circle faces significant risks. In terms of revenue, Circle's total revenue for 2024 is projected to be $1.676 billion, a year-on-year increase of about 16%, with approximately 99.1% of the revenue coming from interest income generated by USDC reserve assets, amounting to $1.661 billion, while other income is $15.169 million. It is evident that the risk-free interest margin is essentially Circle's core source of income, but this is clearly based on the backdrop of macroeconomic tightening and high interest rates. If a rate-cutting cycle begins subsequently, its revenue 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 achieving $1.6 billion in revenue, Circle's disclosed net income is only $156 million, with the missing $1.45 billion attributed to seemingly negligible issuance costs. Most people would think that the cost of large-scale on-chain token issuance approaches zero, but while issuing tokens may be costless, in the current ecosystem, issuance is a technical task that heavily relies on the network effects of large exchanges. Breaking down the issuance costs, Coinbase is the largest partner, taking a cut of $900 million from Circle's profits, accounting for 54.18% of Circle's annual revenue. At the same time, Circle's collaboration with Binance allows USDC to participate in Binance Launchpool, with a one-time exchange cost of $60.25 million, and as long as Binance holds no less than $1.5 billion in USDC, monthly incentives will be distributed based on its USDC custody balance over the next two years. It is clear that Circle's bargaining power is relatively insufficient in the profit structure, and profits are thus squeezed by exchanges and other competitors.

However, valuation is subjective, and some believe that since 14.6% of Coinbase's revenue comes from USDC-related earnings, with Coinbase's current market value at approximately $65 billion, Circle's valuation should be at least above $10 billion. In fact, Circle itself seems to have this intention, as indicated by previous rumors that during negotiations with Coinbase and Ripple, Circle's intended offer 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 eager to extend olive branches. According to a document from the U.S. Securities and Exchange Commission, Cathie Wood's ARK Investment Management has expressed interest in purchasing up to $150 million in stock. On the other hand, asset management giant BlackRock also plans to acquire about 10% of the IPO shares. It is worth noting that both parties reached a cooperation agreement as early as March this year, with Circle entrusting at least 90% of its dollar custody reserves (excluding bank deposits) to BlackRock for management. The return offered by BlackRock is that it will not issue its own stablecoin, which is actually very wise, as it not only gains strong support from traditional institutions, facilitating the opening of subsequent sales channels, but also cleverly avoids potential competition from traditional asset management businesses that come with their own traffic.

On the other hand, Circle's obsession with going public has led to market speculation about a so-called cash-out, suggesting that Circle's move is merely to allow large capital to exit comfortably, benefiting Wall Street capital rather than truly benefiting retail holders. From the current perspective, this point seems somewhat thin. First, as early as 2018, Circle's valuation reached $3 billion, and the subsequent financing of $440 million in 2021 was based on a valuation of $4.5 billion. It can be considered that the vast majority of investors had a relatively high valuation when investing, so although there is currently a total valuation of $7.2 billion, it is not an exorbitant investment return for early investors who have been in the race for many years. Second, unlike Coinbase's direct listing, Circle is adopting a conventional IPO approach, which means that early investors and insiders cannot sell their shares within the first 180 days, at least in the short term, retail investors will not act as exit liquidity. From the speculation before the IPO, in the context of already being oversubscribed, most industry insiders believe Circle will perform well.

Regardless of the performance, this is another milestone event for Circle and the industry. For Circle, going public not only alleviates financial pressure but also officially places it in the capital game, creating core drivers for future operations and development, further achieving global expansion, and successfully seizing an ecological position from the long-term foreseeable U.S. stablecoin landscape, gaining cyclical benefits ahead of others.

For the industry, the impact is even more profound. What seems to be the listing of a stablecoin company is actually a concentrated reflection of the U.S. response priority strategy. Looking at all stablecoin issuers, Circle's compliance is the most prominent, as evidenced by its previous ability to obtain a BitLicense from New York State. Based on this standard, after this listing, USDC is expected to become the first stablecoin that meets the requirements of the U.S. stablecoin legislation and further become a hard redemption model between fiat currency and stablecoins, thereby constructing a compliant circulation mechanism for stablecoins.In this context, compliant stablecoins will officially connect to the banking and Wall Street systems, with US dollar stablecoins becoming the core carrier linking the global cryptocurrency field. This is also the original intention of the United States to promote stablecoin legislation, with the dollar serving as a stabilizing force throughout the traditional financial and cryptocurrency systems, once again reshaping dollar hegemony on a global scale. In the long term, as stablecoins continue to develop, cross-border payments may detach from the bank account system and rely on stablecoins for settlement, which could potentially impact the existing global settlement 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 see growth. In other words, Circle may become a valuation anchor in the DeFi field.

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

Risk Warning and Disclaimer

The market has risks, and investment should be cautious. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investment based on this is at their own risk