If I had to pick the next Nvidia, I'd say it's Circle.

The U.S. Senate recently passed stablecoin legislation, establishing regulatory rules for cryptocurrencies pegged to the dollar. This marks a milestone victory for the crypto industry, further paving the way for digital currencies. This very bill is now fostering what some believe could be the next Nvidia: $Circle(CRCL.US)

Circle's stock, CRCL, went public on June 5th. In just over ten days, its share price soared from an initial public offering of $31 to a high of $199.59 yesterday, a six-fold increase with astonishing speed. Last night, it climbed another 33.82%.

I had actually noticed Circle, a stablecoin issuer, even before its listing and had reviewed its prospectus, immediately recognizing its significant potential and immeasurable future prospects. After observing it for two days post-listing, Shelly established a foundational position last Tuesday and plans to dollar-cost average into the stock over the next few years.

Understanding Stablecoins and Circle's Business Model

First, let's introduce stablecoins. A stablecoin is a type of cryptocurrency whose value is designed to remain stable relative to a fiat currency. Currently, the most prominent USD stablecoins are USDT and USDC, both maintaining a 1:1 peg to the U.S. dollar, effectively serving as a form of digital payment. To uphold this 1:1 exchange rate, stablecoin issuers must ensure that one can always exchange one dollar for one stablecoin and vice versa. This means any deviation from the 1:1 peg can be self-corrected through arbitrage.

Circle's revenue model is straightforward. When Circle issues stablecoins, it receives dollars in return. These dollars can then generate interest income, while the issued stablecoins do not accrue interest payments. This creates a net interest margin. With U.S. interest rates currently relatively high (overnight borrowing rates between 4.25%-4.5%), interest income constitutes the bulk of stablecoin issuers' revenue. Essentially, Circle invests users' dollars into U.S. Treasury bonds, earning stable interest. This forms nearly all of Circle's income. Therefore, its revenue is almost directly proportional to its issuance volume, or market demand.

Profitability Challenges and Future Outlook

In 2024, out of $1.6 billion in revenue, Circle only generated $150 million in profit. The primary reason for this seemingly low-profit margin is exceptionally high distribution expenses, amounting to $1.1 billion. A significant portion of this, $900 million, goes to Coinbase. This is because USDC was initially a joint venture between Circle and Coinbase. Although Circle later acquired Coinbase's stake, a new distribution agreement was signed, stipulating that 100% of the interest income generated from USDC held on Coinbase's platform goes to Coinbase. This agreement was signed in 2023 and is set for renewal every three years. This means that next year, Circle and Coinbase may renegotiate the terms. If the distribution fees can be reduced from 60% to 30% after renegotiation, Circle's profitability could significantly improve.

Currently, CRCL boasts a price-to-earnings (P/E) ratio of 150 times, comparable to Tesla, while Coinbase and Nvidia are in the 40s. Many might question such a high valuation for a company with seemingly linear revenue and thin profit margins. However, Shelly believes Circle's future is far from simple. The company's true potential lies in its continued scale expansion in the long term, suggesting its current P/E ratio might not be as high as it appears.

The Vision of Circle as a Financial Infrastructure Giant

For an investment to be successful, it must yield unexpected results. If only expected outcomes materialize, there's little gain, as future earnings expectations are already discounted into the current stock price, meaning you're buying at a premium. If the U.S. and Europe both pass stablecoin legislation, leading to widespread adoption of stablecoins, and even the tokenization of national debt (RWA) for on-chain circulation, or if banks worldwide begin integrating stablecoin systems, then USDC and USDT, with their first-mover advantage, could evolve into global financial infrastructures like SWIFT or global payment networks like Visa.

Should this vision become a reality, Circle would not only generate substantial service fees but also experience a massive increase in demand for USDC. Consequently, the volume of dollars managed by USDC would grow exponentially, significantly boosting its wealth management income. At that point, Circle (or Tether) could transform from the modestly profitable company it is today into a true behemoth within the next 5-10 years.

If one must name the next Nvidia, Shelly believes it's Circle. Circle's imaginative potential is immense, and such promising targets are rare. They typically meet several criteria: "market capitalization is not yet high," "future trends are highly certain," "there's potential for significant future surprises," and "they possess a first-mover advantage." Therefore, when considering a company like Circle, focusing on the current P/E ratio is meaningless, as there are too many possibilities for unexpected future surprises. After all, investing isn't about the present; it's a game of probabilistic judgments about the unpredictable future.