Can You Square The Circle?

Circle Launch

The Circle (CRCL) initial public offering (IPO) has received significant attention and investment from retail and institutional investors including BlackRock.

Circle initially sold 34 million shares at an IPO price of $31 on the New York Stock Exchange (NYSE) and raising $1.1 billion.

On launch, trading of Circle shares was almost immediately halted as shares surged in price by more than 300% and reached an intraday high of over $100. The stock ended the day at $82.

However, it didn’t end there. Investment in the stock continued post launch and the price peaked at almost $300 on Monday before correcting and closing at $224 on Tuesday.

So, do the fundamentals support the current Circle valuation?

The majority of Circle earnings are from interest earned on the short-term U.S. government bonds that it holds as reserves to back its USDC stablecoin.

Revenue for 2024 was $1.68 billion and revenue estimates for 2025 are $2.3 billion.

Operating income, however, for 2024 was just $167 million. Circle spent more than a billion dollars in distribution costs in 2024. Most of that, $908 million, went to Coinbase.

An arrangement in 2022 between the two companies means that Coinbase receives around 50% of all revenue generated by Circle stablecoin reserves.

That will likely constrain future operating income.

The reliance on revenue from reserves means that Circle’s profits are also highly sensitive to a reduction in interest rates.

Additionally, Circle is vulnerable if and when there is a significant correction in the Bitcoin price and a decline in demand for stablecoins.

Traditional Finance

The “elephant in the room”, however, is likely the financial institutions.

Financial giants with established brands and financial firepower are on the sidelines and gearing up to enter the market once stable coin regulation becomes clear.

JPMorgan have filed a new trademark (JPMD) for crypto payment services which likely includes a stablecoin. PayPal has an earnings growth target of 20% for its stablecoin (PYUSD) and Bank of America and Fidelity are also actively working on their own stablecoin.

On balance, probability weighting suggests that Circle’s valuation is currently driven more by speculation than fundamentals. Proceed with caution.