Coinbase Valued at Only $14 Billion, Circle's Second IPO Likely to Succeed?

The circulating supply of stablecoins has returned to a historical high of around 180 billion US dollars. Circle, the US stablecoin issuer that has always aimed for compliance and listing, has seen its circulating supply steadily increase to 35.5 billion US dollars, accounting for 20% of the total market value of stablecoins. With the increasing diversification of stablecoin applications, does Circle have the opportunity to restart its IPO plan?

Bernstein: The stablecoin market cap hits a new high, becoming increasingly "systemically important"

Review of Circle's History

For a long time, the stablecoin USDC, which has steadily held the position as the second-largest by market capitalization, was governed by the Center Consortium formed in 2018 by Circle in partnership with the cryptocurrency exchange Coinbase.

In Q4 of 2021, Circle attempted to go public through a merger with the special purpose acquisition company Concord Acquisition Corp for an IPO listing. However, the plan was ultimately called off by the end of 2022. Following this, amidst the cryptocurrency market downturn and the Silicon Valley banking crisis, the market capitalization of USDC plummeted from its peak of $56 billion to a low of $24 billion.

However, with the increasing diversification of stablecoin applications and the growing calls for regulatory oversight worldwide, Circle seems to be aiming to take advantage of the cryptocurrency market's recovery. It quietly applied for a U.S. IPO, intending to become the first compliant and publicly listed stablecoin issuer in the United States. Recently, Circle announced its global headquarters relocation to New York City and plans to establish a flagship office space in the high floors of One World Trade Center. By setting foot in the economic hub of the U.S., it appears to be preparing for its IPO in the United States.

USDC market capitalization back to $30 billion, most reserves managed by BlackRock, Circle IPO in progress

Disbanding of Center, Coinbase Directly Invests in Circle

Circle and Coinbase, the partners overseeing the issuance of USDC through the Center Consortium, officially announced its dissolution in August 2023. According to reports at that time, Circle and Coinbase believed that with the increasing clarity of regulations on stablecoins in the United States and around the world, the requirements of independent governance bodies like Centre were no longer necessary. Circle will continue to act as the issuer of USDC, incorporating the governance and operational responsibilities of the Center internally. The new structure will simplify operations and governance, strengthening Circle's direct responsibilities as the issuer, including holding all smart contract keys, complying with reserve governance regulations, and enabling USDC on new blockchains.

At that time, Coinbase and Circle reached a new agreement, with Coinbase acquiring a stake in Circle to continue their collaboration on stablecoins, reflecting Coinbase's belief in the fundamental importance of stablecoins to the broader crypto economy.

Coinbase Values Circle at Only $14.6 Billion

When seeking to go public in 2022, Circle was valued as high as $9 billion. According to reports in July, based on the trading price of Circle Internet Financial's private shares in the secondary market, Circle's current valuation is estimated to be around $5 billion to $5.25 billion.

In the same year, Circle submitted a confidential S-1 draft to the U.S. Securities and Exchange Commission (SEC). Circle plans to go public, but the valuation and exact timing of the IPO remain uncertain.

According to Coinbase's 2023 annual report, Coinbase exchanged its original 50% stake in Center with Circle US Holdings, Inc., a joint venture partner, in August 2023, in exchange for a fully diluted 3.5% stake in Circle Internet Financial Limited, with a fair value of $51.1 million. Based on this price, Circle's valuation is only $14.6 billion.

However, at that time, Circle was still in a downturn, and given the long-standing and firm partnership between Coinbase and Circle, investing at a friendly price seems reasonable?

Is Stablecoin a Good Business?

Stablecoin issuers hold significant cash reserves and do not need to pay interest to customers, making it seem like a profitable business. Leading stablecoin Tether has boasted continuously increasing profits, with a report from the second quarter of 2024 claiming a profit of $5.2 billion in the first half of 2024.

However, analyzing the financial situation of Circle based on its financial reports submitted for IPO in 2022, Circle barely broke even in 2020 with a profit of $20 million due to recognizing $200 million in other income from selling Poloniex. The bull market summary in 2021 also resulted in a loss of $500 million, and in the first half of 2022, the accumulated loss reached a staggering $850 million.

Circle's high operating expenses, including personnel costs accounting for 40%, with 869 employees globally in October 2022, and employee stock options, as well as a significant increase in employee costs, contributed to the operating expenses. Additionally, 17% of operating expenses were from general and administrative expenses, mainly legal consulting fees. At that time, it was believed that aside from the unfavorable market conditions, the lack of profitability was the key reason for Circle's announcement to temporarily abandon its IPO plans.

Is stablecoin a good business? Insights into Circle's business model from its financial reports

According to Circle's July transparency report, nearly 30% of its reserves are held in short-term U.S. Treasury securities maturing within three months, with almost 60% in repurchase agreements (Repo), where the current three-month U.S. Treasury bond yield is 4.77%, and the overnight repo rate is about 4.8%. These rates are significantly higher than the 0.36% before Circle's IPO application, as estimated based on its financial figures.

In August 2023, Circle CEO Jeremy Allaire stated that Circle's revenue in the first half of 2023 was $779 million, surpassing the full-year revenue of $772 million in 2022. The adjusted EBITA pre-tax, pre-interest, depreciation, and amortization profit was $219 million, also exceeding the full-year profit of $150 million in 2022. Perhaps Circle has turned losses into profits in these two years?

Rate Cut Cycle Initiated, How Will Stablecoin Issuers Respond?

The Federal Reserve announced a 2-point rate cut on 9/18, officially initiating this rate cut cycle, with a possible cumulative 4-point rate cut by the end of the year. How should stablecoin issuers, whose important source of income is U.S. Treasury bonds, respond?

Diversification Strategy by Tether

As the leading stablecoin, Tether, with reserves reaching hundreds of billions of dollars, may see a potential reduction of $200 million in quarterly income.

However, Tether may have anticipated this situation early on and began actively diversifying earlier this year. Because investments in the early stages may face challenges in rapidly recovering funds or even encountering cash burn in the early stages of a startup, aside from investments in new ventures like AI data centers, Tether recently invested $100 million in shares of the South American agricultural giant Adecoagro with the stock code: AGRO. Tether stated that land is also an important asset, but it is speculated that Adecoagro, listed on the New York Stock Exchange, may also be considered for its stable dividend income. As the rate cut is about to start, how far will Tether expand its industrial footprint? Let's find out together!

With the rate cut imminent, Tether's quarterly income may be reduced by $200 million. How will the leading stablecoin respond?

Circle Actively Expanding Payment Landscape

Circle, aiming to be compliant and even go public, cannot invest in whatever it wants like Tether. In fact, in 2022, Circle had already divested many entities and focused on core business development. In 2023, it decided to reduce or stop investing in non-core businesses, lower operating costs, including a small amount of layoffs.

In early July, Circle announced that it became the first MiCA-compliant stablecoin issuing institution and officially opened its USDC and EURC services to European business customers. Additionally, Circle is actively expanding services in various payment areas.

• Circle partnered with Hong Kong payment startup REAP to provide B2B payments for companies that have difficulty accessing traditional financial services such as credit cards and bank accounts, offering financial solutions to over 22,000 global enterprises.
• Circle expanded USDC to Brazil and Mexico for localized digital dollar transactions in national payment systems.
• In response to the International Settlement Bank blockchain project Agorá, Circle hopes to collaborate with seven central banks to simplify cross-border payment processes.

As for when Circle will successfully go public through an IPO, in addition to improving its operational conditions, a successful IPO will also signify a significant step forward for the advancement of crypto in the United States!