A Deep Dive on Circle: Biggest IPO in Crypto History?

Introduction

On June 4th, Circle launched its IPO of 32 million shares of common stock, with rumors circulating of the round being 25x oversubscribed. Known today for issuing UDSC, a cryptocurrency stablecoin pegged to the US dollar, Circle was founded in 2013 as a peer-to-peer payments technology company.

After launching on the Nasdaq yesterday morning, Circle's valuation rapidly rose to over 200% above the IPO, signaling high investor interest in crypto firms, particularly those in the stablecoin market. This interest is, in part, the result of upcoming federal legislation which will set regulations and reserve requirements for issuers of stablecoins. 

Currently moving through the Senate, the GENIUS Act is viewed by many as a gateway to expanding cryptocurrency's use and familiarity. Stablecoins recently achieved product-market fit as a much less volatile alternative to other tokens, but their future depends greatly on their regulatory acceptance. Circle's upcoming IPO demonstrates confidence in future cryptocurrency legislation such as the GENIUS Act and the future of the stablecoin market.

What Are Stablecoins?

As a refresher, the term stablecoin refers to any digital form of currency seeking to maintain a stable value by pegging its value to another asset. The values of some stablecoins are pegged to commodities, such as gold, while the values of others can be pegged to fiat currencies, such as the US dollar.

The total stablecoin market capitalization stands today at $248 billion. Circle’s USDC holds a 25% share of the stablecoin market at a market capitalization of $60 billion, second only to Tether’s USDT at 61%, which is also pegged to the US dollar. Circle also manages EURC, the leader of Euro-backed stablecoins, which has a market capitalization of $224 million.

What Is USDC?

Circle issues USDC as a digital dollar, pegged one-to-one with actual US dollars. Unlike cryptocurrencies like Bitcoin or Ethereum, stablecoins like USDC are designed to maintain stable values by backing them with US Treasury-issued securities or cash held in banks. Circle generates revenue primarily through interest earned on the assets backing USDC. 

USDC serves primarily two major functions: providing access to US dollars in regions where banking systems are unreliable or unstable and enabling quick, low-cost international payments compared to the traditional systems including ACH or SWIFT. For instance, residents of countries with significant currency devaluation risks (such as Argentina or Venezuela) often use USDC to preserve their savings.

The Past and Future of Circle

Circle's IPO aligns with the company's broader strategy to position itself as a regulated stablecoin issuer advocating transparency and cooperation with regulators. CEO Jeremy Allaire has been vocal about the necessity of comprehensive federal regulations to ensure the digital dollar remains globally competitive and secure, which the GENIUS Act will likely provide.

Circle-operated stablecoins such as USDC and EURC align with the company's mission to use the technology underlying Bitcoin to improve consumer payments. Because of their high liquidity and acceptance across many cryptocurrency exchanges, these stablecoins sometimes offer the most efficient way to exchange certain currencies, enabling fast and cheap global payments without any reliance on traditional financial institutions. 

However, Circle's success does not come without risks. Circle's revenue model heavily depends on interest rates. As rates rise, so does Circle’s revenue; however, the inverse is also true. Additionally, Circle's stablecoins are susceptible to de-pegging from their respective currencies. In March 2023, USDC was briefly de-pegged from the dollar following the Silicon Valley Bank crisis. Since then, Circle has diversified its banking partnerships to enhance the stability and security of its native stablecoins.

Another risk for Circle investors is the company's reliance on its distribution partners. Coinbase keeps all of the interest revenue generated from USDC on its exchange and half of the interest revenue generated from USDC held elsewhere. This revenue-sharing model poses concerns about Circle’s profit margins and operational control.

Conclusion

Circle's IPO marks an exciting time for the cryptocurrency space. The market response will serve as a measure of investor appetite not only for the company but also for stablecoins as a reliable component of the cryptocurrency ecosystem amid evolving regulations under the Trump administration.