Circle IPO: The “ChatGPT” Moment for Stablecoins and On-Chain Finance

Author: Paolo@Victory Securities Partner, Andy@VDX Senior Researcher

TL;DR

• Market Space: The stablecoin market relies on the two core rigid demand scenarios of transaction and payment, and may have dozens of times of growth in the future. Stablecoin is the first track to be included in the compliance and supervision of various crypto tracks. Compliance, institutionalization and mainstreaming are long-term trends. In the future, stablecoin users may even exceed BTC holders and become the largest killer app in crypto.

• Circle's advantages and barriers: 1) Compliance first mover and orthodoxy: benefiting from compliance dividends, it is expected to carry the on-chain dollar expansion strategy as an "in-system stablecoin"; 2) Open infrastructure and ecological network: USDC has multi-chain support, cross-chain protocols, and is deeply integrated with various exchanges and DeFi, and cooperates with payment institutions to become the hub of cross-border payment and on-chain settlement; 3) Institutional trust and mainstream capital access: assets are safe and transparent, audit reports are published regularly, and it is currently the only product widely accepted as an "institutional stablecoin".

• Circle's risks and challenges: 1) The income structure is highly dependent on US Treasury interest, interest rates are sensitive and cyclical, and income growth is under pressure during the US dollar interest rate cut cycle; 2) High channel dependence, and about 60% of the current income is distributed to channels such as Coinbase and Binance. Whether it can expand other sources of income (such as transaction commissions, etc.) and improve channel bargaining power in the future is the key to its growth.

  Competition comparison: The competition between USDT and USDC is essentially the competition between black and white dollars in different markets and scenarios. Tether is a "money printing machine" and Circle is a "narrow bank". USDT relies on the liquidity pillar of exchanges, OTC exchange, and gray payments, while USDC focuses on compliant cross-border payments, corporate liquidation, DeFi, and RWA asset underlying currencies. The two form a parallel symbiotic relationship in different scenarios.

  Investment analysis: As the first compliant stablecoin leader to be listed after the introduction of the Stablecoin Act, Circle's IPO benefited from high market sentiment. However, compared with its revenue of US$1.7 billion and net profit of US$160 million in 2024, the current market PE valuation of nearly 50 times has been priced more optimistically, and we need to be wary of concentrated profit realization under high valuations. In the long run, the stablecoin track has huge potential for growth. Circle is expected to further consolidate its leading position with its advantages in compliance first-mover, ecological network construction, and mainstream institutional capital access. It is recommended to pay attention to its long-term development.

Introduction｜From gray arbitrage to institutional takeover: Stablecoins usher in a watershed

Circle's listing marks the first time that stablecoins have entered the main stage of the global capital market. From USDT, which was regarded as "casino chips", to USDC, which represents the "compliant digital dollar", landing on the US stock market today, this is not only a turning point in business, but also a frontier battle for the reconstruction of the financial order. Compliant stablecoins are no longer a circulation tool on the chain, but a strategic agent for the US dollar to expand globally in a "de-banking and de-geographical" manner.

In 2025, the regulation of stablecoins in the United States, Hong Kong and other countries will be implemented one after another, and the "gray dollar" represented by Tether and Circle and the "white list dollar" will be formally differentiated. Circle's listing is not only a capitalization event for the crypto industry, but also another structural upgrade of the globalization of the US dollar, and it is the starting point for the compliant dollar to complete the on-chain export of financial sovereignty.

Market size | Stablecoins as a new anchor for global liquidity

According to forecasts by Citigroup and other institutions, the total market value of global stablecoins will be between 1.6 trillion and 3.7 trillion US dollars in 2030, with the increase mainly concentrated in the three major areas of cross-border payments, on-chain finance and RWA.

• Cross-border payments will become the core driving scenario. The average clearing cost of stablecoins is more than 90% lower than that of traditional SWIFT paths, and the T+0 settlement efficiency is particularly attractive to high-friction areas such as the Middle East, Latin America, and Southeast Asia.

• RWA connects on-chain and real assets. Stablecoins are the on-chain funding end, and RWA is the asset end. The twin relationship between the two constitutes a growth flywheel. The USDC Treasury Fund launched by Circle and BlackRock is a typical pilot: stablecoins are used as clearing and participation tokens, while providing income access and asset packaging.

• Virtual asset native scenarios serve as continuous basic liquidity carriers. On-chain lending, derivatives, and structured income agreements continue to absorb stablecoins as collateral to form the underlying "US dollar liquidity pool".

Stablecoins will no longer be just a transit channel for currency circle funds, but will gradually become the "US dollar liquidity kernel" in the Web3 native operating system.

Competitive Landscape | Circle is experiencing a dual race between native on-chain scenarios and new compliant players

Circle is currently facing a dual race: on the one hand, it is competing with native on-chain players such as Tether in terms of liquidity coverage and flexibility of use, and on the other hand, it is competing with traditional financial giants such as PayPal and JPMorgan in the right to output the stablecoin system

Circle's core competitive advantages:

• Compliance first mover and orthodoxy: Benefiting from compliance dividends, it is expected to serve as an "in-system stablecoin" to carry the on-chain dollar expansion strategy.
• Open infrastructure and ecological network: USDC has multi-chain support, cross-chain protocols, and is deeply integrated with various exchanges and DeFi, and cooperates with payment institutions to become the hub of cross-border payments and on-chain settlements.
• Institutional and trust and mainstream capital access: Assets are safe and transparent, audit reports are published regularly, and it is currently the only product widely accepted as an "institutional stablecoin".

The implementation of policies has raised the market entry threshold and will accelerate the withdrawal of non-compliant players

In the on-chain native usage scenarios, as global regulatory policies are accelerated, the operating thresholds and costs of non-compliant issuers continue to rise. Circle's institutional compliance and auditability are gradually transformed into competitive dividends, allowing its ecological nesting capabilities in DeFi, wallets, payment protocols and other scenarios to continue to increase.

Although it is difficult for Circle to beat USDT in terms of liquidity scale in the gray market, it is building irreplaceability from the institutional level and taking over USDT's compliant market share:

• If the US and Europe accelerate supervision, USDT's market share in compliant scenarios is expected to drop from 25% to 10%, releasing about $21.6 billion in market space;

• Circle is expected to take over about 60% of it, corresponding to an increase of $13 billion.

The possibility of USDT's "compliance" is extremely low. In the future, it may maintain its role as a gray channel, reach an "informal agreement" with the US, and continue to be the black tentacle of the global spillover of the US dollar.

After clarifying the market access rules, banks and payment institutions will accelerate their entry and challenge USDC's compliance leading window period

• Circle's compliance license barrier leading advantage is relatively limited, and many players have accelerated to catch up (Paypal, etc.).

• The compliance transition leading advantage from compliant issuance to application is still there, and JPM, Fidelity and other self-minted stablecoins are still in an internal closed system.

• The capital market traffic dividend will also be diluted with the listing of compliant crypto companies, and there is a risk of dilution of the early ecological dominance.

Can Circle's compliant payment scenario be maintained?

• The core advantages of the three original stablecoin giants are: USDT is deeply involved in gray and black scenarios and has a bottom-up multi-level acceptance distribution network; USDC has compliant bank and institutional channels; DAI is censorship-resistant and cannot be frozen.

  Among them, USDC's compliant channel barriers are the most vulnerable. Bank-issued stablecoins use traditional bank account systems and compliant channels to deploy large-scale scenarios. Circle (e.g. USDC is a derivative of USDT in specific scenarios. In cross-border trade, users actually use USDT, but the terminal on/off ramp will be changed from USDT to USDC through its compliant legal currency channel)

• Whether Circle's current cooperation channels can have a strong binding relationship or continue to burn money for subsidies is still in doubt.

Circle's competition with traditional financial institutions

• In the short term, Circle has an overwhelming advantage in the "open global on-chain clearing network" by virtue of its compliance first mover, on-chain native ecology, and open protocol capabilities

• In the medium and long term, if traditional financial players enter the market, their traffic, user accounts, and deposit and withdrawal systems will become the biggest threat, especially in retail payments and closed system settlements (such as their own wallets), which may constitute a partial replacement

• The key to victory lies in: who can build a "compliant + composable + accessible" on-chain payment infrastructure faster and win the trust of institutions. Circle is already ahead, but it cannot be taken lightly

• Only compliance and reserve transparency are no longer a moat. Circle must win the dominance of on-chain payment and transaction settlement and bind RWA to new incremental asset categories. Otherwise, its application layer will continue to be eroded and its valuation ceiling will be suppressed.

  

  Business model｜Interest rate sensitivity, channel dependence, Circle needs to move towards a diversified growth curve

  Circle's current profit structure is single and interest rate sensitive

  • Revenue in 2024 is about $1.7 billion, net profit is $160 million, 99% of which comes from reserve interest;

  • Assuming the Federal Reserve cuts interest rates by 1% annually, based on the AUM scale in 2024, revenue may decrease by about 20%, which will have a huge impact on its profits;

  High degree of channel dependence, Coinbase monopolizes monetization efficiency

  • Coinbase has exclusive rights to the USDC platform, and Circle relies heavily on Coinbase's promotion network;

  • After 2023, Coinbase will become the only issuing partner of USDC, and the interest income generated by its platform will belong to Coinbase;

  • Circle can only split the non-Coinbase channels 50-50. In 2024, almost all of the distribution expenses of about US$1 billion will go to Coinbase, and Circle's interest rate spread monetization efficiency is extremely low

  Core transformation direction: composable monetization of stablecoin infrastructure and expansion of non-interest rate spread income

  • Interest alone cannot maintain long-term valuation expectations. In the future, it is necessary to expand revenue scenarios through on-chain payment APIs, stablecoin cross-chain channels, wallet accounts and other modules to increase To B profitability

  • CCTP (Cross-Chain Transfer Protocol) builds a bridge between different chains for USDC, making it the basis for becoming an "on-chain payment layer".

  • Circle Mint and API products have been connected to dozens of platforms. If a closed loop of SDK-level calls can be formed, a To B business closed loop will be formed.

  • On-chain clearing and settlement and RWA linkage (such as cooperation with BlackRock and Securitize) are the core scenarios for long-term valuation reconstruction.

  

  

  Finance and Valuation｜Black and White Dollar Hedge Structure, Compliance Road is Difficult to Compare Profit Margin

  Financial Status

  • Circle's IPO valuation is about $8.1 billion, with a PE of about 50 times and a PS of about 5 times (calculated based on the 2024 financial report data). Judging from the profit margin and cash flow structure alone, the valuation has achieved a relatively optimistic pricing.

  • AUM has rebounded to $60 billion, surpassing the level of about $40 billion before the SVB crisis.

  • The current interest rate supports profitability, with a gross profit of about $660 million, high operating expenses, and employee costs of $260 million.

  Its comparison with Tether is as follows:

  • Tether's net profit exceeds $13 billion, 80 times that of Circle, and AuM is only 2.5 times that of Circle

  • Extremely high net profit margin: all directly operated, no channel costs; with only more than 100 employees and low compliance costs, it is the company with the highest per capita net profit in the world

  • USDT's reserve asset structure is more radical (85% US bonds, 5% gold, 7% BTC), high risk also brings high returns

  Different profit structures: Tether is a money printing machine, Circle is a narrow bank

  • Tether has extremely low operating costs, does not need to bear compliance costs, does not pay channel commissions, and directly collects all interest rate spreads; USDC is pumped at every link

  Different application scenarios: gray industry vs. compliance

• Circle is highly compliant and its financials are open and transparent

• USDC must implement blacklist, KYC, AML and other systems

• Refuse to enter some high-risk/non-compliant markets

• Profitability is suppressed by compliance costs (such as auditing and compliance expenses)

Compliance profit margins are difficult to compete with non-compliance

• But compliance can attract mainstream and institutional funds

• Under the compliance trend of the mainstream market, the space for non-compliant survival is getting smaller and smaller; but at the same time, under the background of global fragmentation, the bottom-up real/non-regulatory demand is growing rapidly

• Only compliance can create capital market value and capital premium

   

Investment Strategy | Short-term sentiment-driven valuations have achieved relatively optimistic pricing, and there are sentiment premium trading opportunities; long-term efforts should be made to reconstruct systematic valuations

• During the IPO phase, market sentiment is high and funds are crowded. Short-term market enthusiasm and recognition of the narrative of "leading compliant stablecoins" may bring about periodic trading opportunities

• However, attention should be paid to the potential fluctuations in valuation regression. The main risks come from the spread compression brought about by the decline in interest rates, and the income sensitivity that may be exposed due to the fact that the channel bargaining power has not yet been fully established

• In the medium and long term, the key lies in the expansion of new businesses, whether channel dependence is reduced, and the ability to embed into global payment networks

• Investors are currently buying compliance licenses + future pricing power of the on-chain payment network, not current profits

• Whether Coinbase's "high listing" will be repeated remains to be seen, and the key is whether it can deliver on-chain payment landing progress and non-interest rate differential income incremental data in the next two quarters

Conclusion | The Stablecoin Act opens the era of compliance, and IPO is just the prologue to the stars and the sea?

The stablecoin market is entering an unprecedented eve of an explosion: the rigid demand for payment and transactions provides it with fuel for continued growth, and the trend of compliance, institutionalization and mainstreaming is shaping it into the most core infrastructure of on-chain finance.

Circle is at the core intersection of this trend.

• Compliance and legitimacy bring institutional advantages, making it a representative option for "stable coins within the system";

• Open infrastructure capabilities give it a multi-chain, composable, and nested technical architecture, which can achieve neutral integration in scenarios such as payment, DeFi, cross-chain and RWA;

• Institutional-level trust structure enables it to become the preferred clearing and settlement asset for traditional institutions to access the crypto world in compliance.

But at the same time, Circle still faces structural challenges such as the sensitivity of its revenue structure to interest rates and high channel dependence. Whether it can get rid of cyclical constraints and build a second growth curve in the expansion of new businesses will determine its valuation reconstruction path.

The competition between USDC and USDT is no longer a single-dimensional "market value battle", but a full-stack competition representing the black and white dollar system, different clearing and settlement paths, and regulatory compatibility.

What the capital market is really betting on is not today's revenue, but whether it can play the role of a key protocol layer in the global on-chain dollar consensus system. When USDC becomes the universal circulation base of the "on-chain dollar", the story of Circle will truly begin.