With Bitcoin (BTCUSD) prices up nearly 50% over the last year and currently trading above $104,000, the frenzy is clearly returning to the cryptocurrency arena. 

As evidence of this, the excitement surrounding the initial public offering of stablecoin issuer Circle, which will trade under the ticker CRCL, is quite robust. 

So, with CRCL set to start trading today, Thursday, June 5, how should you play the newly minted shares? 

About Circle

Founded in 2013, Circle is a prominent fintech company specializing in digital currency infrastructure, best known for issuing USD Coin (USDC), a stablecoin pegged to the U.S. dollar. In May 2018, Circle, in collaboration with leading crypto exchange Coinbase (COIN), co-founded the Centre Consortium to develop a price-stable cryptocurrency. This partnership led to the launch of USD Coin (USDC) in September 2018.

Now, Circle is hitting the public markets. Offering 34 million shares at $31 per share, above the expected IPO price range of $27-$28, Circle is now valued just below $7 billion. 

Its debut will net the company $1.05 billion. The company intends to use the proceeds to invest in new products and capabilities, as well as for expanding awareness, usage, and distribution of its products. Circle says it could also use the cash for potential acquisitions.

The IPO has piqued the interest of the investing community, with demand for shares far outpacing what was available in the offering. Plus, Circle has found some powerful institutional backers like Cathie Wood’s ARK Invest (ARKK) and the world’s largest asset manager, BlackRock (BLK).

Why? Let’s find out.

Stable Financials

In the volatile world of cryptocurrencies, where significant price fluctuations are second nature, a company with stable financials should command a premium. And Circle provides that.

From 2022, when its revenues stood at $772.1 million, Circle closed 2024 with total sales of $1.7 billion. Not only that, losses turned into profits as well. While net losses were at $768.8 million in 2022, 2024 saw the company reporting a net income of $155.7 million.

Negative cash flow from operating activities of $72.7 million in 2022 became positive in 2024 at $344.6 million. Overall, Circle closed 2024 with a cash balance of about $751 million, more than double the prior year’s figure of roughly $369 million.

However, it’s not just Circle’s strong financial standing that is leading to such solid demand for its IPO.

Exciting Drivers (With Some Caveats)

The stablecoin market, currently featuring Tether (USDTUSD) and USDC as its most prominent constituents, represents a combined valuation of approximately $215.5 billion. A significant upward trajectory is foreseen for this group, with Citigroup analysts projecting stablecoins to reach an impressive $3.7 trillion by the 2030 timeframe. Fueling this anticipated expansion are several key factors, chief among them being the increasing incorporation of these digital currencies into established financial infrastructures, their practical application in streamlining international fund transfers, and the more extensive embrace of blockchain solutions across business domains.

A defining characteristic of stablecoins is their inherent design for price consistency, which underpins their utility as dependable transactional tools, repositories of value, or consistent units for accounting. Given Circle's substantial involvement as a primary custodian and proponent of USDC, the organization is strategically positioned to capitalize significantly on this projected market escalation.

Meanwhile, Circle presently collaborates with a network exceeding 500 partners, supports 400 distinct smart contracts facilitating USDC transactions, and enables the direct issuance of USDC on 19 separate blockchain platforms. 

Further diversifying its portfolio beyond USDC, Circle has introduced Euro Coin (EURC), a digital currency pegged to the euro, thereby broadening its stablecoin offerings. In terms of strategic growth, the entity has successfully obtained regulatory consent to commence operations within the Middle East, while also recently launching the Circle Payments Network. This newly established remittance infrastructure is engineered to offer more rapid and cost-effective cross-border payment capabilities through the use of USDC, EURC, and other governmentally recognized stablecoins.

However, the company faces a notable vulnerability stemming from its exposure to fluctuations in short-term U.S. interest rates. This is because a considerable segment of the reserves underpinning USDC is allocated to short-duration U.S. Treasury bills and similar cash-based instruments. Should short-term rates rise, the valuation of pre-existing fixed-income holdings, particularly those acquired when yields were lower, could diminish. Such market dynamics could potentially impact profitability or the overall stability of its reserves.

Further, navigating the patchwork of regulatory and compliance standards across various global jurisdictions poses considerable operational difficulties for Circle. These include heightened complexities in day-to-day functions, potential barriers to market penetration, and the prospect of more intensive governmental supervision, any of which could substantially hinder the realization of its growth objectives.

The Bottom Line

Wyatt Lonergan, a general partner at VanEck, offered his outlook on Circle’s upcoming public offering by presenting four distinct possibilities with his base scenario projecting that Circle would be able to leverage the growing prominence of stablecoins and strategically align itself through critical partnerships to accelerate its expansion.

On the other hand, analyst Omar Kanji from Dragonfly Capital maintained a more cautious stance. He voiced reservations about Circle’s valuation and raised what he sees as red flags about the company’s elevated distribution expenses, compressing gross margins, and the uncertainty stemming from potential regulatory rollbacks in the U.S. market.

Taking all of this into account, I view Circle as a company operating in a growing market with solid fundamentals. Moreover, its flagship USDC has a number of use cases with the added advantage of not having the volatility of traditional cryptos such as Bitcoin and Ethereum (ETHUSD).

Although some regulatory concerns and exposure to interest rates can be headwinds, the overall value addition and growth prospects mark Circle as a reasonable investment choice.