Circle Internet Group (CRCL +1.38%), a fintech company that issues stablecoins, was a big winner in its first month on the market. Its initial public offering (IPO) on June 5 was priced at $31 per share. Within a few weeks, it had reached $299.
Even though the stock has pulled back since then, it's still up a spectacular 555% at the time of this writing (July 10). But Circle has a few notable downsides that could lead to subpar performance over the next year.
Image source: Getty Images.
Reliance on interest rates
Circle has two stablecoins: USDC (USDC +0.00%), the second-largest U.S. dollar stablecoin after Tether; and EURC, the largest euro stablecoin. It maintains one-for-one reserves, backing each coin with cash and cash equivalents. For example, USDC is backed by Treasuries and cash in the bank.
Interest on its reserves is how Circle makes most of its money. In 2024, Circle reported $1.68 billion in revenue, and $1.67 billion of that came from reserve income. Last year wasn't an outlier, either. Circle reported that reserve income accounted for 95% to 99% of total revenue in 2022, 2023, and 2024.
When interest rates are high, like they are right now, Circle can earn a healthy return on its reserves. However, the reliance on interest makes this crypto company vulnerable to rate cuts, which could happen this year. The odds of the Fed cutting rates at its September meeting currently sit at nearly 70%, according to CME FedWatch.
A costly collaboration agreement
USDC technically started as a joint venture between Circle and Coinbase Global, one of the top crypto exchanges. The two companies currently have a collaboration agreement where Coinbase receives 100% of the interest earned on USDC on the Coinbase exchange and 50% of the revenue from Circle's USDC reserve.
Circle also has an arrangement with Binance to promote USDC on its exchange and maintain a portion of its treasury in USDC. Circle paid Binance a one-time fee of $60.25 million for this in 2024 and also agreed to pay a monthly incentive fee.
These agreements help increase the adoption of USDC, but they also reduce Circle's bottom line. It reported $1 billion in distribution and transaction costs in 2024 and net income of $155.7 million. The net income was a 42% year-over-year decrease, even as revenue increased by 16%.
Why Circle may continue to do well
Stablecoin adoption is growing rapidly. The average supply of stablecoins in circulation has increased by about 28% per year over the past two years, according to data from Allium and Visa. Total stablecoin transfer volume reached $27.6 trillion in 2024, more than all Visa and Mastercard transactions combined.
Governments are also getting frameworks in place to regulate stablecoins, which could help increase adoption by making prospective users feel safer. The U.S. Senate passed the Genius Act last month, a bill to regulate stablecoins, and it's now awaiting action in the House. Europe has already adopted the Markets in Crypto-Assets (MiCA) Regulation, which includes rules for stablecoin issuers.
NYSE: CRCL
Key Data Points
Circle's success is largely tied to the stablecoin industry. More demand for stablecoins means that Circle can issue more USDC and increase its revenue.
It's also possible that USDC could cut into Tether's market share. Tether is the biggest stablecoin by a wide margin, with a market cap of $159 billion as of July 10. USDC sits at $63 billion.
However, Tether and its parent company, Tether Limited, don't exactly have a spotless reputation. Tether Limited doesn't allow independent audits to verify its reserves. In 2021, it had to pay a $41.6 million fine for inaccurately stating that every Tether coin was fully backed by U.S. dollars.
Circle, on the other hand, has had monthly independent audits of its USDC reserves since 2018. Circle's transparent approach could give it an advantage with regulators and stablecoin users.
A one-year prediction for Circle
Thanks to its rapid growth, Circle now has a very high valuation. It trades at a price-to-earnings (P/E) ratio of 283, and its market cap is about 27 times its 2024 revenue.
CRCL PE Ratio (Annual) data by YCharts
Circle will need to increase its revenue and income quickly to keep up with expectations, but I don't think that will happen. I'm bullish on stablecoins and prefer USDC to Tether. However, Circle's dependence on interest rates, and the fact that a large portion of its revenue goes to Coinbase, may negatively impact its performance.
IPO stocks often start strong but then come back down to Earth after the initial enthusiasm wears off. That could be the case with Circle. I expect it to underperform the market over the next year, and I wouldn't be surprised if it loses 10% or more. While it's not a bad business, the current valuation is far too rich.
