This episode dissects the explosive Circle IPO, revealing a stark disconnect between fervent investor appetite for crypto exposure and the stablecoin issuer's challenging business fundamentals, offering key lessons for evaluating crypto-related ventures.
Circle's IPO Surge: A Sign of Investor Appetite
- The discussion kicks off with the remarkable performance of the Circle IPO, which saw its valuation surge significantly, described by one speaker as trading “like a low low market cap shitcoin” due to its rapid pump.
- The primary analyst views this as a clear indicator of immense investor appetite for crypto-related assets, even beyond direct cryptocurrency investments.
- He explains, “there is a whole new class of investor that wants to get access to this market... there are institutional investors out there that have a tremendous appetite in crypto and they're trying to find all of the right ways to get in.”
- This demand extends to products offering exposure to crypto market segments, such as stablecoins. An IPO (Initial Public Offering) is the process by which a private company first sells shares of its stock to the public.
- Investors are betting on the long-term growth of stablecoins (cryptocurrencies designed to maintain a stable value, typically pegged to a fiat currency like the US dollar), anticipating significant market cap expansion in the coming years.
Scrutinizing Circle's Business Fundamentals
- Despite the market enthusiasm, the analyst expresses strong skepticism about Circle's underlying business model, pointing to its $22 billion market cap (the total value of a company's outstanding shares) achieved after a 300% price increase.
- He highlights Circle's 2024 revenues of $1.6 billion, which generate a net income of only $18 million, resulting in extremely thin EBITDA margins (Earnings Before Interest, Taxes, Depreciation, and Amortization – a measure of a company's operating profitability) of about 1%.
- The analyst contrasts this with Tether, which is perceived as a highly profitable business per employee. He questions, “How is it that like 16 Italian dudes in Lugano can run Tether as like basically the most profitable business per employee in the history of the world? And these Circle guys generate 1% Ebida margins.”
Why Circle's Margins Are So Low
- The analyst, drawing on his experience at a market maker, explains that Circle's low profitability stems from significant expenses beyond standard SG&A (Selling, General & Administrative expenses).
- A major cost is payments to companies like Coinbase to prominently feature USDC (Circle's stablecoin) and incentivize its adoption over competitors like Tether.
- Additionally, Circle historically paid the market making community (entities that provide liquidity by placing buy and sell orders) for minting USDC. This practice aimed to increase USDC's float (circulating supply), thereby boosting the yield Circle could collect on its reserves.
- However, the analyst argues this strategy is unsustainable because much of the minted USDC isn't held by end-users but is cycled through by market makers and often migrated to other stablecoins, failing to create “sticky” demand.
Future Headwinds: Interest Rate Cuts and Unsustainability
- The analyst warns that Circle's revenue model is highly vulnerable to macroeconomic shifts, particularly interest rate cuts. As interest rates fall, the yield Circle earns on its reserves (a primary revenue source) will decrease significantly.
- He states, “as interest rates come down. This revenue is like going to get slashed in a major way.”
- This makes Circle's business model fundamentally different from a company selling tangible products like Apple, as its revenue is heavily dependent on monetary policy decisions.
- Strategic Implication for Crypto AI Investors: This highlights the critical need to assess the sustainability of revenue models in crypto-related businesses, especially those sensitive to external factors like interest rates, a consideration that also applies to Crypto AI ventures reliant on specific market conditions or tokenomics.
Broader Market Sentiment and Institutional Influence
- Avi, the co-host, concurs that the investor appetite is strong, suggesting similar hype could surround a potential Ripple IPO, leading to “insanely stupid valuation[s].”
- He anticipates eventual market corrections in hyped crypto-related stocks like Circle, Coinbase, and MicroStrategy (MSTR) playbook companies.
- Avi notes the influence of retail investors, often referred to as DGENs (a slang term for "degenerate" traders known for high-risk, speculative bets), who are drawn to narratives and institutional signals.
- He mentions that BlackRock taking a 10% stake in the Circle IPO fueled retail interest, with many reasoning, “Well, if BlackRock really likes it, like we we we we we got to get in.”
- The primary analyst acknowledges BlackRock's involvement but points out that large asset managers like BlackRock, with trillions to deploy, often participate in many IPOs. However, a larger-than-usual allocation could signal genuine interest in the crypto sector and a preference for "safer" regulated entities like Circle over Tether.
- Actionable Insight for Crypto AI Researchers: The significant impact of institutional participation (like BlackRock's) on market perception and valuation, even for companies with questionable fundamentals, is a key dynamic. Researchers should track how institutional capital flows into the Crypto AI space, as it can heavily influence project visibility and perceived legitimacy.
Analyst's Personal Stance
- Despite potential regulatory advantages or market positioning for USDC as a "white shoe firm coin," the primary analyst remains unconvinced by Circle's business fundamentals.
- He concludes with a personal note: “I just still think that Circle is such a terrible company that I even if it 10xes from here, I still wouldn't touch it personally.”
Conclusion
The Circle IPO frenzy highlights a crypto market where strong investor demand for exposure can overshadow weak business fundamentals. Crypto AI investors and researchers should critically assess underlying business models and hype, recognizing that institutional signals can significantly sway market perception, even for ventures with challenging economics.