Circle IPO Analysis: Growth Potential Behind Low Profit Margins

In the stage of accelerated reshuffling in the industry, Circle chooses to go public, behind which lies a seemingly contradictory yet imaginative story — a continuous decline in net profit margins, yet still harboring enormous growth potential. On one hand, it boasts high transparency, strong regulatory compliance, and stable reserve income; on the other hand, its profitability appears to be relatively "mild," with a net profit margin of only 9.3% in 2024. This apparent "inefficiency" does not stem from a failed business model, but rather reveals a deeper growth logic: against the backdrop of gradually diminishing high interest rate dividends and a complex distribution cost structure, Circle is constructing a highly scalable, compliance-first stablecoin infrastructure, with its profits strategically "reinvested" in market share enhancement and regulatory leverage.

1. Seven-Year Long Journey to Listing: The Evolution of Cryptocurrency Regulation

1.1 Paradigm Shift of Three Capitalization Attempts (2018-2025)

The listing journey of Circle can be seen as a microcosm of the dynamic game between crypto enterprises and regulatory frameworks. The first IPO attempt in 2018 coincided with a period of ambiguity regarding the classification of cryptocurrencies by the U.S. SEC. At that time, the company formed a "payment + trading" dual-drive model through the acquisition of the Poloniex exchange and secured $110 million in financing from several well-known institutions. However, doubts about the compliance of exchange operations and the impact of the bear market led to a significant decline in valuation, exposing the vulnerability of early crypto enterprises' business models.

The SPAC attempts in 2021 reflect the limitations of regulatory arbitrage thinking. Although merging with a special purpose acquisition company can circumvent the strict scrutiny of a traditional IPO, the SEC's inquiries into the accounting treatment of stablecoins hit the nail on the head. This challenge, while leading to the collapse of the transaction, propelled the company to complete a critical transformation: divesting non-core assets and establishing "stablecoin as a service" as the strategic focus.

The IPO choice in 2025 marks the maturity of the capitalization path for crypto enterprises. Listing on the NYSE not only requires meeting a full set of disclosure requirements but also undergoing internal control audits. The S-1 filing first detailed the reserve management mechanism: of the approximately $32 billion in assets, 85% is allocated through the Circle reserve fund managed by an asset management company into overnight reverse repurchase agreements, and 15% is held in systemically important financial institutions. This transparent operation establishes an equivalent regulatory framework to traditional money market funds.

1.2 Cooperation with a certain trading platform: from ecological co-construction to a subtle relationship

At the beginning of USDC's launch, both parties collaborated through the Centre alliance. When the alliance was established in 2018, a trading platform held 50% of the shares and quickly opened the market through a "technology output for traffic entry" model. In 2023, Circle acquired the remaining 50% of the shares for $210 million in stock and renegotiated the profit-sharing agreement.

The current revenue-sharing agreement is based on dynamic game terms. Both parties share revenue proportionally based on USDC reserve income, with the sharing ratio related to the amount of USDC supplied by a certain trading platform. In 2024, this platform holds approximately 20% of the total circulating supply of USDC. By taking about 55% of the reserve income with a 20% supply share, this trading platform poses a hidden danger for Circle: when USDC expands outside its ecosystem, the marginal costs will rise non-linearly.

2. USDC Reserve Management and Equity Structure

2.1 Reserve Fund Hierarchical Management

USDC reserves exhibit a "liquidity layering" characteristic:

• Cash (15%): Held in important financial institutions to address sudden redemptions.
• Reserve Fund (85%): Allocated through a specialized fund

Starting from 2023, USDC reserves are limited to the cash balance in bank accounts and the Circle reserve fund, with the asset portfolio primarily consisting of short-term U.S. Treasury securities and overnight repurchase agreements. The weighted average maturity of the portfolio does not exceed 60 days, and the weighted average duration does not exceed 120 days.

2.2 Equity Classification and Hierarchical Governance

After Circle goes public, it will adopt a three-tier equity structure:

• Class A shares: Common stock issued in an IPO, with one vote per share.
• Class B shares: held by the founders, with five votes per share, and a total voting power cap of 30%.
• Class C shares: no voting rights, can be converted under specific conditions.

This structure aims to balance public market financing with the stability of the company's long-term strategy, ensuring that the executive team retains control over key decisions.

2.3 Distribution of Executive and Institutional Shareholdings

The executive team holds a large number of shares, with several well-known venture capital and institutional investors holding over 5% equity, collectively owning more than 130 million shares. A $5 billion valuation IPO will bring them significant returns.

3. Profit Model and Revenue Breakdown

3.1 Revenue Model and Operational Indicators

• Sources of revenue: Reserve income is core, total revenue of $1.68 billion in 2024, with 99% coming from reserve income.
• Revenue sharing with partners: A certain trading platform earns 50% of reserve income based on the amount of USDC held, which lowers net profit performance.
• Other income: Business services, USDC Mint operations, cross-chain transaction fees, etc. contributed relatively little, only 15.16 million dollars.

3.2 The Paradox of Income Rise and Profit Contraction (2022-2024)

Structural drivers:

• Converging to single-core: The proportion of reserve income increased from 95.3% in 2022 to 99.1% in 2024.
• Distribution expenses surged: rising from $287 million to $1.01 billion within three years, an increase of 253%.
• Gross margin decline: from 62.8% in 2022 to 39.7% in 2024
• Profitability turns from loss to profit but marginal slowdown: Net profit of $155 million in 2024, net profit margin of 9.28%, a decrease of about half year-on-year.
• Cost rigidity: General administrative expenses have risen for three consecutive years, reaching $137 million in 2024.

Circle's financial structure is gradually aligning with traditional financial institutions. The revenue structure, which heavily relies on the yield spread of U.S. Treasuries and trading volume, means that a decline in interest rates or a slowdown in USDC growth will directly impact profit performance. The deep-seated contradiction lies in the flaws of the business model: as USDC's "cross-chain asset" attributes are strengthened, they ironically weaken the profitability of the issuers.

3.3 rise potential behind low net profit margin

Despite the pressure on net profit margins, the business model and financial data still hide multiple rise drivers:

• The continued increase in circulation drives stable rise in reserve income: USDC market capitalization exceeds $60 billion, with a market share rising to 26%. By 2025, market capitalization is expected to increase by $16 billion, potentially reaching $90 billion by the end of the year.
• Optimization of distribution cost structure: Collaborating with a certain exchange to pay a one-time fee, significantly reducing the customer acquisition cost.
• Conservative valuation does not price in market scarcity: IPO valuation of $4-5 billion, P/E of 20-25x, does not fully reflect the value of the only pure stablecoin asset.
• Resilience of stablecoin market capitalization trend: demonstrating unique advantages amidst fluctuations in the crypto market, potentially becoming a "safe haven" for funds.

4. Risk - Dramatic Changes in the Stablecoin Market

4.1 The institutional relationship network is no longer a solid moat.

• The double-edged sword of interest binding: a trading platform takes 55% of the reserve income but only holds 20% of the USDC share.
• Ecological Lock-in Risk: Signing a prepayment agreement with leading exchanges may trigger a "distribution cost spiral rise".

4.2 The bidirectional impact of the stablecoin bill progress

• Localization pressure on reserve assets: The bill requires 100% of reserves to be prioritized for use by U.S. institutions, which may result in hundreds of millions of dollars in one-time capital migration costs.

5. Reflection Summary - The Strategic Window of the Breakthrough Player

5.1 Core Advantages: Market Positioning in the Era of Compliance

• Dual compliance network: covering the regulatory matrix of the United States, Europe, and Japan
• Cross-border payment alternatives wave: Launching "USDC instant settlement" service in collaboration with payment companies.
• B2B financial infrastructure: The proportion of USDC settlement in e-commerce payment systems has increased.

5.2 rise flywheel: the game of interest rate cycles and economies of scale

• Emerging market currency substitution: USDC occupies a portion of the US dollar foreign exchange trading share.
• Offshore dollar repatriation channel: Collaborating with asset management giants to explore tokenized asset projects
• RWA asset tokenization: launched tokenized asset services to achieve initial management scale
• Interest rate buffer period: The circulation must be pushed to a critical threshold before the full pricing of interest rate cut expectations.
• Regulatory gap period: Utilize existing compliance advantages to capture institutional clients
• Enterprise service suite deepening: packaging "Web3 financial services cloud", charging traditional banks SaaS subscription fees

Beneath the low net profit margin of Circle lies a strategy actively chosen during its strategic expansion phase, which is to "exchange profit for scale." When the circulation of USDC surpasses 80 billion USD and the scale of RWA asset management and cross-border payment penetration achieves breakthroughs, its valuation logic will undergo a qualitative change—from an "issuer of stablecoins" to an "operator of digital dollar infrastructure." This requires investors to reassess the monopoly premium brought by its network effects from a 3-5 year perspective. At the historical intersection of traditional finance and the crypto economy, Circle's IPO is not only a milestone in its own development but also a touchstone for the revaluation of the entire industry.