Recently, there has been a big news in the U.S. stock market, the world's second-largest stablecoin issuer, Circle's stock price has plunged from $299 to $76, causing a lot of people to be trapped.
Some people asked me if I could catch the bottom, and I spent two days doing some research to analyze whether there are opportunities or pitfalls.
Before discussing Circle, we need to talk about the USDT stablecoin that has been very popular this year.
USDT is essentially an electronic token of the dollar, which has formed the role of 'gray dollar' especially in countries with high inflation/capital controls, and can be said to be very popular among certain groups of people.
It is issued by Tether, the world's largest stablecoin company, with a market share of over 60%, making it the undisputed industry leader, managing over US$180 billion in assets.
Circle issues USDC, also a stablecoin, with a 24% market share, consistently holding the second position.
How do stablecoins guarantee their credibility? Simply put, if you invest $1 with a stablecoin company, they will deposit $1 into a regulated account.
Stablecoins themselves do not offer interest, but the companies issuing stablecoins receive US dollars and invest them to earn the interest rate spread.
In theory, for fully compliant USD stablecoins, the issuers should use the USD they receive from investors to buy low-volatility assets like short-term US Treasury bonds to ensure they have enough funds to make redemptions.
But TEDA Company, it just wouldn't do that!
It only used slightly over 70% of the money to buy government bonds, and then used the rest to invest in gold, Bitcoin, and lending, attempting to earn some extra income.
The proportion of investment in risky assets has even increased from 17% last year to 24% this year.
So, with the recent drop in BTC prices, financial institutions have started sounding the alarm:
As a result, TEDA's rating has recently been downgraded by several institutions.
Given Tether's current situation, in addition to its $180 billion USDT in covered collateral, it also has approximately $6.8 billion in excess reserves.
TEDA's gold + BTC position is approximately $22-23 billion.
This means that if this asset falls by more than 30%, it will break through the shareholders' capital, the excess reserves will become zero, and the 1:1 coverage ratio will no longer be possible.
If a widespread liquidity crisis also occurs, and a large number of people choose to redeem USDT, triggering a bank run, it could lead to an asset sell-off and cause Tether's ultimate crisis.
This is also a potential risk point for TEDA's financial crisis, which can be summarized in one sentence:
TEDA's entire business model is a high-stakes gamble on "time":
It bets that the long-term rise in gold and BTC will outpace the speed at which they crash in the short term plus the speed at which a run on the market occurs.
As long as it wins the bet:
TEDA will become one of the most profitable financial institutions in the world.
The quality of USDT's collateral will increase as the US dollar depreciates.
If it loses the bet:
It could collapse instantly in the near future during a BTC/gold crash combined with a liquidity shock.
Even if the logic remains correct in the long run, there may not be enough time to realize it.
This is the true destiny structure of TEDA.
II. Circle's Operation and Valuation Logic
Now that we've finished talking about TEDA, let's move on to Circle.
Circle is much more well-behaved than Teda; it's like the good kid next door.
You give it US dollars, and it gives you a token called USDC.
However, after receiving the money, it neither invested in gold nor Bitcoin, but instead dutifully used it all to buy short-term US Treasury bonds, earning only the interest rate spread on US Treasury bonds (currently, 99% of Circle's revenue comes from this).
Secondly, it is 100% subject to bank supervision and detailed audits, while its neighbor TEDA doesn't even clearly disclose its specific custodian bank.
TEDA is like a black box, partially transparent but not completely transparent, while Circle is a transparent box, where everyone can see everything clearly.
Therefore, it can be said that Circle is the most officially recognized stablecoin issuer, and many financial institutions prefer to choose it when using stablecoins for settlement.
However, this star of the emerging industry, a compliant stablecoin giant, has seen its stock price plummet by 75% in just a few months, causing it to collapse. So what did it do wrong?
......
Circle's current revenue formula is extremely simple:
Revenue ≈ USDC size × US Treasury yield × 40%
P.S.: The reason for multiplying by 40% is that USDC is actually jointly issued by Circle and Coinbase, the largest cryptocurrency exchange in the United States. The two companies split the interest income equally. In addition, a portion of it must be given to Coinbase, hence the 40% conversion.
So here's the question: why did it perform so well in the past two years? It's because USDC grew significantly in size, and the Federal Reserve also raised interest rates, allowing Circle to passively earn interest rate spreads.
But now the tide has turned. Expectations for a Fed rate cut have been fully priced in, and with recent declining US employment data, a rate cut has become the prevailing trend.
Short-term US Treasury yields have fallen from a high of 5.5% to 4% in the past year or so.
According to the agency's calculations, for every 1% decrease in interest rates, Circle's revenue will decline by 27%!
If interest rates fall further as the rate-cutting cycle continues, Circle's performance will decline again.
Secondly, the continuous decline in cryptocurrency prices over the past period has also had a significant impact on Circle, causing its stock price to fall again.
Another risk that the market has not fully factored in is that it would be very troublesome if the tokenized RWA of money market funds replaced a large portion of USDC.
Just as the widespread adoption of Yu'ebao severely impacted banks' demand deposit business, if stablecoins could be seamlessly converted into interest-bearing money market funds like RWA with a single click,
Stablecoins that are not used in the short term will almost all be converted into RWA tokens of money market funds, which will have a huge impact on the scale of stablecoins!
Historically, after banks and securities firms launched the automatic transfer of demand deposits to money market funds, this dormant income has been drastically reduced, potentially causing companies like Circle and TEDA to lose as much as 50-80% of their profits.
III. Investment Assumptions
In conclusion, while I am very optimistic about the long-term development potential of blockchain, and the development of stablecoins is a foregone conclusion...
Currently, the circulating market capitalization of stablecoins is $300 billion. According to predictions from various institutions, by 2030, the market capitalization of stablecoins will most likely exceed $1 trillion, with some even optimistically predicting $3 or $4 trillion.
However, the extent to which industry development will boost Circle's net profit, which relies on interest rate spreads, remains highly uncertain.
Let's do a few calculations for the Circle in 2030:
1. Extremely pessimistic
Assuming that the tokenization of RWA money market funds suffers a major setback, the circulating market capitalization of stablecoins will only be $500 billion in 2030.
Circle's market share has shrunk to only 15%, or $75 billion.
With the Federal Reserve cutting interest rates to a neutral rate of 3%, Circle's revenue = 750 × 3% = 2.25 billion US dollars.
Regarding distribution costs, Circle gave 60% to Coinbase, amounting to $1.35 billion.
Operating costs totaled $500 million.
Therefore, the total profit is 22.5 - 13.5 - 5 = 400 million US dollars.
Assuming a fair price-to-earnings ratio of 15, the market capitalization would be $6 billion, only 33% of Circle's current market capitalization, a drop of 67%.
2. Neutral
Assuming that the circulating market capitalization of stablecoins will reach $1 trillion by 2030,
Circle's 24% market share remains unchanged, amounting to $240 billion.
With a neutral interest rate of 4% (and a slight rate cut by the Federal Reserve), Circle's revenue = 2400 × 4% = 9.6 billion US dollars.
Regarding distribution costs, Circle gave 60% to Coinbase, amounting to $5.8 billion.
In terms of operating costs, the total is US$1 billion.
Therefore, the total profit is 96 - 58 - 10 = 2.8 billion US dollars.
With a fair price-to-earnings ratio of 20, the market capitalization is US$56 billion, which is 310% of Circle's current market capitalization, representing a 210% increase.
3. Extremely optimistic
Assuming that by 2030, the circulating market capitalization of stablecoins exceeds expectations and reaches $2 trillion,
Circle's market share increased slightly to 30%, or $600 billion.
With a neutral interest rate of 5% (and a slight rate hike by the Federal Reserve due to rising inflation), Circle's revenue = 6000 × 5% = 30 billion US dollars.
The distribution cost ratio: Circle gives 50% to Coinbase, which amounts to $15 billion.
Operating costs totaled $2 billion.
Therefore, the total profit is 300 - 150 - 20 = 130 billion US dollars.
With a fair price-to-earnings ratio of 25, the market capitalization is US$325 billion, which is 18 times the current market capitalization of Circle, representing a 1700% increase.
IV. In conclusion
The above are just some of my thoughts. Obviously, after reading my analysis, you will know that Circle's future performance is highly uncertain, because the possibility of going to hell or going to heaven is not small.
The biggest uncertainty is the sustainability of this stable business model that relies on interest rate spreads. After all, the full rollout of RWA money market funds is inevitable; it's just a matter of time.
Of course, high risk comes with high reward, which was fully reflected in the volatility of the stock market's ICU and DISCO sectors this year.
My advice is that if you don't have a deep understanding of it, you should stay away from it, because you won't be able to hold onto it anyway.
If you're really optimistic about it, you might treat it like a lottery ticket, or an aggressive move.
I also had another thought: since the market is very worried about the risk of Circle's interest income decreasing due to the Fed's interest rate cuts...
However, we can actually hedge by constructing a combination of "Circle + ultra-long-term US Treasury bonds".
Because US Treasury bond prices are negatively correlated with interest rates, typically, for every 1% decrease in interest rates, the price of ultra-long-term Treasury bonds will rise by about 15%-20%.
Therefore, allocating more than 150% of the portfolio to 20-year US Treasury bonds theoretically hedges the risk to Circle from declining interest rates.
Of course, Circle faces more than just interest rate issues; there are also numerous potential market risks to consider:
For example, could market competition lead to a significant decrease in Circle's market share?
For example, is it possible that US policy could force a direct and direct cut to Circle's net interest income?
For example, when will RWA money market funds significantly replace stablecoins and become the mainstream for short-term investment...?
Finally, the above is a sharing of my due diligence findings. I haven't invested in any shares myself yet, but I'm offering some reference for those who are considering buying Circle shares. That's all.
