Circle IPO Analysis: The Rise Potential Behind Low Profit Margins

In the stage of accelerated clearing in the industry, the choice of Circle to go public hides a seemingly contradictory yet imaginative story. Despite a continuous decline in net profit margins, the company still harbors enormous rise potential. On one hand, it has high transparency, strong regulatory compliance, and stable reserve income; on the other hand, its profitability appears surprisingly "mild", with a net profit margin of only 9.3% in 2024. This apparent "inefficiency" does not stem from a failure of the 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 building a highly scalable, compliance-first stablecoin infrastructure, and its profits are strategically "reinvested" into increasing market share and regulatory leverage. This article will take Circle's seven-year journey to going public as a clue, deeply analyzing the rise potential and capitalization logic behind its "low net profit margin" from corporate governance, business structure to profitability model.

1. Seven-Year Long Journey to Listing: A Microcosm of Regulatory Evolution

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

The listing journey of Circle reflects the dynamic game between cryptocurrency companies and regulatory frameworks. During its first IPO attempt in 2018, the U.S. Securities and Exchange Commission had not yet made clear determinations about the nature of cryptocurrencies. At that time, the company formed a "payment + trading" dual-driven model by acquiring the Poloniex exchange and secured $110 million in financing from several well-known institutions. However, questions about the compliance of exchange operations and the sudden bear market led to a valuation collapse of 75% from $3 billion to $750 million, exposing the fragility of early cryptocurrency companies' business models.

The SPAC merger plans of 2021 reflect the limitations of regulatory arbitrage thinking. Although merging with a special purpose acquisition company can bypass the strict scrutiny of traditional IPOs, regulators' inquiries into the accounting treatment of stablecoins hit the nail on the head, demanding that Circle prove its stablecoins should not be classified as securities. This challenge led to the collapse of the transaction, but it pushed the company to complete a crucial transformation: divesting non-core assets and establishing "stablecoin as a service" as the strategic focus.

Choosing to list on the NYSE in 2025 marks the maturation of the capitalization path for crypto enterprises. This not only requires meeting a full set of disclosure requirements but also undergoing strict internal control audits. It is noteworthy that the listing documents disclose for the first time the reserve management mechanism in detail: of the approximately $32 billion in assets, 85% is allocated through a dedicated fund of a large asset management company to overnight reverse repurchase agreements, while 15% is held at systemically important financial institutions. This transparent operation essentially establishes an equivalent regulatory framework to that of traditional money market funds.

1.2 Partnership with a large cryptocurrency exchange: from ecological co-construction to delicate relationships

At the beginning of the stablecoin project, Circle partnered with a well-known cryptocurrency exchange platform through a consortium. When the consortium was established in 2018, the exchange held 50% of the equity, quickly opening up the market through a "technology output in exchange for traffic entry" model. According to Circle's IPO documents disclosed in 2023, it acquired the remaining 50% equity of the consortium from its partner for $210 million in stock and redefined the profit-sharing agreement related to the stablecoin.

The current revenue-sharing agreement exhibits characteristics of dynamic games. According to disclosures, the two parties share revenue based on stablecoin reserve income at a certain ratio, which is related to the amount of stablecoins supplied by the partner. From publicly available data, it is known that by 2024, this trading platform will hold approximately 20% of the total circulation of stablecoins. However, the partner, with a 20% supply share, takes away about 55% of the reserve income, posing a hidden risk for Circle: when stablecoins expand outside the partner's ecosystem, the marginal cost will rise non-linearly.

2. Reserve Management and Equity Structure

2.1 Reserve Fund Hierarchical Management

The reserve management of Circle's stablecoins exhibits a distinct "liquidity layering" feature:

• Cash (15%): held in systemically important financial institutions to respond to unexpected redemptions.
• Reserve Fund (85%): Allocated through specialized funds

Starting from 2023, reserves are limited to cash balances in bank accounts and the Circle Reserve Fund, with the asset portfolio primarily consisting of U.S. Treasury securities with remaining maturities not exceeding three months and overnight U.S. Treasury repurchase agreements. The dollar-weighted average maturity of the asset portfolio does not exceed 60 days, and the dollar-weighted average duration does not exceed 120 days.

2.2 Equity Classification and Hierarchical Governance

According to the documents submitted to the regulatory authorities, Circle will adopt a three-tier equity structure after going public:

• Class A shares: Common stock issued during the IPO process, with one vote per share;
• Class B shares: held by the co-founders, each share has five votes, but the total voting power cap is 30%, ensuring that the core team retains decision-making dominance;
• Class C shares: no voting rights, convertible under certain conditions to comply with exchange rules.

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

2.3 Distribution of Executive and Institutional Shareholding

The prospectus reveals that the executive team holds a significant amount of shares, while several well-known venture capital firms and institutional investors hold more than 5% of the equity, with these institutions collectively owning over 130 million shares. The IPO, valued at 5 billion, is expected to bring them considerable returns.

3. Profit Model and Revenue Analysis

3.1 Revenue Model and Operational Metrics

• Source of Revenue: Reserve income is the core source of income for Circle, with total revenue reaching $1.68 billion in 2024, of which 99% (approximately $1.661 billion) comes from reserve income.
• Revenue sharing with partners: According to the agreement, a large trading platform receives 50% of the reserve income based on the amount of stablecoins held, resulting in lower actual revenue attributable to Circle, which negatively impacted net profit performance.
• Other income: Increased revenue through enterprise services, minting business, cross-chain fees, etc., but the contribution is relatively small, only 15.16 million USD.

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

Behind the surface contradictions lie structural motivations:

• Revenue structure tends to be singular: From 2022 to 2024, total revenue will rise from $772 million to $1.676 billion, with a compound annual growth rate of 47.5%. The proportion of reserve income will increase from 95.3% to 99.1%, reflecting the successful implementation of the "stablecoin as a service" strategy, but it also increases dependence on changes in macro interest rates.
• Distribution expenses surge compresses gross profit: Distribution and transaction costs have significantly increased within three years, rising from $287 million to $1.01 billion, a rise of 253%. These costs are mainly used for the issuance, redemption, and payment settlement systems of stablecoins, and grow rigidly with the expansion of circulation.
• Rapid decline in gross margin: from 62.8% in 2022 to 39.7% in 2024, reflecting the profit compression risk faced by its ToB stablecoin model during the interest rate downcycle.
• Profitability turns around but margins slow: Net profit of $268 million in 2023, with a net profit margin of 18.45%. Net profit of $155 million in 2024, with a net profit margin declining to 9.28%.
• Cost rigidity: General administrative expenses in 2024 are projected to be $137 million, a year-on-year rise of 37.1%, mainly used for global licensing applications, auditing, and legal compliance team expansion, confirming the cost rigidity brought by the "compliance first" strategy.

Circle's financial structure has gradually aligned with traditional financial institutions, but its revenue structure, which heavily relies on the interest rate spread of U.S. Treasury bonds and trading volume, means that a decline in interest rates or a slowdown in the growth of stablecoins will directly impact profit performance. In the future, a balance must be sought between "cost reduction" and "expansion of increment."

The deeper contradiction lies in the flaws of the business model: as stablecoins enhance their attributes as "cross-chain assets" (with on-chain transaction volume reaching $20 trillion in 2024), their currency multiplier effect actually weakens the profitability of issuers, similar to the dilemmas faced by traditional banking.

3.3 rise potential behind low net profit margin

Despite the pressure on net profit margins from high distribution costs and compliance expenses, multiple growth drivers are still hidden within the business model and financial data:

• The continuous increase in circulation drives stable revenue growth: As of early April 2025, the market value of stablecoins has exceeded $60 billion, with a market share rising to 26%. The market value has grown by $16 billion in 2025, with a compound annual growth rate (CAGR) of 89.7%. Even with a slowdown in growth, the market value is still expected to reach $90 billion by the end of the year, with the CAGR potentially rising to 160.5%.

• Structural optimization of distribution costs: Although the cooperation with a large exchange involves high commission payments, this cost has a non-linear relationship with the rise in trading volume. The cooperation costs with other trading platforms have significantly decreased, promising market value growth at a lower cost.

• Conservative valuation not pricing market scarcity: IPO valuation at $4-5 billion, with P/E between 20~25x, similar to traditional payment companies. However, this valuation has not fully priced the scarcity value of being the only pure stablecoin asset in the US stock market. If relevant legislation is implemented, the existing compliance framework can be directly translated, creating a "regulatory arbitrage end dividend".

• The market value trend of stablecoins shows resilience compared to Bitcoin: amidst market volatility, the market value of stablecoins can remain relatively stable, and Circle may become a "safe haven" for funds. Its profit model relies more on trading volume and interest income from reserve assets, rather than being directly affected by fluctuations in cryptocurrency asset prices, making it more resilient during bear markets.

4. Risk Analysis

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

• The double-edged sword of interest binding: A large trading platform takes 55% of the reserve income, but its share of stablecoins is only 20%. This asymmetric revenue distribution stems from an early agreement, resulting in Circle having to pay $0.55 in costs for every additional $1 in revenue, significantly higher than the industry average.
• Ecosystem Lock-in Risk: The prepayment agreements signed with other exchanges expose the imbalance of channel control. If leading exchanges collectively demand to renegotiate the terms, it may trigger a vicious cycle of "rising distribution costs."

4.2 The bidirectional impact of the stablecoin bill progress

• Localization pressure on reserve assets: The legislation requires issuers to hold 100% reserves (cash and cash equivalents) and to prioritize using federally or state-chartered deposit institutions as custodians. Currently, Circle has only 15% of its cash held in domestic institutions, and compliance adjustments could incur one-time fund migration costs of several hundred million dollars.

5. Strategic Thinking

5.1 Core Advantages: Market Positioning in the Compliance Era

• Dual Compliance Network: Circle has built a regulatory matrix covering the United States, Europe, and Japan, which is an institutional capital that is difficult for traditional enterprises to replicate. As the legislation is implemented, its compliance costs as a proportion of revenue are expected to significantly decrease, forming a structural advantage.
• The wave of alternative cross-border payments: The "stablecoin instant settlement" service launched in collaboration with a cross-border payment company has significantly reduced the cross-border payment costs for businesses. If a portion of the annual settlement volume of traditional cross-border payment systems is penetrated, it could bring considerable new circulation volume, offsetting the impact of declining interest rates.
• B2B financial infrastructure: The proportion of stablecoin settlements has significantly increased in the e-commerce payment system of a certain payment service provider, and its automatic fiat currency conversion protocol can greatly save foreign exchange hedging costs for enterprises. This kind of "embedded finance" scenario expansion allows stablecoins to gradually evolve from being merely a medium of exchange to having value storage functions.

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

• Emerging market currency substitution: In some regions with high inflation, stablecoins have captured a portion of the dollar foreign exchange trading. If a Federal Reserve rate cut leads to accelerated depreciation of the local currency, this "digital dollarization" process may significantly drive the rise in circulation.