Source: TradingView, CNBC, Bloomberg, Messari
How Circle Could Have Done Things Differently With Its IPO
Circle, the company behind the USDC stablecoin, IPO’d last week, pricing shares at $31 (up from the initial $24-26 price talk). The shares closed the first day of trading at $84, and closed the week at over $107. To say the investment banks mispriced this IPO would be an understatement. To say Wall Street’s appetite for crypto, and specifically stablecoins, is high would also be an understatement.
The bull case on CRCL:
- It's the first and only pure-play way to bet on stablecoin growth, something that investors have been seeking for over seven years (Arca included). For that reason alone, and the expected growth of stablecoins to well over $1 trillion in AUM, it is a good investment story.
- USDC has $60 billion in AUM and grew 91% YoY
The bear case on CRCL:
- It's a bet on interest rates, as all of its revenue is derived from interest income.
- Circle is reliant on Coinbase, which acts as a distribution agent and takes ~50% of the interest income
- Circle is reliant on Blackrock, which has a lot of relationships with other banks that are now trying to compete with Circle and Tether on the stablecoin front
- There has been little to no revenue and earnings growth over the last 3.5 years (though EBITDA did grow +60% YoY).
At $107/share, CRCL is a bit rich, and now trades at roughly:
- 30x Gross Profit
- 110x Earnings
- 59x adj. EBITDA (Q1'25 annualized)
Source: Artemis
Many of you may have seen a tweet, and some subsequent news coverage, of a public letter that I wrote to Circle CEO Jeremy Allaire after their IPO priced this week. I apologize for the use of colorful language in my tweet, and I have since deleted it because it was not representative of any official Arca statement. However, I fully stand by the concept I sent. In my opinion, Circle made a huge mistake in allocating shares to TradFi funds over crypto funds, and they should be held accountable for the sub-textual messaging behind their decisions.
We spoke to numerous other crypto funds and firms that made large allocations for the CRCL order, including those that were also early adopters and users of USDC (such as Arca), and many of whom have even stronger relationships with the underwriters (JPM and Citi) than Arca does. We’ve received anecdotal confirmation from these industry giants that they, too, received horrible or zero allocations, confirming Circle’s favoritism towards Wall Street TradFi firms over crypto-native supporters. I’ve yet to find a single crypto-native firm that was treated well in this allocation process.
THAT IS ABSURD! And incredibly short-sighted by Circle.
Those who know me, or who have invested with Arca, know that I am not an emotional investor. Quite the opposite, actually. I’m very stoic in both good times and bad times, and try to focus on the thesis rather than the feelings.
I am, however, incredibly passionate and emotional when it comes to growing the crypto industry the right way, and even more passionate about integrity in general. Arca has been at the forefront of the industry, battling on behalf of this sector since its inception in 2018. We have spent countless hours driving and winning activist campaigns against crypto companies that have mismanaged investor and/or customer money. Most didn’t think tokenholders had rights – we proved that thesis wrong, and risked our reputation in the process. We believe that it was worth the fight. We have consistently called out what we believed to be fraud and wrongdoings within our industry, often leading to uncomfortable conversations with friends and partners. That too was worth it. We have called out TradFi for purposefully miscategorizing this industry, or lumping all tokens together as one, even when there are very obvious differences. We have called out other companies within the crypto industry when they have purposefully twisted a narrative for self-serving reasons, at the expense of others trying to grow alongside them. We have also acknowledged our own mistakes and will continue to do so. We have tirelessly worked to educate the world about the good and the bad in crypto, so that investors and users of this technology can make fact-based, informed decisions about the future of this industry, rather than being influenced by the media or other untrustworthy entities.
At the end of the day, we cheer for all crypto growth. And rightly or wrongly, we feel an obligation to use our amplified voice to point out everything from what strikes us as outright fraud, to bad actors, to bad decisions, with an effort to make this industry bigger and better in the long-run. It may cost us some deal flow and some friends along the way, but that was a calculated risk that Arca has been willing to take since day 1 in order to help move this industry forward.
Jeremy Allaire and Circle – you are under citizen’s arrest for being the antithesis of crypto.
I’m not some wide-eyed ideologist. I genuinely believe that when you enrich your customers, you enrich your company. There is a reason Binance, Hyperliquid, and even those that are now struggling like Axie Infinity have happy founders, employees, customers, and investors. One word. ALIGNMENT.
This is not a new concept. I
wrote about the lack of alignment with stocks before Arca even had a website in 2018. I wrote about how AirBNB and DoorDash
failed to align their customers with their financial gains via IPO in 2020. I wrote about how Coinbase tried to do the noble thing by
issuing stock via a direct listing, while acknowledging that it is not without risk since they won’t have the support of investment bankers helping to educate investors. I have been speaking for 8 years about how tokens are the greatest capital formation and customer bootstrapping mechanism ever created, because they instantly align all stakeholders, and turn customers into power users and evangelists.
Circle completely and purposefully chose to ignore their customers in this IPO.
I can’t speak for the other firms (many of whom joined Arca in solidarity over the disrespectful allocations to the IPO), but I can speak for Arca. For almost a decade, Arca has been a customer and a partner of Circle. We’ve used our platform to help elevate Circle and USDC back when USDC had virtually no traction and no AUM. We've defended USDC and stablecoins in general to every institution on the planet who called them, and this industry, a joke. Our trading and operations team worked tirelessly with Circle’s team, testing product ideas, and offering improvements, and helping them through tough times like the March 2023 banking crisis and other USDC de-pegs.
To get such a low allocation on their IPO is a slap in the face. Arca, like many firms in the crypto industry, has been through hell and back over the last eight years. Most people and firms in this space tend to stick together and help one another. If you have the opportunity to enrich your customers and, in doing so, help increase returns and AUM for those who can contribute to the growth of this industry, it should be a no-brainer. How about rewarding crypto funds, which can then raise more money with good performance, and pour those gains back into the ecosystem? Wouldn’t that be good for the industry?
But Circle decided to do the exact opposite of the crypto ethos. Instead of aligning their customers and stakeholders with the stock (or a token), so their customers can become power users and evangelists for life, and aligned towards helping the company grow further, Circle chose to give fat allocations to TradFi mutual funds and hedge funds who likely didn't even read the prospectus, have no wallets, and will likely never use their product.
Many fired back at me for my anger with Circle. I’d like to address a few of those comments:
- Arca is just like any other crypto person who thought they deserved a bigger token airdrop for using a product!
Answer: Yes and no. I’d say that’s a fair assessment to some extent, and it points to the ethos that we spoke about above. Customers of all sizes should be rewarded in some way, shape, or form if they directly influence the growth of a business. DoorDash drivers and diners should have received shares of DASH. AirBNB renters and homeowners should have received ABNB shares. Amazon Prime users and Amazon storefronts should have received AMZN shares… the list goes on. However, one significant difference between token airdrops and an IPO is that we were willing to pay the same price as everyone else. In contrast, an airdrop is essentially a free gift. Furthermore, an allocation to an airdrop is often driven by a predetermined calculation. In contrast, an IPO allocation is a manual process where Circle has direct oversight over who receives what allocation.
- You should be mad at Citi and JPM (the underwriters), not Circle!
Answer: Blatantly false. I was a capital markets investment banker and a trader who worked directly with syndicate desks for almost a decade. I was heavily involved with the allocation of many bond and equity deals, and I understand exactly how this process works. While it is true that the underwriters are tasked with generating demand, pricing the deal, and coming up with the INITIAL indications of interest from funds, the client has FULL AND FINAL say on the allocations. Circle pays JPM, Citi, and the other investment bankers who are leading or co-managing the deal a very large fee, and it is Circle’s right to review all orders before a stock or bond deal prices. They can absolutely 100% dictate who receives shares. It is their right, and their duty, to review the book. So, regardless of your relationship with the underwriters, if you have a relationship directly with the management of the issuer, that matters more.
Further, for what it’s worth, Arca probably trades more stocks, bonds, preferreds, and other securities than just about any crypto fund. We even helped facilitate the Galaxy (GLXY) convertible bond offering in 2022, when it was struggling to find investors, and tripled our allocation to help them cross the finish line (the underwriter was Citi, by the way – they loved Arca when we bailed that deal out). Mike Novogratz and the Galaxy team were heavily involved in that allocation process. However, regardless of what we, or other crypto funds, do, big Wall Street banks like JPM and Citi are unlikely to prioritize small crypto firms over their top customers. Allocations needed to come from Circle – and they failed to do this.
Circle was either negligent, incompetent, or purposeful when it shut out crypto funds. This is not the underwriters’ fault.
- The deal was 25x oversubscribed – everyone got cut back!
Answer: Not entirely true. Don’t forget that this is the second time Circle has tried to IPO (the first attempt failed, and they had to pull the deal). And this deal was struggling back in early April when they first started the roadshow for a variety of reasons (the market in general was soft due to the tariff wars, and there was a lot of pushback on Circle’s lack of earnings and reliance on interest rates and partners). The deal became heavily oversubscribed MUCH later in the process after every investor knew that this IPO was going to trade up, and started putting in large, last-minute orders. The process of putting in an order, and receiving an allocation is often a game of cat and mouse. Many investors will put in an order for 10-20x more than they actually want, with the understanding that they will get scaled back in the allocation process. So when you put in an order early in the process (as Arca did) before the book is established, you generally expect to get filled on the exact amount that you ask for. In contrast, when you ask for an allocation late in the process, you have more knowledge of how over- or undersubscribed the deal is, and can adjust your indicative order accordingly. The 25x oversubscribed headline appears to have been largely a farce.
- Stop whining – sour grapes!
Answer: Um, yes. That’s sort of the whole point of this tirade.
Whether or not this decision impacts Circle and USDC’s future will remain to be seen. We look forward to seeing the 13Fs when they are filed to see which investor base Circle chose to enrich over their own customers and supporters.
