Circle IPO Explanation: The Rise Potential Behind Low Profit Margins

The timing of Circle's IPO is quite interesting. Despite the industry being in a turbulent period, the company demonstrates a unique rise logic. On one hand, it has high transparency, strict regulatory compliance, and stable reserve income; on the other hand, its profitability appears relatively modest, with a net profit margin of only 9.3% in 2024. This apparent "inefficiency" actually reveals a deeper strategy: 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, with its profits being strategically "reinvested" into market share growth and regulatory preparedness.

1. Seven Years of Listing History: The Evolution of Crypto Regulation

1.1 The model shift of the three capitalization attempts ( 2018-2025 )

The上市之路 of Circle reflects the dynamic game between crypto companies and regulatory frameworks. During the first IPO attempt in 2018, the U.S. SEC had not yet clarified the nature of cryptocurrencies. At that time, the company formed a "payment + trading" dual-drive model through the acquisition of exchanges, securing investments from several well-known institutions. However, regulatory doubts about the compliance of exchange operations and the impact of the bear market led to a significant decline in valuation.

The SPAC scheme in 2021 reflects the limitations of regulatory arbitrage thinking. Although this method can bypass the strict scrutiny of traditional IPOs, the SEC's inquiries into the accounting treatment of stablecoins go straight to the point. This setback drove a key transformation for the company: divesting non-core assets and establishing "stablecoin as a service" as the strategic focus.

The choice of traditional IPO in 2025 marks the maturation of the capitalization path for crypto enterprises. Listing on the NYSE requires meeting comprehensive disclosure requirements and internal control audits. Notably, the S-1 filing has for the first time detailed the reserve management mechanism, establishing a regulatory framework similar to that of traditional money market funds.

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

In the early stages, both parties jointly promoted USDC through the alliance. A certain trading platform initially held 50% of the alliance equity and quickly opened up the market through a "technology output in exchange for traffic entry" model. Later, Circle acquired the remaining 50% equity for $210 million in stock and renegotiated the profit-sharing agreement.

The current profit-sharing agreement reflects characteristics of dynamic games. According to the disclosures, both parties share profits based on USDC reserve income at a certain ratio, which is related to the amount of USDC supplied by a trading platform. From public data, it can be seen that in 2024, this platform holds about 20% of the total circulating supply of USDC, but has obtained about 55% of the reserve income share. This structure poses risks for Circle: when USDC expands outside the ecosystem of this platform, the marginal cost will rise non-linearly.

2. USDC Reserve Management and Equity Structure

2.1 Reserve Fund Hierarchical Management

The reserve management of USDC shows a clear characteristic of "liquidity layering":

• Cash (15%): Held in systemically important financial institutions, used to respond to sudden redemptions.
• Reserve Fund ( 85% ): Specialized fund allocation managed by asset management companies

Starting from 2023, USDC reserves are limited to cash in bank accounts and reserve funds. The asset portfolio mainly consists of short-term US Treasury bonds and overnight repurchase agreements, with strict limits on both the average maturity and duration.

2.2 Equity Classification and Stratified Governance

Circle will adopt a three-tier equity structure after its listing:

• Class A Shares: Common stock, one vote per share
• Class B Shares: Founders hold, five votes per share, but total voting power capped at 30%
• Class C shares: no voting rights, convertible under specific conditions.

This structure is designed to balance public market financing with the stability of the company's long-term strategy.

2.3 Distribution of Executive and Institutional Holdings

The executive team and several well-known investment institutions hold a large number of shares. These institutions collectively hold over 130 million shares, and the IPO, valued at 5 billion dollars, will bring them considerable returns.

3. Profit Model and Revenue Analysis

3.1 Revenue Model and Operational Indicators

• The core source of income is reserve income, with 99% of the total revenue of 1.68 billion USD in 2024 coming from reserve income.
• Share reserve income with partners based on the amount of USDC held, which lowers net profit performance.
• Other sources of income include enterprise services, minting business, cross-chain transaction fees, etc., but the contribution is relatively small.

3.2 The contradiction between income rise and profit contraction ( 2022-2024 )

The structural reasons behind the apparent contradictions:

• The income structure focuses on a single core, with the proportion of reserve income rising from 95.3% to 99.1%.
• Distribution expenses have increased significantly, with a rise of 253% over three years, compressing gross profit margins.
• Profit has turned from a loss to a gain, but the marginal effect is slowing down, and the net profit margin has declined from 18.45% to 9.28%.
• Compliance-related expenses continue to rise, creating cost rigidity.

Overall, Circle has gradually aligned its financial structure with traditional financial institutions, but the income structure that heavily relies on interest rate spreads and trading volumes also faces risks. In the future, it needs to seek a balance between cost reduction and efficiency and business expansion.

3.3 the rise potential behind low net profit margin

Despite the pressure on net profit margins, multiple growth drivers are still hidden within the business model:

• The circulation of USDC continues to rise, expected to reach a scale of 90 billion USD, driving an increase in reserve income.
• The optimization space for distribution cost structure is large, and the unit customer acquisition cost in the new cooperation model has significantly decreased.
• The conservative valuation has not fully priced in its scarcity as a pure stablecoin.
• The market value of stablecoins shows resilience amid fluctuations in the crypto market and may become a safe-haven asset.

4. Risk Factors

4.1 Vulnerability of Institutional Relationship Networks

• The asymmetric revenue-sharing agreement with a certain trading platform leads to high distribution costs.
• Top exchanges collectively demand renegotiation, which may trigger a cost spiral.

4.2 The bidirectional impact of the stablecoin legislation progress

• The localization requirements for reserve assets may incur significant one-time adjustment costs.
• The implementation of the bill may also bring regulatory arbitrage benefits, increasing market share.

5. Strategic Thinking

5.1 Core Advantages: Market Layout in the Compliance Era

• The multi-regional regulatory matrix has constructed a system capital that is difficult to replicate.
• Cross-border payment alternatives have shown cost advantages.
• B2B financial infrastructure is gradually evolving towards value storage functions.

5.2 rise flywheel: scale effect and interest rate cycle game

• The "digital dollarization" process in emerging markets may drive a rise in circulation.
• The offshore dollar repatriation channel opens up new rise space.
• New businesses such as RWA asset tokenization are expected to contribute substantial management fee income.
• The regulatory window period provides opportunities for seizing institutional clients.
• The enterprise service suite can open up a non-reserve income rise curve.

The low net profit margin of Circle is essentially a proactive choice during its strategic expansion period. When its ecosystem scale reaches a critical point, the valuation logic will upgrade from "stablecoin issuer" to "digital dollar infrastructure operator." This requires investors to reassess the potential premium brought by its network effects from a long-term perspective.