Circle: Disrupting The Digital Payment System

Summary Circle Internet Group is the second-largest stablecoin provider, positioned for strong network effects and institutional adoption through regulatory compliance. CRCL's USDC offers faster, cheaper payments than traditional systems, with significant growth potential as stablecoins expand into mainstream payments and institutional ￰0￱ estimates CRCL at $185.6 per share, a 47% premium, with a 71.8% probability of outperforming its current price; a Buy rating is ￰1￱ risks include interest rate declines and distributor bargaining power, but long-term USDC growth and network effects are expected to offset these ￰2￱ Thesis Circle Internet Group ( CRCL ) is the second-largest stablecoin provider in an industry with potentially high network effects.

Circle’s value proposition is a winner compared to its closest competitor in terms of trust and regulatory ￰3￱ company aims to disrupt the payment industry with its unique relationships with financial and crypto institutions, and it exposes a potential investor to great ￰4￱ company is linked to the more extended crypto world, and that will make the stock price fluctuate with high volatility. I estimate Circle’s stock value to be around $185.6 per share, a 47% premium over its current stock price, with a probability of 71.8% of not losing money in the investment. I recommend buying the ￰5￱ Network Effects Stablecoins as payment systems are businesses with network effects, as you can observe in the current credit card industry, dominated by Visa ( V ) and Mastercard ( MA ).

The value of your product, the USDC stablecoin, grows as more consumers or businesses use it, but to use it, a large number of consumers or merchants must accept USDC. Therefore, volume is critical for this business. I consider Circle as being in a better position than Tether, its main competitor and the market leader, with a market capitalization of USDT of $181 ￰6￱ is mostly used for crypto trading and large cross-border transactions, but regulatory concerns have limited its adoption by institutional ￰7￱ is more payment-oriented, and the real utility of stablecoins is more favorable to institutional clients. I consider Circle a clear winner, but even if the company just remains as the second leader in the market, that is not a bad position, as in the credit card market, where there are two ￰8￱ are a more convenient payment method, as payment speed is almost instant compared to 1-5 business days in traditional ￰9￱ cost per transaction is less than $0.1 compared to 1.5%-3.5% for a regular credit ￰10￱ is able to manage smart contracts with automatic possibilities and is fully ￰11￱ market could reach $500 to $750 billion in 2028, which is double the current market ￰12￱ Circle has a 33% market share and is growing due to its strategy of regulatory compliance and institutional trust, the company could reach $190-$285 billion USDC valuation, considering a 38% market ￰13￱ would mean a x2.5 or x3.8 multiplier from current ￰14￱ I consider that distribution fees will increase but at a much lower rate, and marginal costs are close to zero, there will be an increase in free cash flow even if interest rates decrease by a considerable amount.

Currently, daily payments on stablecoins are $30 billion , which is less than 1% of total payments in all ￰15￱ reserve return rate was 4.14% in the last quarter, way down from a year ago in the equivalent quarter at 5.17%. The current Federal Reserve (Fed) funds rate target range is 4.00–4.25%, and it is expected to decrease to 3% in ￰16￱ this scenario is true, it will mean a 25% decrease due to lower interest rates, and as we have seen, it is offset by the increase in TAM expansion and market share ￰17￱ if lowering interest rates to 2%, the fall in revenue would be 50%, but as a one-shot, compared to a TAM expansion in a stable coin, that could reach in the long run a 20% growth ￰18￱ Wallets, MeWs, in the last quarter were 5.7 million, growing 68% from a year ￰19￱ revenue increased 49.9% thanks to an 86% increase in USDC circulation, offset by a decrease of 27.7% in interest ￰20￱ Costs Are Not a Concern One of the major worries an investor can have is about distribution ￰21￱ company is paying handsomely to partners like Coinbase in a revenue-sharing ￰22￱ deal states that Coinbase will receive 100% of the interest income from USDC held on the Coinbase platform and 50% from USDC held outside the Circle and the Coinbase ￰23￱ costs can be a concern, but as volume rises and network effects are higher, the balance of power will ￰24￱ costs have grown 64.6% to $406.5 million, much higher than the 50% growth rate in reserve ￰25￱ costs over revenue have increased from 58.3% last year to 64.1% last quarter, reflecting the intense efforts of Circle to extend its network and capture network ￰26￱ distribution deal is favorable to the distributor partner, with the hope of reversing the bargaining power in the future when the network gets a higher ￰27￱ percentage of USDC held in Circle’s platform has increased from 2% in 2024 to 10% in ￰28￱ on the Coinbase platform has increased from 18% to 21% in a less meaningful way, and the USDC held in a platform different from Coinbase and Circle has decreased from 80% to 69%.

It is positive, from a margin perspective, to hold more in Circle’s platform, but as long as Coinbase is increasing, gross margins will ￰29￱ expenses increased just 16.4% if IPO-related expenses are excluded, supporting the economies of scale of the business model and why high distribution costs are ￰30￱ costs over revenue have decreased from 31.0% in Q2 2024 to 24.1% in Q2 ￰31￱ In my valuation methodology, I discount projected free cash flows at a convenient WACC. I define cash margin as net income adjusted for non-cash items such as amortization and depreciation, stock-based compensation, and deferred income tax, offering a clearer view of operational cash generation than standard margin metrics.

I project interest rates will decrease to 3% in 2026 and, conservatively, to 2%, the Fed’s target in 2027 and later (Figure 1). This is a conservative assumption, considering this monetary expansion as the worst-case scenario for ￰32￱ circulation will grow at a decreasing rate until reaching 20% as the long-term growth rate. I consider Other Revenue as a diversified type of revenue, thanks to the optionality that a blockchain network ￰33￱ of these revenue sources are Circle Wallets, Circle Contracts, Circle Paymaster, and ￰34￱ those assumptions, the growth rate would decrease in 2027 to 10% from 37.6% the previous year due to the deceleration of interest ￰35￱ 2028, the revenue growth rate will go up to 46.9% and then decrease in the next year to stabilize at 20%.

Figure 1: Author I estimate that margins for Circle will increase over the ten-year period in my ￰36￱ base case assumption is that Circle will increase its power over crypto exchanges, as Coinbase, and will negotiate better terms once USDC has consolidated its network ￰37￱ margin will increase in year ten to 22% from the current 18%. From 2027 to 2029, margins will decrease due to the current bargaining power of crypto exchanges and the need to extend USDC ￰38￱ flows will be discounted at 11.3% WACC because the beta is ￰39￱ risk-free rate is 4.2%. Debt, as a percentage of market capitalization, is 1%, and I consider it to have no excess ￰40￱ perpetual growth rate is set at 3%, which is slightly better aligned with the long-term GDP growth ￰41￱ 2: Author My value estimate has just reached $185.6 per share (Figure 2), up 47% from its current stock ￰42￱ and Uncertainties The main risk is interest rate ￰43￱ interest rates lower, Circle's revenue will decrease if USDC circulation doesn’t ￰44￱ current macroeconomic environment is favorable to a dovish approach; the Fed just lowered 25 bps interest rates to 4.00–4.25%.

This issue doesn’t concern me because the maximum decrease would be two percentage points, which is 50% in revenue, but as a one-time decrease. However, the counterbalance item is USDC volume growth that will be for the long ￰45￱ last quarter has increased by 86%, and I expect to grow at a high rate in the coming years, multiplying by 8 in the next 5 ￰46￱ 71% of stablecoin volume is generated by ￰47￱ main use case is high-frequency trading in other cryptocurrencies, with about 88% of total transactions, and 22% is for payment and remittances. Therefore, its high transaction volume is not comparable to Visa or Mastercard and doesn’t reflect a real utility use but a speculative ￰48￱ this picture doesn’t revert in the coming years, the most attractive attribute of stablecoins, the utility as a payment method, will vanish, and it will become just another speculative ￰49￱ risks would affect revenue.

I model, due to its high uncertainty, as the revenue growth rate could fluctuate +/-15 percentage points over the base case 90% of the ￰50￱ risk is the bargaining power of distributors like ￰51￱ I said, it is not a concern for me. However, I have to recognize that the industry structure could turn favorable to the crypto exchanges, and their negotiating power would increase, pressing margins. I model it as the cash margin could change +/- 5 percentage points over the base case 90% of the ￰52￱ those risks in my model and running Crystal Ball, I’ve found that the probability that the stock’s value is greater than the current stock price is 71.8%.

Conclusion Circle is an attractive business with network effects in the emerging cryptocurrency ￰53￱ is not a speculative stock, as it has a real value proposition: a digital payment ￰54￱ is differentiated with respect to its main competitor by its trust and compliance approach, attracting solid institutional ￰55￱ on a growing USDC circulation and a decreasing interest rate environment, while increasing diversified revenue sources with moderated margin improvement, I value the company at 185.6 per share, a 47% premium over its stock ￰56￱ probability of exceeding its current stock price is 71.8%. Therefore, I recommend buying the stock.