Circle’s IPO documents show rising costs and deep Coinbase dependency

Circle’s new initial public offering (IPO) filing has shed light on its relationship with Coinbase, including the millions paid to the exchange for USDC stablecoin distribution. According to the filing, over 50% of the firm’s revenue in 2024 went to Coinbase.

The S-1, a preliminary filing for companies planning to go public, shows that Circle generated $1.67 billion in revenue for 2024. This represents a sizable increase from $1.4 billion in 2023 to $772 million in 2022. However, the company is doing worse financially as earnings before interest, tax, depreciation, and amortization (EBITDA) decreased by 29% to $285 million, and net income also fell by 42% to $155.67 million.

While many factors caused this, analysts have identified the major problems as Circle’s distribution costs and reliance on Coinbase. According to the filing, the USDC issuer spent $1.01 billion in distribution and transaction costs for 2024, beating its expenses in 2023 and 2024.

Interestingly, Coinbase got most of these funds, receiving $908 million while Binance also got $60.25 million and monthly fees for its partnership with Circle. The massive amount paid to Coinbase is due to the share of USDC being held on the exchange. The supply of USDC on Coinbase is now 20% of the total USDC in circulation, up from the 5% it was in 2022.

Although the amount paid to Coinbase is surprising, the two companies have a long relationship. In 2018, they formed the Centre consortium that launched USDC but Circle gained full control of the stablecoin in 2023 when they dissolved the consortium.

However, Circle had to pay $210 million in its own stock to buy Coinbase’s stake in Centre, giving the exchange about 8.4 million common shares for the stake. With this relationship, Coinbase stands to be a major beneficiary of  Circle’s IPO success.

Analysts raise concerns about Circle’s financials

Meanwhile, Circle’s IPO filing has put the company in the public eye, with financial analysts raising concerns about its business fundamentals. According to commenters such as the head of digital assets research at VanEck, Matthew Sigel, and Farside Investors, the company’s high distribution costs are a major issue.

The massive distribution costs highlight how USDC growth in the past year might be coming at a high price for Circle’s business. USDC has been the fastest-growing stablecoin in the past few months. Its circulating supply increased by 100% in the last 12 months with more than $15 billion this year alone, enough to raise its market cap above $60 billion.

Farside Investors also noted the company’s massive spending on compensation and higher-than-expected gross creation and redemption numbers for USDC.

The firm wrote:

“The gross creation and redemption numbers are a lot higher than we would have thought for USDC. Gross creations in a year are many multiples higher than the outstanding balance.”

Meanwhile, Dragonfly investment analyst Omar had a more scathing criticism of the IPO filing, noting that he does not see the potential of it going to the $5 billion that Circle is aiming for. He also pointed out the distribution costs, the potential deregulation which will bring in more competitors, and the likelihood of interest rate cuts as headwinds for the company.

He said:

“32x ’24 earnings for a business that just lost its mini-monopoly and facing several headwinds is expensive when growth structurally challenged. feels like a hail mary for some liquidity before the squad rolls in.”

However, Circle acknowledged some of these challenges in its filing, particularly the cost of distribution partners and reliance on Coinbase. The firm mentioned new global partners such as Nubank, Mercado Libre, and Grab.

VanEck Ventures general partner Wyatt Lonergan also admitted that new partnerships and Circle’s status as the only stablecoin firm with a legitimate claim to go public could prove to be its advantage. Nevertheless, the analyst provided predictions on how the IPO could turn out.

In the base case scenario, Circle will ride the stablecoin narrative for about 12 months, find ways to diversify revenue, and sign new deals with major distribution partners like Visa. However, if the stock market continues to decline, Circle stock could suffer and Lonergan expects that Coinbase could acquire the company.

He added that Coinbase could even buy up Circle before it goes public, allowing the exchange to fully own the stablecoin issuer. Still, he believes an outsider such as Ripple, which also has its own stablecoin, could swoop in with a massive bid to acquire Circle so as to increase its market share.

The filing also shows that USDC has recorded 25 trillion in on-chain transaction volume throughout its lifetime, with over $1 trillion in tokens minted and redeemed within that period.

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