Since going public earlier this month, shares of Circle Internet Group(NYSE: CRCL) have rocketed by more than 600% (as of June 24). While initial public offerings (IPOs) tend to fetch outsize attention, I’ll admit that Circle’s parabolic rise is unusual.
Let’s explore what is driving such an intense interest in Circle right now. These details should help investors better understand Circle’s role in the fintech landscape — specifically, how the company is carving out a unique niche in the crypto market.
From there, I’ll reveal a subtle detail that some investors may be missing about Circle and explain why Coinbase Global(NASDAQ: COIN) could be the biggest crypto winner of all in the long run.
Circle’s business revolves around stablecoins, specifically USDC. A stablecoin is a type of cryptocurrency that pegs its value to another asset. In the case of USDC, the underlying asset is the U.S. dollar.
Outside of the normal hype that IPO stocks tend to experience, Circle appears to be benefiting right now for a couple of specific reasons.
First, retailers Amazon and Walmart were recently tied to reports suggesting the e-commerce and brick-and-mortar juggernauts could be exploring stablecoins as a mechanism to outmaneuver fees from credit card providers such as Visa.
While integrating stablecoins into their respective payments infrastructure could take time, investors are likely enthusiastic over the news that global retailers are exploring this type of technology — hence, adding a level of validity to what Circle’s is trying to achieve.
I think another reason that Circle stock is rising at the moment can be tied to geopolitical tensions in the Middle East. Broadly speaking, during periods of uncertainty, alternative investments — including crypto — can see some action relative to traditional outlets such as stocks or bonds.
Image source: Getty Images.
While the details above help explain why there is demand for Circle stock, what does any of this have to do with Coinbase?
According to a note in Circle’s pre-IPO S-1 filing, the company leverages Coinbase’s ecosystem to help distribute USDC. In return for Coinbase’s distribution network, Circle pays it a fee.
I see this arrangement as extremely advantageous for Coinbase. Stablecoins represent a new revenue stream for Coinbase that is relatively low-effort for the company in terms of building new, costly infrastructure. Moreover, income from stablecoins helps diversify Coinbase’s business while also helping offset the volatility and unpredictability of trading revenue from Bitcoin and other crypto tokens.
Furthermore, should stablecoin adoption scale in the long run, Coinbase is in a position to market itself as a payments provider similar to what Visa and Mastercard do for retail platforms.
Per the chart below, investors can see that Coinbase has witnessed some notable valuation expansion during the past couple of months. As a result, the company’s forward price-to-earnings (P/E) multiple has climbed to historically high levels.
Coinbase appears to be in a less volatile position than other opportunities surrounding the crypto market.
For example, while trading Bitcoin and other tokens is a core component of Coinbase’s business, the company is in a position to benefit when the price of these assets increases or decreases — making it slightly less vulnerable to a crypto winter.
In addition, crypto-adjacent stocks such as Robinhood are making moves to expand into other pockets of financial services. For this reason, if I wanted exposure to a crypto-centric opportunity that was not a specific token, I’d choose Coinbase right now.
Overall, I think the company has a compelling long-term growth narrative and is making some important moves to transform from simply a crypto broker.
With that said, investing in Coinbase stock right now requires paying a premium and potentially getting caught up in some pronounced momentum. Coinbase stock is pricey at the moment, and I’d encourage investors to exercise some patience and take advantage of any dips down the road.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adam Spatacco has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Bitcoin, Mastercard, Visa, and Walmart. The Motley Fool recommends Coinbase Global. The Motley Fool has a disclosure policy.
