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“Could replace every dollar currently in circulation around the world” — What’s Ian King Hinting at as his Most Recent Recommendation?

Checking out a New Era Fortunes teaser

This teaser pitch has been sticking in my head for a day or two, so I thought I’d write about it for you while I’m chewing on it. The pitch is for Ian King’s New Era Fortunes (currently being sold at $1,995/yr), and this is an excerpt of the pitch email I received…

“… in a digital age, we need digital dollars.

“And one tiny company is rapidly becoming the hub for U.S. digital dollars…

“That could replace every dollar currently in circulation around the world.

“The number of these digital dollars in circulation has increased by 575% just since January.

“While the total number of digital dollars transferred on its network…

“Is already approaching $1 trillion.

“Yet, this small $4.5 billion company is still trading for just $10.

“Over the next couple of months, as investors catch on to what’s happening…

“I expect the stock price to explode higher.

“This is my most recent New Era Fortunes recommendation.”

That’s it in the way of clues, since that teaser email just leads you through to a sales presentation which is a little older (dated October 2020), and teases some older ideas in EV charging and such but includes nothing about this most recent pick from King.

So what is it? Well, a reader chimed in with a possible solution in one of our comment threads last week, and asked me about it, so I decided to dig in a little bit.

So first of all, I think that reader is correct — the Thinkolator confirms that this is very likely hinting at Circle, which is a crypto-related company that is in the process of trying to merge with a SPAC to go public. Assuming that deal goes through as planned, which most of them do (though it was only announced a few weeks ago, so there will at least be a wait), Concord Acquisition Corp (CND) will end up becoming Circle (CRCL).

And yes, if there are no redemptions of that $276 million trust fund held by Concord, and the deal does not otherwise change in a big way, CRCL, at the current ~$10 per share, will be a $4.5 billion company when it comes to enterprise value, though the market cap will be more like $5.5 billion.

Circle’s claim to fame is that they are a founding partner of USD Coin (USDC), which seems to be the fastest-growing and most-institutionally-favored (partly because of a partnership with Coinbase) digital US dollar. Which seems odd, of course, that they “own” a digital dollar, and is kind of odd… but in the absence of a discrete digital US dollar that lives on the blockchain instead of in the ledgers of your bank or the Federal Reserve, someone had to invent one. There have been several such creations, but USDC seems the most trusted, and, unlike some that seem more like shady offshore schemes, like Tether, Circle’s USDC seems to be fully backed with actual dollars.

If you’ve begun to dabble in crypto you’ve probably seen USDC — if you deposit dollars into your Coinbase account, they will encourage you to keep it not in cash but in USDC, by offering you a small interest payment for USDC (only 0.15% at the moment, but better than nothing), and that will allow for somewhat easier transfers as USDC, unlike the US$ by itself, can zip around the internet on the blockchain, without (big) fees or speedbumps. Here’s how the company describes it in the press release from the deal:

“Circle is the principal operator of the fastest growing dollar digital currency, USD Coin (USDC), which has grown to more than $25 billion in circulation and has supported more than $785 billion in on-chain transactions. In 2021, USDC in circulation has grown in excess of 3400%, fueling a broadening array of use cases for high-trust, low-friction internet-native payments and settlements.”

There’s obviously potential for that to grow, since it’s already growing — whether USDC establishes anything meaningful as a vehicle for asset movement, I don’t know. It looks fairly compelling so far, as I skim through their characteristically optimistic investor presentation for the deal, but remember, this is not a speculative cryptocurrency, USDC won’t change in value and provide huge leverage to its owners, this is meant to be a functional currency — a mechanism for making online transactions on the blockchain a little bit easier and faster. And the returns for the operator of this market are going to be wee little slivers of pennies, at least at firs — they can’t charge a meaningful transaction fee for any movements of USDC, because then it looks a lot less appealing and it’s maybe no better than using a credit card or bank network or PayPal to move your money around, and if it’s expensive that opens the door to someone to come in cheaper or free, which would mean they don’t establish a controlling stake in what could be a big market.

So for now it seems that the USDC platform makes money mostly just by holding your cash, and that’s probably pretty close to a wash right now — Circle is not a bank, so they’re not levering up those returns with fractional banking or something and they can’t do anything risky with any of the money, they just need to have full and audited risk-free way to hold the cash that they are banking to back up every USDC on the blockchain. It’s hard to imagine them or their USDC partners making more than 0.3% on that kind of arrangement, with interest rates so low (the more money you have, the harder it is to get a decent return on “overnight” money that you can pull back instantly), though I don’t know for sure, and they are paying a small interest rate to USDC holders of 0.15%, at least through Coinbase, so in order for that kind of net interest margin, say it’s 0.15%, to represent real revenue potential, the amount of dollars converted to USDC would have to be MASSIVE.

If there are $25 billion in USDC in circulation right now, and that’s something of a steady state number (or growing), then the platform might generate $30-40 million in revenue from holding those dollars that back up the USDC cryptocurrency (Circle presumably isn’t holding it all, I’m not sure how that money is shared, Circle and Coinbase were the founding partners of USDC and I don’t know who else has signed on). What does it cost them to manage that part of the business, and how big does that reserve backing the USDC need to be to cover their overhead? That’s the question I’d be asking when it comes to scalability, because even $40 million in PROFIT for a $4.5 billion company would be no great shakes, and if you think of just this part of the company, then, the valuation is probably something in the range of 100X revenues… which is very, very pricey, and means you have to have a really clear vision of strong growth ahead, though they do also make clear that rising rates would help the business case considerably — if base interest rates go up 200 basis points next year, for example (which would be a massive crisis, to be clear), then that would bring almost another billion dollars in incremental revenue (before they share with partners and USDC holders, at least).

And thankfully, while managing the USDC network is the real core of the company, there are actually two other segments of the business that have the potential to generate more meaningful returns on equity if the business takes off as they hope. That’s the fee-generating portion of the business, where they earn transaction fees for some digital-native businesses, like if you use US$ to buy something a non-fungible token for a basketball highlight video on TopShot, or enter into short-term arrangements to borrow USDC on a collateralized basis, and the SeedInvest marketplace, which is essentially a public marketplace for private venture-style or crowdfunded investments, kind of like Fundrise or OurCrowd, and generates fees from that activity. Both of those are also very tiny right now, but projected (by Circle, at least) to grow very fast in the next few years.

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So the promise is that they can become a key part of the foundational payment networks of the crypto economy, with USDC representing the fairest and easiest path for easily trading US dollars on the blockchain. Maybe, maybe not, but if they do it will require a truly massive volume of USDC to come into existence before Circle has much chance to make a profit from that part of the business. What would be more immediately appealing for me is if the transactions business and the SeedInvest business can reach come sort of profitability fairly quickly, and generate the big cash flow to support their ongoing work and perhaps demonstrate a profit for investors, while we wait to see whether USDC becomes the de facto Visa or MasterCard platform for moving dollars around using cryptocurrency platforms and networks.

Circle is not a brand new company, and it has had a rich valuation before — back in May of 2018, when Bitcoin and cryptos were in a bit of a downtrend, they did what was then their largest private funding round (series E, raised $110 million) at a $3 billion valuation… I don’t know the back story of those deals, and Circle’s focus has changed a couple times in its relatively short life (back in 2018 they were in the middle of buying the Poloniex crypto exchange in a bid to become a “one stop shop” for cryptocurrencies, and apparently lost a lot of money on that ambition — there’s a nice quick summary by Techcrunch here), but at least we can say that although the $4.5-5.5 billion valuation of the SPAC deal today might be inflated, it’s not just a feature of the current crypto mania or the (fading) SPAC mania, this has been a hotly pursued private investment by a bunch of venture funds, for different reasons, for several years.

And USDC has, at least, been growing very fast — Circle has been developing and supporting USDC to support payment systems for several years, and the number of USDC has indeed exploded — it rose 500 percent in 2020, when they reported having three billion USDC in circulation, and now the $25 billion in circulation that they talked up this month represents another 900% or so jump, presumably thanks in some degree to the huge numbers of Coinbase accounts created in the early part of this year. Will it keep growing at some kind of crazy clip like that? If so, I guess we’re eventually talking about some real money, and the possibility for economies of scale to let them generate a reasonable amount of net interest revenue without putting their finger on the scale.

And they do see big growth continuing, of course, because every company going public through a SPAC deal sees big growth coming — in Circle’s case, they think there will be $190 billion in USDC in circulation in two years, with $15 billion in total transaction volume for USDC and $50 billion lent out, which will presumably generate borrowing fees, and that Circle as a company will have $885 million in revenue as they build out this USDC partnership that they believe makes payments “frictionless, immediate & nearly free.”

I don’t know what the regulatory risk is here, if the US Federal Reserve ends up establishing a backed digital dollar maybe that eats into the appeal of USDC, though that would depend a lot on what an official digital dollar looks like and how it can be used, or maybe if they hold enough dollars in reserve for the Fed to get worried there would be other pressures on them, but at this point those risks seem fairly theoretical — there’s no pending FedCoin, and I would imagine that Circle’s share of the $25 billion cash accounts backing USDC doesn’t even really pop up on the radar as a risk just yet, the size of the liquid dollar market is just so massive. There’s a lot of liquid “pretty much like cash” stuff out there, so you have to get big before you get a lot of attention (just as one comparison point, the Office of Financial Research says there’s currently about $5 trillion in US$ Money Market funds globally).

The base of all of this is a Circle Account, since they’d like to control a point of contact with you as a customer, which lets you convert your USDC to regular US$ or vice versa, and send and receive USDC (almost instant, nearly free) on the blockchain, or store it, but then the revenue kicks in with partners like TopShot using Circle’s API services to embed Circle payments and transaction processing for buying NFTs, or other partners facilitating borrowing/lending of USDC to help connect DeFi projects to “real” US dollars, or other things like that which facilitate movement of real money on the blockchain without the fees associated with converting your US$ to bitcoin or ethereum using a credit card or a bank transfer. The biggest partnerships are with Visa, which has integrated USDC into its network, and with Coinbase, as an on-ramp to crypto for new folks.

What’s unique about Circle? That’s a good question. They say that their platform is “difficult to replicate,” and that’s probably true, particularly their integration with several big cryptocurrency exchanges/platforms and with Visa and other partners, and they have good integrations built in with major banking and payments networks and at least several years of working with regulators to stay within their rails when it comes to USDC. That doesn’t guarantee they’ll “win” this part of the crypto business, but as regulation gets tighter and people begin to worry about more things in crypto as it grows, being more established and having some regulatory history is likely to provide some competitive advantage. As to whether their networks or systems are technically better than other “stablecoin” projects or platforms (of which there are many), or even better in the end than the captive platforms that are often used for dollar transfers, like Venmo or Square’s Cash app (neither of which generates much money for its parent, considering their scale), I have no idea.

And will the SPAC partners bring anything to the table, beyond their cash? Perhaps. There is one really big name in banking at Concord Acquisition, Chairman Bob Diamond, who was head of Barclays until being essentially forced out in the LIBOR scandals a decade ago, and he might carry some weight with his fellow banking bigwigs when it comes to continuing to build relationships. They have other partners who are well-connected to big financial firms as well, though it’s not clear what the final management makeup will be and the Circle shareholders (founders plus all those VC firms who backed them over the past decade) will continue to have overhwelming ownership control and voting power.

I can definitely see how it might work out if they are really able to establish persistent leadership, particularly thanks to solid partnerships with Mastercard, Visa and Coinbase, but it’s a little hard to stomach the current valuation for a “could work” situation — the tendency for SPAC mergers to include really rosy projections is always a factor in how we think about those forecasts they put out for 2022 and 2023 revenues, though if they’re right the valuation might make sense — given just the estimated current-year revenues of $100 million or so, which they’re probably more able to genuinely predict, I’d rather see it trade at 20X sales than 50X sales. The real drama comes when we try to guess at whether they’ll really be able to grow in the next year like they did in the past year — they think they’ll hit $400 million in revenue in 2022 and almost $900 million in 2023, which would make today’s valuation a bit easier to swallow, even though they’re still not likely to actually be profitable even at nearly a billion in sales (they do think they’ll have positive “adjusted EBITDA” of $76 million in 2023). I’ll keep watching, though those partnerships are impressive.

The most comparable company that they cite in their presentation slides is bakkt, the digital assets platform backed by Intercontinental Exchange and going public through a SPAC merger (currently delayed a bit) with VPC Impact Acquisition (VIH), and which trades at a somewhat similar valuation based on 2021-2023 revenue forecasts but is meaningfully more profitable and about half the size of Circle’s planned market cap. I looked at a different pundit’s tease of that Bakkt story a bit here, in case you’re curious. I like the story at Circle a bit more, mostly because I think Bakkt is overly reliant on putting “points and miles” programs on the blockchain and considering them real assets, but both are obviously bets on their view of the future.

So… feel like buying a piece of Circle, whether or not it’s an Ian King recommendation? Shareholders are currently in a “meh” mood over the deal, it appears, since the SPAC shares are still, at about $10.20, trading close to the redemption price (though not below the redemption price, like VIH is for the Bakkt deal at the moment), so the downside is fairly limited if you buy shares near $10 and wait for the vote and the redemption option, since you could change your mind and redeem for $10 if you don’t end up liking it. There is a little optimism backed in to the SPAC warrants, since they’re now trading at about $1.75 (they would have a five year term after the deal consummates, so each warrant would let you buy one share of CRCL for five years at $11.50, though like almost all SPAC warrants they can rush the expiration date if the shares get above $18-20 for any length of time).

I’m feeling a little meh as well, frankly, I like the potential but I’m not sure I understand where the real profit levers are likely to be in the business, particularly since they mostly haven’t really started to get pulled yet, and I’m not thrilled that Circle has gone through some big strategic shifts since founding (though that may not be fair, if your idea fails you have to pivot somewhere), so I haven’t been able to talk myself into a $5 billion valuation… as always, I’ll let our dear Irregulars know if I change my mind and buy the shares.

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glbcpa1
Member
July 29, 2021 10:05 pm

Don’t frett, the US Gov’t will take charge with the “Reset”. Soon The US Constitution states Article I Section 8 “Congress shall have the power to coin-mint money and determine the value thereof”. US Gov’t will soon implement US Digital dollar and render all other cryptocurrencies moot and demised (in the crypt). Do you disagree? NG To the average man, it was seen as salvation…
Yet, overnight, FDR’s plan did something radically different…

It allowed the Treasury to pay for all his pet programs — from Social Security to the Tennessee Valley Authority and the Civilian Conservation Corps — by making a massive change to the dollar.

Image
At the time, our currency was backed by gold. And coins, like these, were popular.

Image
But with this single act, the government forced Americans to turn in their gold savings.

In fact, the Federal Reserve Bank in New York snatched more than $30 million – worth almost $600 million in today’s dollars – in just one fateful day.

Each one-ounce coin was swapped for $20.67 in paper money. Failure to comply would result in a massive $10,000 fine – or jail time.

And once the government had its hand on the gold?

It changed the price to $35 an ounce… effectively stealing 69% of Americans’ savings.

Do you see a pattern here?

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glbcpa1
Member
July 30, 2021 1:52 pm

I trade the Bitc and Eth Equities but do not see them as an investment for any duration. I do not pretend to be an investment pundit. I simply read and do the DD (Due Diligence) and as a CPA I can read a balance sheet, cash flows, Footnotes, etc. A balance sheet is a reflection of past and current. It is not a guaranteed road map of perfection to the future, But it is the best contemporary thing if the figures are true. Your last paragraph down to the last “BUT”, is a good summary of the occurrences and or coming occurrences.
I believe the Fed Gov’t will reset the $ to digits and cash is gone. The US Gov’t will not relinquish its control and power to control currency. James A Garfield said; whoever controls the money supply of a nation controls the nation. They will never give that up. As far as confiscations, you will live to see the US Gov’t in the next few years reach in (confiscate) and take a 15-25% portion of all retirement accounts. Dire debt times will bring dire actions. Everyone has opinions, those are some of mine.

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Sean
Guest
Sean
August 3, 2021 3:40 am
Reply to  glbcpa1

The end game is to cancel ALL debt…..only way they can do that is by seizing ALL land rights……so you would then lease the land your house sits on……it’s also designed to destroy wealth……

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provman999
Member
provman999
July 30, 2021 4:29 am

The collateral that backs these stablecoins is the subject of major contention at present by regulators. The issuers of these stablecoins have not been very transparent about the assets that back these dollar pegged tokens.

Just recently 3 of the Largest issuers USDT (Tether), USDC (Circle) and BUSD (Paxos) have recently revealed the assets that back their coins and all 3 are by no means backed by actual dollars.

Guy at Coin Bureau which is one of the most respected authorities in the cryptocurrency space just yesterday published a very enlightening video which goes into great detail about these coins and is well worth watching.

Take the time to watch the following as it may influence your views:

https://www.youtube.com/watch?v=TxcTDNHSS-U

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capgain&time
Member
capgain&time
July 30, 2021 7:57 am

The optimism about crypto as an asset has been out to the moon. Nice to see a company with some practical ideas, and a series of recognized actions untoward it, to make transactions all free and universal. Ok, I’m sold on this one. I want to buy 2 shares of Circle (CRCL) and sit on it – right now!

But, I’m still in a haze on how things work ( “just this one rare instance, I’m sure”) with these SPACs.
I just buy 2 CND “right now” and walk? Then I own – X shares? -2 shares? – on down the line? I hopes it’s that convenient tell you the truth. Or maybe asked this way: How many of CND do I buy right now to end up with at least 2 shares CRCL?

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editnowthanlater
Member
editnowthanlater
August 10, 2021 9:59 am
Reply to  capgain&time

Excuse me, the way to secure X shares of CRCL right now and not have to mess with it further?

It’s undoubtedly been touched on by Travis somewhere. I apologize in advance that I am a slow reader (compounding – yech), have some eyesight problems, and the steps are just not clear yet as to the question above.

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editnowthanlater
Member
editnowthanlater
August 10, 2021 1:24 pm

I was hoping it that simple. And thank you for your unsurpassed fundamental and company operations insights.

And if you’ve time:

1. A SPAC is never responsible for bringing more than 1 company to public? For some reason, when I first heard of these, I got thinking they bring 1 company public, turn around, then another, maybe juggle a few….

2. Say I’ve bought X CND now; what, worst case, might it cost me if the deal is not consummated?

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Jim Salvarakis
Guest
Jim Salvarakis
July 30, 2021 1:49 pm

Question! If the Feds can ban American citizens from owning Gold, can’t they just as easily ban us from owning Cryptos (Bitcoin et. al.). I have read numerous articles recently that Cryptos can’t be regulated because they are decentralized. While that is true, what will prevent China, USA, Russia from banning ownership of Cryptos by their respective citizens? This seems to me to be a large risk factor for Cryptos.

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vinnie5j
vinnie5j
July 31, 2021 3:19 am

Travis, thanks for posting this.

I have been interested in the crypto space since 2013, and finally took the plunge in 2017. I have had great success with the crypto space. I know there are naysayers, but the entire blockchain industry is just a little over 10 years old. I am sure the horseshoe industry hated the first automobile; and the Model T was no Ferrari. This space is new, but I believe it is the future. Now how well it can stay decentralized without the manipulation of power brokers will remain to be seen. The beauty of crypto is that no country owns it, and I think that if they try to make it illegal, it will just create a black market for cryptos. Regulate the internet – hello VPN. Shut off the power … not likely.

On another note, TradeStation Crypto is offering 8% APR for staking USDC – not horrible!

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taubie
August 1, 2021 2:17 pm

How exactly does one go about trading in a warrant for a share of the stock? Can this be done via an online broker or is this strictly between the company and the warrant holder (after the newly created company actually comes into existence)? In other words, how complicated is the process? BTW, thanks for all you do, Travis!

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Izzill
Irregular
August 20, 2021 11:37 pm

I think XRP

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nu2game
nu2game
August 24, 2021 10:42 am

Travis: Thanks for your informative postings. I ‘m interested in your take on the reset. Receiving dire warning from numerous offshoots of the 90’s Oxford Club. Long since cancelled all subscriptions, but still getting scare tactical notices. Will the reset actually replace the dollar with the global reserve currency currently being hyped. Spoke with my rep at Schwab a few weeks back, who knew nothing about it . Can anyone elucidate. Thanks

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lalgulab12
October 9, 2021 12:51 pm

I should charge you all $2000 each for this free info I provide now. Get some Raidatech cloud coins now .

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