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