A deep dive into Circle: What's the game plan now that Poloniex has been axed?

Over the course of the last year, Circle has been selling itself to investors and potential acquirers. 

But it's not clear where the strength of their business lies. And that lack of clarity only became more apparent last week after the firm announced it was severing ties with Poloniex, the cryptocurrency exchange it allegedly acquired for $400 million in February 2018. The development, although not entirely surprising, raises questions about the firm's future and what the exact plan forward will be. 

Poloniex has been struggling for years to capture more market share. Since Circle acquired the firm in February 2018, its market share of total traded volume globally has fallen from 5.2% to a paltry 1.2% in September 2019. To be fair, the decline of Poloniex began long before its acquisition by Circle in the Spring of 2018 — soon after the exchange implemented new KYC requirements. At its peak, Poloniex commanded a strong 58.1% of the market.

The story doesn't end with Poloniex. Even as market pundits proclaimed Circle was building a cryptocurrency "empire," The Block reported in February its shares were being offered at a massive discount on the private market.

Since then, it has sunsetted its payments app — Circle Pay — and has witnessed a mass exodus of talent from its once-mighty over-the-counter cryptocurrency trading desk. Things have been quiet out of SeedInvest. 

It is also not clear if Circle was successful in raising an additional $150 million in a fundraising round this year. Sources tell The Block the firm has been shopping itself around, including to cryptocurrency exchange Coinbase. 

Even its research product, Circle Research, appears to be dead in the water. The main employee working on the project, Ria Bhutoria, recently left Circle to join Fidelity Digital Assets. 

Firm-wide, the company in May laid off 10% of its staff. One source said that further layoffs are imminent. 

A spokesperson for Circle declined to make CEO Jeremy Allaire available for an in-person interview. 

Where's the silver lining?

Circle's OTC trading business has historically been its core. In 2018, it "handled over $24 billion in notional volumes across 1,000 counterparties" — that's more than the volumes seen on most cryptocurrency exchanges.

It's not clear what those numbers look like for 2019, although one source described the situation at Circle Trade as "business as usual." A spokesperson told The Block such data would not be made public until January.

Still, considering the backdrop of the OTC market and the fact that several people have left the company's trading business, it is a relatively safe bet to suggest that 2019 is not going to be as strong as 2018. On the whole, fees in the OTC market continue to compress, shrinking the profit opportunity for firms like Circle. One market observer estimates fees have compressed by as much as 80% over last year. 

"OTC market is more and more competitive," the person said. "I'd be shocked if their volume is 50% of last year's."

In August, Circle Trade's head Dan Matuszewski resigned from his position. Paul Martin, Chris Hermida, and Ryan Salame are among the other exits from the unit this year. Meanwhile, Beatrice O'Carroll and YinFeng Shao left the company to start their own desk, Reciprocity Trading. 

A source says five employees remain at Circle Trade. The unit is led by Nick Gustafson, who previously worked at Kraken. 

What's Circle's game plan?

It doesn't appear that Circle Trade is the growth engine it once was. So then what is the core business for Circle now that Poloniex is out of the picture?  

With zero staff, Circle Research is out of the picture. Circle Invest, which allows folks to buy baskets of cryptos with the click of a button, doesn't fit the bill. Using ratings as a relatively good proxy for number of users — you can estimate that Coinbase's app has ~300x the downloads of Circle Invest on iOS.

Then, there's SeedInvest — Circle's broker-dealer. The long term plan for the business, which helps certain types of investors put money into startups raising via private offerings, is to explore tokenization, as Allaire said in March. However, with security tokens unable to generate substantial traction in both 2018 and 2019, it's unclear exactly how or when the plan will take off. 

Circle's website, which appears to have been revamped in June, suggests new businesses Circle might soon break into, including custody and lending. 

Don't forget USDC

Lastly, there's USDC — the stablecoin pioneered by Circle in partnership with Coinbase. 

Since launch, it has seen its issued supply gradually increase. At last check, it was a few million dollars shy of hitting $500 million — a far cry from rival Tether, but larger than other stablecoins including TrueUSD, PAX and Gemini dollar.

Still, its success until this point has not necessarily translated into meaningful profits. 

Circle makes money off the USD it receives in exchange for the USDC it issues. An executive at a rival stablecoin firm estimated that Circle could make anywhere from 1.8 to 2.9% on the cash pile, depending on the instruments they invest in. 

"If you want to get higher, it's too risky, you have to invest in non-liquid instruments that have higher return but you onboard more risk," the person said. At most, Circle is bringing in a couple million from USDC — which is pretty insignificant for a firm valued at over $3 billion during its last public fundraise.

Bull case

So what's the bull case for Circle? There is a chance it might have something up its sleeve. If its website is any indication, it could soon roll out lending and custody services, which could serve as a buoy to OTC. 

Lending proved to be a successful venture for rival Genesis Global Trading, which has originated hundreds of millions of dollars worth of loans since it launched the business in 2018.

Relinquishing Poloniex could prove to be a smart business move in the long run. Without the sunk cost, Circle can focus on building out new businesses, such as a potential $100 million venture fund – which would scour SeedInvest's platform for the best investment ideas.