Cryptocurrency startup Circle may see the upside of the Federal Reserve’s long-awaited interest rate hike announcement yesterday. Indeed, Circle is behind the popular stablecoin USDC Coin (USDC-USD). And the company could dramatically increase its value in the face of higher interest rates.
So what’s going on with Circle and USDC lately?
Well, Circle may end up one of the big, and few, winners of the Fed’s rate hike. USDC is a stablecoin tied to the value of the U.S. dollar. As such, when an investor purchases USDC, Circle invests the cash into a portfolio that maintains the crypto’s convertibility with the U.S. dollar. USDC has surged in popularity the past six months, alongside Circle’s valuation. Currently, Circle manages the equivalent of roughly $53 billion in USDC.
Circle earns a yield on its portfolio, a yield that will likely rise in line with interest rates. As you might imagine, the Fed’s hike yesterday could translate into substantial gains for Circle. In fact, Circle expects to raise an additional $2.3 billion in interest income over the next two years. This figure is based on interest rate futures and the predicted circulation of USDC in 2023.
However, there’s more to Circle’s story.
USDC Coin Set to Send Circle’s Value Soaring Alongside Advisory Fee
Circle, which is set to go public via a merger with special purpose acquisition company (SPAC) Concord Acquisition (NYSE:CND), continues to battle with its rapidly changing valuation. In 2019 Circle hired investment bank FT Partners to help raise funds for the company. As a part of their agreement, FT may be entitled to a 9% advisory fee for the impending merger. This would effectively result in a more than $800 million cut, given Circle’s $9 billion valuation.
Circle has disputed the scope of the fee and neglected to mention FT as an adviser in its deal with Concord. However, FT has stated that its engagement letter entitles the company to the agreed upon 9% transaction value. FT is somewhat infamous in the world of investment banking, both for its ability to gain sky-high valuations for its customers and its equally exorbitant advisory fees.
Should Circle end up coughing up the $800 million, it would be the highest advisory fee in Wall Street history, five times higher than the current recordholder.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
