Circle Internet Soars; BNPL FinTechs Rally as Recession Fades

June 9, 2025 | Premium Service | With the IPO of Circle Internet (CRCL) last week, financial innovation in America took another giant leap forward. Investors in CRCL have the opportunity (but not certainty) to participate in a remarkable business. People who want to create their own payments system may buy “stable coins,” exchanging fiat currency for a worthless token. CRCL then takes the cash and invests it, retaining the spread and also charging fees for users to create their very own coin ecosystems.  Will global retail funnels like Amazon (AMZN) and Alibaba Group Holding Limited (BABA) eventually spawn coins to limit competition?

We’re tempted to set up a CRCL account with some of our offshore friends just to check out the “know your customer” (KYC) protocols used by CRCL. The CRCL token is “pegged” to the dollar, which is a remarkable commentary on a new payments mechanism that is supposed to help you escape the broken world of fiat dollars. But if you don't peg a "stable coin" to the dollar, will anyone care? Stable yen? Russian rubles? No, too much volatility.

We have always appreciated the speculative potential in bitcoin, ether and other movable tokens, but a “stable coin” issued by an unregulated nonbank strikes us as a truly amazing and innovative way to lose money. FTX and many other examples of coin-based frauds speak loudly to the need for caution, but the rush into stable coins is not informed by past concerns. 

As put most succinctly by Friedrich Nietzsche (1844-1900): “Madness is rare in the individual—but with groups, parties, peoples, and ages it is the rule.” John Chancellor, in perhaps the most important economic commentary ever published in The New York Review of Books, observed that:

"More accurate historical accounts of speculative manias and advances in the psychology of decision-making have failed to produce any noticeable improvement in financial behavior. On the contrary, over the past quarter-century, we have witnessed a succession of speculative bubbles, from dot-com stocks to the current craze for new technologies such as electric vehicles and cryptocurrencies."

Political volatility is another coin risk. Donald Trump Jr. last week seemed to be distancing himself from his father’s meme coin — while defending the family’s broader foray into crypto as a response to being frozen out of the traditional banking system. “I wasn’t involved in the meme coin,” Trump Jr. said in an interview on CNBC’s “Squawk Box.” “I’m more focused on the stablecoin, the bitcoin mining.”

The key to all of these coins is who is holding the fiat cash. Last week, when Trump Jr. made it sound like he was taking his wallet and walking away from the Trump meme coin project, the result was decidedly negative in the infant market for $WLFI tokens. The very ground shook underneath POTUS, we are told.

Eric Trump — who helps run World Liberty Financial alongside Trump Jr. — then made a perfect pirouette and announced late Friday that the Trump token had “aligned” with the company, The Hill reported, and would no longer being moving forward with a separate crypto wallet.

Readers of The IRA with unrealized profits in $WLFI might want to think about taking their money off the table. This is a game you want to play with House money. More generally, some observers worry that the stable coin fad is somehow a threat to the dollar and other non convertible paper currencies, but unless we see stable coins accepting non-dollar payments, the net net in terms of aggregate liquidity seems to be zero. 

All coins are a zero sum game. You win when a greater fool looses. After all, CRCL has your cash, you have their play money, and they invest the fiat proceeds into income producing, risk-free assets, which must eventually be kept with a bank. Who has got the money and how quicky can you exit the particular coin back into fiat dollars seem to be the only two questions that matter.

The custodian of your fiat should avoid taking any short-term market losses on risk-free "collateral" to avoid spooking the sheep. Remember just how fast cash ran out of Silicon Valley Bank? In the bad old days in Mexico, currency runs took weeks to reach crisis proportions because bank tellers counted very, very slowly. And if your coin sponsor uses unrated offshore banks as "custodians" for your cash, run, don't walk, to the nearest exit.

CRCL was up 30% in trading on Friday, but that does not mean that the stable coin party will continue next week. In terms of the rest of our finance company surveillance group, which we discuss below for our Premium Service subscribers, CRCL is not even close to the top performers – yet.  

Many of these stocks, good and bad, have a crypto component. But frankly if given a choice, we’d probably prefer to hold the CRCL common than the stable coin it sponsors. Right? Better to be a taker than a giver of rent in this ethereal marketplace. And since the barrier to entry is obviously low or no load, with a proliferation of turnkey coin offerings as ubiquitous as Salesforce (CRM), be careful of transient valuations for coin sponsors.  

Fact is that locally sponsored wallets are growing quickly around the world, taking share from some of the more established fintechs like PayPal (PYPL), the large banks and the global card-based wallets. Even Apple (AAPL) and Google are fighting for share against local offerings. The proliferation of low- or no-cost coin systems is ultimately negative for established players in nonbank finance and payments, including the major card issuers, as we discuss below.  Still worried about interchange fees?

Last summer, names like RobinHood Holdings (HOOD) and Affirm Holdings (AFRM) were down in the dumps, but the election of President Donald Trump created a powerful updraft that pulled many of the “buy now pay later” stocks up by orders of magnitude. The lack of a broad based consumer recession has also contributed to the general upswell in interest in names that, a year ago, were near the bottom of our group in terms of market performance.  But not today, as shown on the table below.

Finance Surveillance Group

Source: Bloomberg (June 6, 2025)

We wrote about HOOD and Coinbase (COIN) last month. One big surprise has been Block (XYZ), which many had given up for dead but has come surging back on renewed buying interest. Perhaps trading off 80% from the all-time highs, which we enjoyed BTW, has finally made the stock compelling. We got into XYZ (f/k/a “Square”) when many equity managers discovered fintech during COVID and exited when the stock surged over $200.  Notice in the chart below that both COIN and XYZ appear to be dancing to the same tune.

Our basic concerns about the XYZ business remain, but seeing the stock up is positive for the sector. Fact is that XYZ has over 4 million sellers and processed over $228 billion in payments across 5.2 billion transactions in 2024, which still makes them one of the smaller players in payments. The proliferation of stable coins and other digital wallets that operate outside of traditional financial networks is a competitive threat to platforms like XYZ, but all are trying to gain operating and pricing leverage in the coin wave.

Spending by American Express (AXP) cardholders hit $1.55 trillion in 2024, a 6% increase over the $1.46 trillion in 2023. We own AXP and see them as a dominant player in the upper reaches of consumer credit vs the AFRM and Upstart (UPST), which are very deliberately catering to the lower quartile of consumer credit. The likely delta on the credit book of BNPL models is likely to be quite volatile and perhaps even surprising to the inhabitants of Wall Street, who as a group are as jaded as were market participants in the 1920s. The chart below shows the finance surveillance group by market capitalization, then sorted with the best 1 month returns starting from the left with CRCL and HOOD.

Source: Bloomberg (June 6, 2025)

Finally, we want to point out that the traditional managers such as Apollo Global Management (APO), Ares Management (ARES) and Blackstone (BX) are underperforming the crypto-charged finance group. The PE ratio on APO has doubled since last year, so perhaps the pace of value creation in the world of private credit has finally cooled. We remind our readers that returns available from public markets are typically superior to the returns offered in private equity and credit, with a lot less heartache and more liquidity.

For example, Blue Owl Capital (OBDC), one of the smaller alternative private credit managers in our finance group, just got wacked by a couple of defaults on its commercial real estate portfolio. "Two bankruptcies have sent occupancy tumbling at a 6.5M SF nationwide real estate portfolio owned by New York-based alternative investment manager Blue Owl Capital," reports BisNow.

"S&P Global downgraded the credit rating of three classes of debt on a $275M CMBS loan backing the 42-property retail, industrial and office portfolio after occupancy fell from 100% to a little more than 36%, the ratings firm said last week."

Managers with exposure to commercial and multifamily real estate portfolios stand a high risk of financial loss and also reputation damage in blue state markets such as New York, where more radical political candidates are talking about freezing rent to help inflation-battered consumers. These risks are largely idiosyncratic and asset-specific, but the fact that some of the larger managers of private strategies are lagging behind the group suggests that investors may be starting to discount these names to reflect these risks.

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