"Stablecoin leader" Circle: The higher the interest rates, the better the returns? Not entirely true.

At the moment when the leading stablecoin Circle just went public and its market value skyrocketed to 22 billion US dollars, a seemingly contradictory investment logic is quietly emerging: Although Circle mainly relies on reserve fund income in a high-interest rate environment, the explosive growth potential of its future valuation may rely precisely on the Fed's interest rate cuts. Circle officially went public on Thursday local time, with an offering price of $31 per share. Currently, it has risen sharply and closed at around $110 on Friday. According to the prospectus listing the number of Class A and B common shares, the company's market value is close to 22 billion US dollars, with a P/E ratio of over 125 times. For many investors, traditional valuation indicators are almost meaningless. In their eyes, Circle is not a new type of bank, but a bet on future possibilities. Cryptocurrency supporters generally believe that stablecoins - digital tokens representing the fixed value of traditional currencies (such as the US dollar or euro) - could become a key component of the daily financial system, such as for consumer payments. The paradox of interest rates and income Circle's core business model is simple: users deposit fiat currency to exchange for USDC stablecoins, and the company mainly invests these funds in government money market funds and bank deposits to earn income. By 2024, Circle's reserve fund size increased from 22 billion US dollars in 2023 to over 37 billion US dollars, with an average yield rising from 4.89% to 5.09%. In the past year, Circle's total reserve income was close to 1.7 billion US dollars. At first glance, high interest rates seem favorable for Circle. However, some analysts point out that a low interest rate environment may be more favorable for the company's long-term development for two reasons: USDC circulation growth can easily offset lower yields: In the first quarter of this year, despite the average reserve rate of return dropping from 5.13% to 4.16%, reserve income still increased from around 360 million US dollars last year to 558 million US dollars by 2025. This is because the USDC circulation increased from 32 billion US dollars to about 60 billion US dollars. Low yields drive users to seek higher returns: When returns on holding cash (whether in digital form or bank deposits) are low, people tend to seek higher returns and are more willing to spend. This may encourage more usage scenarios for cryptocurrencies and stablecoins. In short, in the current market atmosphere filled with expectations for stablecoins, the true value of Circle may not lie in short-term reserve income, but in its potential to achieve exponential user base expansion in a low interest rate environment. Distribution costs and key to future growth Reserve income does not directly Circle's profits. In 2024, the company paid over 60% of its reserve income as distribution and transaction costs, including payments to Coinbase - which collaborates with Circle to launch USDC and help expand its attractiveness and usability. As Circle reduces its dependence on Coinbase or other partners, it may reduce distribution costs. In its IPO prospectus, Circle stated: "If the proportion of USDC held on the Coinbase platform continues to increase in the future, our distribution costs may grow faster than reserve income growth." As more USDC exists outside of Coinbase, Circle will be able to retain a higher proportion of reserve income, which may offset the decline in reserve yield. Circle is also increasing revenue sources beyond reserve income, including new products related to stablecoin liquidity and other trading services. These other revenues accounted for about 3.6% of total revenue in the first quarter of 2025, up from about 1.5% a year ago. At Circle's current valuation level, expanding the USDC user base should be investors' top priority, especially as many other issuers are also trying to take advantage of the Trump administration's current friendly attitude towards cryptocurrencies (especially stablecoins). This article is translated from "Wall Street News" by author Bu Shuqing; GMTEight editor: Liu Xuan.