MW Circle's buzzy IPO was a big hit. Now comes the hard part.

By Frances Yue

Circle Internet Group Inc.'s debut as a public company this week was successful, in part because investors expect a friendlier regulatory backdrop to boost the growth of stablecoins - cryptocurrencies whose values are pegged to another asset, such as a fiat currency like the U.S. dollar or a commodity like gold.

But soon, Circle $(CRCL)$ may face the same problems as everyday savers of dollars, as the Federal Reserve is expected to resume cutting its key interest rate later this year - a move that could reduce the interest that companies and individuals receive on cash and cash-like investments.

Lower rates could put significant stress on Circle, since its main source of income has been the interest generated from cash holdings, according to Sean Farrell, head of digital-asset strategy at FundStrat.

"Looking forward, we see more scenarios that pressure the business [of Circle] at current pricing than scenarios that unlock significant upside," Farrell wrote in a Friday note.

Farrell made the comment as Circle's shares climbed 29% to close at $107.70 on Friday, after rocketing 168.5% in their public debut on Thursday. The stock has more than tripled its initial-public-offering price of $31 a share.

In terms of scope, Circle has become the world's second-largest stablecoin issuer - with its main product, USDC (USDCUSD), being a crypto token that is supposed to be pegged 1:1 to the U.S. dollar DXY. While USDC accounted for about 24% of the total stablecoin supply in the market as of Friday, it trails Tether's USDT (USDTUSD), which has more than a 60% share of the market.

Like many other stablecoin issuers, Circle's main revenue has come from the interest it generates through USDC reserves, or assets the company holds to back the stablecoin's value and secure its peg to the dollar. About 98% of Circle's 2024 revenue came from interest on USDC reserves, according to its S-1 filing with the U.S. Securities and Exchange Commission, dated May 27.

Of note, some 90% of Circle's reserve were held in its Circle Reserve Fund, a government money-market fund that holds a portfolio of short-dated U.S. Treasurys, overnight U.S. Treasury repurchase agreements and cash, while the rest of the reserves were held in cash at regulated U.S. financial institutions as of March 31, according to the filing.

With the benefit of elevated yields of short-dated U.S. Treasurys over the past few years, Circle generated $1.7 billion in reserve income in 2024 and $558 million in reserve income for the three months ended March 31 of this year, according to the S-1 filing. The three-month Treasury bill yield BX:TMUBMUSD03M, a proxy for the Fed's federal-funds rate, stood at 4.34% on Friday, a historically elevated level since the financial crisis in 2008.

However, if the Fed resumes cutting its key policy rate, each 25-basis-point reduction could trim Circle's earnings before interest, taxes and amortization, or Ebita, by roughly $100 million, based on Fundstrat's estimates.

That may be concerning, as traders on Friday were pricing in a 91.7% chance of at least one rate cut this year, while seeing up to four cuts possible in 2025, according to data from the CME FedWatch Tool.

Circle's business would need to grow substantially to offset any reduction in margin from lower rates, Farrell said. Fundstrat's analysis showed that every 25-basis-point cut in the policy rate would require over 10% growth in either the overall size of the stablecoin market or Circle's market share to keep its earnings steady, he noted.

To be sure, Farrell said he expects the stablecoin market to grow significantly in the next decade. The U.S. Senate is expected to soon vote on a new bill, known as the GENIUS ACT, that aims to regulate stablecoins. Should the bill become law, crypto bulls see potential for it to drive wider adoption of dollar-linked stablecoins.

However, Circle is not the biggest player in the space and growth in stablecoins may not directly translate to the expansion of the company's business.

Read: New crypto bill could turbocharge the stablecoin industry: 4 changes it might bring

In addition, Circle also faces the strain of an elevated distribution cost, according to Farrell. Roughly 60% of Circle's gross reserve income in 2014 was paid to partners such as crypto exchange Coinbase Global Inc. (COIN) for distributing and promoting USDC. Such costs have been weighing on Circle's margins, Farrell noted.

Furthermore, in a scenario where interest rates decline but stablecoin adoption grows, investors might lean toward nonstablecoin crypto assets and equities more directly tied to crypto prices, Farrell said. Such assets, often perceived as risky, might generate higher returns when the Fed cuts rates as investors look for yield in the market.

"The optimal backdrop for Circle is one where short-term rates stay elevated, while fiscal policy supports crypto demand," Farrell wrote.

-Frances Yue

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June 07, 2025 12:03 ET (16:03 GMT)

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