Stablecoins, Interest Rates, and the Circle Conundrum
As stablecoins surge into the mainstream, Circle’s IPO raises an important question: Is this the future of finance—or a yield-dependent house of cards?
The Rise of Stablecoins
Stablecoins are no longer a fringe financial concept. Once confined to crypto-native trading platforms, they’re now being explored by household names like Amazon and Walmart as a potential backbone for faster, cheaper, and more transparent money movement. Stripe is acquiring infrastructure players. USDC is integrated into global payment flows. And with a highly publicized IPO from Circle, the stablecoin story is center stage.
But as institutional interest grows, a more fundamental question emerges: how do stablecoin businesses make money?
Circle and the USDC Opportunity
Circle, the issuer of USDC (currently the second-largest stablecoin by market cap), has long positioned itself as the most compliant, transparent, and institutionally aligned player in the space. Their June IPO priced at $31/share and has since surged to over $160—a 400%+ gain in under two weeks. That puts their market capitalization north of $35 billion.
Investors are clearly excited. But what are they buying into?
Despite the excitement around digital dollars and crypto payment rails, Circle’s business is relatively simple: they earn interest on the U.S. dollar reserves backing USDC. In 2024, around 99% of Circle’s $1.68 billion in revenue came from interest income on T-bills and other short-duration securities held to collateralize their token.
That means Circle is, for now, essentially a yield-harvesting platform—not a technology company monetizing transaction flows or charging subscription fees.
The Interest Rate Problem
This yield-focused model worked spectacularly during a period of historically high interest rates. But now, the Federal Reserve is signaling a change. Markets are currently pricing in 3 to 4 rate cuts over the next 12 months, likely moving short-term rates from 5.5% closer to 4% or below.
According to analyst estimates, each 25bps cut would reduce Circle’s EBITDA by approximately $100 million. That implies a potential $300–400 million drop in earnings if rate cuts materialize as expected. With 99% of revenue rate-dependent, Circle is extraordinarily exposed to macro shifts.
The Growth Offset Dilemma
To maintain flat earnings in the face of falling rates, Circle needs to dramatically grow the supply of USDC in circulation. Each 25bps rate cut requires roughly a 10% increase in total USDC reserves to offset lost yield.
That’s a tall order. Competition from other stablecoins like PayPal USD and Tether is heating up. Regulatory uncertainty still clouds the market. And while adoption is growing, it’s not clear it will accelerate at the pace needed to support Circle’s lofty valuation.
What Investors Are Betting On
At a valuation near 183x earnings, the market is clearly optimistic. Investors are implicitly assuming:
· Interest rates remain higher for longer
· USDC adoption accelerates
· Circle builds a diversified revenue base beyond yield
But those are large assumptions. Especially for a company whose financial performance is currently tied almost exclusively to a single macro variable.
Final Thoughts
At Kirra Capital, we’re excited about the long-term potential of stablecoins. We believe they represent a foundational shift in how money can move globally—faster, cheaper, and more openly. We love fintech and payments and think stablecoins are an exciting technology.
But we’ve yet to find the right investment that shows clear promise of building an exceptional, durable business around this innovation.
Circle’s IPO is a fascinating milestone. But whether it becomes the next great fintech story or simply a beneficiary of a temporary rate environment remains to be seen.