How does Circle make money from the surge in stablecoins?

"The first stock of stablecoins" $Circle(CRCL.US)$ Since its listing on June 5 of this year, the stock price has soared continuously. Especially with the passage of the "GENIUS Act," Circle's stock price has significantly increased, rising nearly seven times over 11 trading days. In addition, ARK recently reported that stablecoins will become one of the most important strategic assets of the U.S. government in the next 5-10 years, and the stablecoin market is expected to experience exponential growth, with supply potentially increasing 5-10 times in the next five years.

So, $Circle(CRCL.US)$ how much room for imagination is there, and is it worth long-term attention from investors? This week's opportunity speed post is here to share.

Understand stablecoins in 1 minute

Before understanding Circle, it is necessary to be familiar with what stablecoins are. Why do we need stablecoins?

Stablecoins, as a special type of virtual currency, typically peg to fiat currencies (such as USD, EUR) or physical assets (such as Gold), maintaining a fixed Exchange Rate of 1:1 with the pegged asset, for example, 1 USDC ≈ 1 USD (fluctuation < 0.5%), and each stablecoin is backed by equivalent reserves (such as cash, U.S. Treasury bonds, etc.).

Essentially, stablecoins are Cryptos that peg the value of traditional assets, initially serving as a medium of exchange for native Cryptos like Bitcoin, and later gradually becoming important payment tools for cross-border trade due to the characteristics of blockchain. The uses of stablecoins can be broadly categorized into three types:

1. Cryptos as a general equivalent: Serving as a bridge between fiat currency and digital assets, early cryptos lacked fiat channels, and USDT issued by Tether became the main trading currency for BTC.

2. Payment tools for cross-border trade: Stablecoins facilitate faster payments at lower costs, making them increasingly popular.

3. Alternative currencies in inflationary regions: In high-inflation countries like Argentina, Nigeria, and Turkey, stablecoins are used as a dollar reserve tool to avoid risks of currency depreciation.

Currently, stablecoins pegged to dollar assets have become mainstream in the global market, with USDT (issued by Tether) and USDC (issued by Circle) holding over 90% market share, nearly monopolizing the stablecoin market. As of June 20, USDT reached a scale of 155.9 billion USD, while USDC reached 61.237 billion USD.

As the world's second-largest stablecoin company, what is Circle's business model and growth potential?

How does Circle make money?

Historical background

Circle is a fintech company headquartered in Boston, USA, co-founded in 2013 by Jeremy Allaire (current CEO) and Sean Neville. The company initially positioned itself as a Bitcoin exchange operator and collaborated with Coinbase in 2018 to launch the stablecoin USDC, transforming into a stablecoin issuer.

At the current stage, USDC has become the second largest stablecoin globally, with a market share of 29% and a total circulation of 61.2 billion. It is also the largest regulated stablecoin. Currently, millions of users are using USDC for payment and settlement, and as a means of storing value as a digital dollar.

Revenue Model

In the stablecoin Industry Chain, there are several important roles, including issuers, exchanges, public chain infrastructure, regulatory agencies, users, and asset custodians.

As a stablecoin issuer, Circle's core business is the issuance of USDC, reserve management, and compliance operation. Its partner Coinbase provides exchange resources, markets USDC, and offers user base and liquidity support. In other words, a portion of the money Circle earns is shared with the exchange Coinbase, with the specific distribution depending on the agreement between the two.

How does Circle make money? The logic of earning with stablecoins differs from that of typical cryptocurrencies, as stablecoins must be pegged 1:1 with fiat currency, leaving no possibility for price appreciation. Therefore, Circle's revenue mainly comes from reserve interest, which is the interest income earned from USDC reserve assets. According to the prospectus data, nearly 99% of Circle's revenue from 2022 to 2024 comes from reserve income.

Since the exchange rate of USDC to USD is 1:1, for every 1 dollar of USDC purchased by users, Circle receives 1 dollar in reserves. Circle then invests this money in high liquidity, low-risk assets, such as purchasing U.S. Treasury bonds, to earn interest.

This sounds like a business with guaranteed profits. However, the premise is that USDC must be widely adopted, which can bring Circle a larger scale of reserves, and the interest rates on U.S. Treasury bonds need to be attractive enough. For example, during the interest rate hike cycle in the U.S. over the past few years, Circle benefited from this.

Market Outlook

The article begins by mentioning that ARK believes stablecoins will become one of the most important strategic assets for the U.S. government in the next 5-10 years. What are the reasons behind this?

In the past 15 years, the proportion of U.S. Treasury bonds held by foreigners has been rapidly declining, coupled with geopolitical pressures and changes in the situation, including the trade tariffs imposed by the Trump administration, this proportion is likely to continue to decrease. Furthermore, the Federal Reserve is currently committed to a quantitative tightening policy and is unlikely to become a major buyer of U.S. debt. Therefore, ARK believes that stablecoin issuers like Circle and Tether, which hold large amounts of dollar reserves, are most likely to become significant investors in U.S. Treasury bonds.

As shown in the chart below, the scale of U.S. Treasury bonds held by Circle and Tether has now reached 18th place, second only to South Korea but surpassing Germany. At the current issuance rate of stablecoins, by the end of the year, they may exceed four or five other countries.

Additionally, in ARK's "Big Ideas 2025" investment report (course learning > >Cathie Wood's Technology Treasure Map) it is mentioned that by 2030, the total supply of stablecoins is expected to reach 1.4 trillion dollars. If Circle and Tether maintain their current market share and allocation in U.S. Treasury bonds, the estimated total will exceed 660 billion dollars, close to China's current holding of 772 billion.

In the recently passed "GENIUS Act", it is also required that stablecoin reserves are backed by dollars and U.S. Treasury bonds. This means that as long as stablecoins are pegged to the dollar, users around the world purchasing stablecoins is approximately equivalent to buying dollars. This not only reinforces the dollar's status as a pricing currency but also creates sufficient demand for short-term U.S. debt, indirectly solidifying the financial strength of the United States.

Therefore, the assertion that stablecoins have become a strategic tool for the U.S. is highly likely to be true. This is, of course, a good thing for stablecoin issuers like Circle.

Risk Analysis

In terms of market share, Circle is currently ranked second globally, but its older sibling Tether has a market share of 62%, leaving little room for Circle to catch up. However, Circle has its own unique advantages, namely: it is licensed and meets regulatory requirements. Therefore, USDC far exceeds Tether's USDT in terms of compliance, transparency, and redemption mechanisms. Although privately operated Tether is flexible, it is difficult to gain equal capital endorsement and trust from Institutions.

In terms of revenue structure, as mentioned in the previous analysis, Circle's revenue sources are quite singular, with almost 99% of its income coming from interest earned on stablecoin reserves. This means it is highly sensitive to interest rates and extremely dependent on the Federal Reserve's rate levels. If interest rates decline, it will directly lead to a drop in the company's profits.

Additionally, Circle's distribution and trading costs are quite high. From 2022 to 2024, the proportion of revenue shared with the Exchange Coinbase has been rising, from 32% to 54%, and this distribution cost has eroded most of Circle's profits. If Circle wants to improve its net profit margin in the future, it either needs to adjust the profit-sharing agreement or find ways to diversify its revenue sources.

In summary

In summary, the investment opportunities in the stablecoin market are promising. As a leader in compliant stablecoins, Circle is also one of the biggest beneficiaries at present. In the future, it will be important to focus on whether Circle can continue to expand its market share and improve its dependency on channels, as these are likely to become significant factors influencing stock prices.

In addition to Circle, there are many other related Industry Chain companies worth paying attention to. Previously, Futu News has already compiled this information, so it will not be repeated here. More detailed information can be found in the image below >>>