Circle: Dismal Market? Stablecoin's First Stock Still Expanding

Core Viewpoint

1. Ecological Layout: Still the old script, crypto investment under pressure, new scenarios continue to be explored

(1) The average circulation value of USDC in the first quarter was 75.2 billion. After hitting a bottom in February, it slowly climbed to nearly 77 billion by the end of the quarter under adverse geopolitical conditions, a 2% increase quarter-on-quarter, similar to the previous quarter. The newly minted coins during this period amounted to 73 billion, a decrease compared to the previous quarter, affected by the bleak performance of cryptocurrency assets in Q1. However, excluding this impact, the minting scale remains high, reflecting the expansion of demand scenarios beyond cryptocurrency asset investment.

At the same time, the redemption amount reached 72 billion, with a faster year-on-year growth rate, reflecting that under pressure in the cryptocurrency market, some users are cashing out profits or turning to other interest-bearing products.

The proportion of USDT compared to USDC decreased in January, but quickly recovered in the following two months. Therefore, from a competitive standpoint, USDT still poses a significant competitive threat. After the Drift hacking incident in April, Circle faced negative public opinion, while Tether actively provided financial assistance to Drift, resulting in Circle losing customers.

Currently, we are still in the early stages of expanding the overall stablecoin market, so competition will not temporarily become a major factor affecting USDC's growth.

(2) Distribution within the USDC ecosystem: Circle's internal share further increased to 18%, with an average daily retention rate of 17.2%, rising from 6% over the past year. Meanwhile, the external sharing ratio of reserve interest income slightly decreased by 1 percentage point, with the potential for further optimization to enhance profitability. Coinbase accounted for nearly 25%, showing a trend of proactive retention compared to the previous quarter.

(3) By the end of the first quarter, the number of digital wallets (MeWs) holding more than $10 in cryptocurrency reached 7.2 million, with a net increase of 400,000 during the quarter, exceeding market expectations and reflecting growth in the platform's direct user connections.

(4) In terms of ecological expansion news, the first quarter mainly involved collaborations with Cash App, Polymarket, and Kyriba (platforms supporting native USDC transactions), while also promoting the scale of the Arc public chain and CPN transactions.

Overall, USDC's on-chain transactions in the first quarter reached $21.5 trillion, a year-on-year increase of 263%. The annualized transaction scale of CPN calculated in March was $8.3 billion, and in April, a new product, Managed Payments, was launched, allowing financial institutions to enable stablecoin payments without managing digital assets.

2. Income has highlights but is not as stunning as the previous quarter: Non-interest income performed better than expected but slowed quarter-on-quarter.

The aforementioned ecological expansion aimed at the B-end will also bring Circle income beyond reserve interest—accounted for in the "other income" category. Therefore, in addition to helping expand the USDC market, it also serves as a second curve for Circle to counter the pressure of growing reserve interest during the interest rate cut cycle.

In the first quarter, other income reached $42 million, although it still accounted for a small proportion (6%), it maintained double-digit growth against a rising base. However, from a trend perspective, the quarter-on-quarter growth rate of 13% slowed compared to 29% in the previous quarter, not as stunning as last quarter.

3. Gross Margin: Increased retention share, buffering sharing pressure

The market previously worried that while Circle expanded its ecosystem, it would also need to share reserve interest income with partners, and that Coinbase's financial report revealed an increase in its USDC share, thereby raising Circle's channel distribution costs and putting pressure on gross margins.

The actual situation is that Circle continues to alleviate cost growth pressure by increasing its self-held USDC share. The cost paid to Coinbase as a proportion of overall sharing costs is decreasing (from 97% to 75%). It should be noted that Coinbase has the greatest bargaining power in its cooperation with Circle, thus the sharing ratio of 50% is also the highest.

Additionally, most of the income from software, payments, and other infrastructure services in other income categories belongs to high-margin businesses. This quarter, the growth rate of other businesses was faster, and the contribution ratio of income also increased. Ultimately, the gross margin was 41.4%, improving by 130 basis points quarter-on-quarter.

4. Under rigid investment cycles, profits are under pressure: Operating profit declined significantly year-on-year, also due to the rigid investment cycle, where a large proportion of interest income is very sensitive to changes in profits once affected.

However, in the Q1 financial report, management maintained the guidance for FY 2026, keeping the adjusted operating expense range (570-585 million) unchanged, which is better than the market's higher investment expectations (725 million).

5. Future Growth: Guidance unchanged, short-term fluctuations remain cautious

(1) Regarding the outlook for USDC's multi-year scale growth, management in Q1 still maintains a multi-year CAGR growth expectation of 40%. However, like the previous quarter, Dolphin believes it is still necessary to remain cautious and not price immediately: due to significant market changes, this can be temporarily ignored. Based on last year's situation, this medium to long-term qualitative guidance does not necessarily mean that short-term targets will be met.

(2) Other income is also maintaining a revenue target of $150-170 million, with a year-on-year growth rate of 46%. If annualized directly based on Q1, it would be $167 million, just within the target range. However, Dolphin believes that with the effective advancement of the CLARITY Act, there is a high likelihood that this guidance will beat expectations.

6. Overview of Important Financial Indicators

Dolphin's Viewpoint

The performance in Q1 is similar to a "strengthened" version of last year's Q4—crypto asset trading sentiment has further cooled, but Circle has not stopped expanding into other scenarios, resulting in even greater short-term pressure on profits.

Although Coinbase and Circle belong to different segments of the industry chain, the impact on both parties is different when the cryptocurrency market is not performing well (Circle's impact is somewhat smaller), and there are also issues of profit sharing between them. However, in the short term, both are moving in the same direction in terms of trading rhythm.

Therefore, last quarter, under the pressure of cryptocurrency assets and unclear policy timelines, we focused on a safe bottom line price, while this quarter we are more inclined to pay attention to how much upward repair space remains. Currently, with a valuation of 28 billion, it corresponds to Dolphin's neutral expectation when first covering it last year (which can be traced back to "Coinbase vs Circle: The Symbiotic Strangulation in the Stablecoin Circle, Who Holds the Power?").

However, given the significant short-term fluctuations, we will estimate based on this year's performance outlook:

Assuming that in the remaining three quarters of this year, the cryptocurrency market stabilizes but may find it difficult to replicate last year's performance due to inflation and interest rate expectations, we expect the stablecoin scale to grow by 5% quarter-on-quarter (last year's QoQ growth in Q2 to Q3 was 12%), reaching $87 billion by the end of the year. Based on a constant federal interest rate of 3.5%, the total annual interest income would be $2.8 billion, and other income is expected to exceed the upper limit of the guidance of $170 million, totaling $3 billion in revenue, with a year-on-year growth rate of 9%.

With a gross margin of 42% and an adjusted operating expense midpoint of $580 million, the adjusted operating profit would be $680 million. Yesterday's closing price * ( locked content and detailed value analysis have been published in the Long Bridge App "Dynamics - Depth" column of the same name).

In summary, the current reasonable repair process of Circle has completed most of its journey. The opening of future space will depend on the expansion progress of stablecoins and USDC. In the short term, due to the effective advancement of the CLARITY Act, there is hope for some positive sentiment in the absence of more systemic risks in the macro environment, thus supporting the current valuation.

The following is a detailed analysis

I. Basic Business Framework of Circle

Circle is the issuer of the stablecoin USDC, with main income coming from: (1) interest on reserve assets, which is linked to the market circulation scale of USDC and treasury bond interest rates. (2) Other income, including providing Web3 software (SaaS subscriptions), CPN payments (charged based on payment amounts/number of transactions), and service fees or gas fees charged by the Arc public chain (charged per transaction).

To mitigate the impact of interest rate cuts, Circle is actively exploring other income items, with a major push in 2025 for CPN payments and Arc public chain business. Currently, other income has gradually approached 5%, and it is expected to accelerate growth and expand in scale.

In terms of expenditures, Circle's internal operating costs mainly consist of employee salaries, while external costs mainly include channel distribution and transaction costs, which account for 60% of revenue (most of which goes to Coinbase). After adding back depreciation and stock-based compensation, the EBITDA profit margin is around 20%, which is lower than most fintech platforms. Therefore, while expanding the ecosystem, the expected increase in sharing costs has also led to some concerns about Circle's short-term profitability.

From a medium to long-term perspective, the importance of ecological expansion is higher. Currently, USDC ranks second in the entire stablecoin market, with its advantage over the leader USDT being compliance. Once the CLARITY Act is implemented, USDC is expected to continue to demonstrate its "relative" advantages and attract more institutional capital.

II. USDC Ecosystem: Accelerating New Coin Issuance, Short-term Impact from Cryptocurrency Asset Pressure

In the first quarter, the average circulation scale of USDC was 75.2 billion, a quarter-on-quarter decrease, but it climbed to 77 billion by the end of the quarter, a 2% quarter-on-quarter increase. During this period, 73 billion coins were minted, and 72 billion were redeemed, with a noticeable slowdown in net issuance compared to the third quarter. According to Coinmarketcap, the circulation balance of USDC rapidly fell under panic selling in the cryptocurrency market in January, rebounding only in early February.

1. USDC External Market Share

In the overall stablecoin market, USDC's share remained stable at 28%. Compared to its most direct competitor USDT, USDC did not demonstrate a sustained competitive advantage.

2. USDC Internal Channel Competition

In terms of distribution across different channels, Circle's internal holding proportion continues to increase, reaching 18%.

Based on the Q1 financial report from Coinbase, its share of USDC circulation increased to 25%, showing a trend of proactive retention compared to the previous quarter.

Another core indicator reflecting ecological development—the number of effective digital wallets—by the end of the first quarter, the number of digital wallets (MeWs) holding more than $10 in cryptocurrency reached 7.2 million, with a net increase of 400,000, speculated to have continued to slow down due to pressure in the cryptocurrency market.

III. Other Income Continues to Exceed Expectations, but the Trend is Not Positive Enough

Since 95% of Circle's income comes from reserve asset interest income, which can be considered public data, the main source of expected discrepancies is other income, which continued to exceed expectations in the first quarter.

Specifically, other income mainly includes coin issuance income, trading, custody, Web3 API suite, tokenized fund USYC, and CPN fees (fixed access fees + settlement/audit fees charged per transaction, Arc chain gas fees, etc.) launched in April last year.

In the first quarter, other income was $42 million, with a quarter-on-quarter growth of 13%, which has slowed down and was not as stunning as the previous quarter. Meanwhile, the company maintains its guidance for this year's other income at $150-170 million, which does not appear too positive based on the quarter-on-quarter growth trend. Dolphin believes that if USDC expands normally, there should be a possibility of continued beating expectations.

The major income, which accounts for a large proportion, is affected by the pace of USDC expansion and the current treasury bond interest rate environment. In the first quarter, the average scale of USDC grew by 70% year-on-year, with interest rates declining to 3.5%, a year-on-year decrease of 64 basis points, resulting in a rapid slowdown in the growth rate of reserve interest income to 17%.

However, the subsequent expectations for interest rate cuts have basically dropped to zero, so if the scale continues to expand normally in the next three quarters (QoQ growth of over 5%), there is still hope to maintain a growth rate of 5-10% for the year under pressure from year-on-year interest rates.

IV. Under Rigid Investments, Profitability is Under Pressure

In the first quarter, the gross margin increased by 130 basis points quarter-on-quarter, reaching 41.4%. Circle continues to alleviate channel sharing growth pressure by increasing its self-held USDC share. Additionally, most of the income from software, payments, and other infrastructure services in other income categories belongs to high-margin businesses. This quarter, the growth rate of other businesses was faster, and the contribution ratio of income also increased.

Despite the pressure on revenue growth slowing in the first quarter, all expense revenues still maintained high growth, resulting in an adjusted EBITDA of $133 million, with a profit margin of 19.2%, improving by 50 basis points quarter-on-quarter.

The company maintains its guidance for total costs and operating expenses for 2026 (excluding SBC and depreciation) unchanged at 570-585 million, a year-on-year increase of 10%, which is lower than market expectations.