Circle’s Reliance on Coinbase Limits USDC’s Market Reach

BitMEX co-founder and former CEO Arthur Hayes says USDC stablecoin issuer Circle may be overvalued, relative to its industry peer, Tether (USDT).

The analysis and critique come barely weeks after Circle’s explosive Initial Public Offering (IPO) and NYSE debut, raising enquiries about which crypto firm would go public next.

Circle Cannot Match Tether’s Distribution Network, Hayes Says

The BitMEX executive argues that Circle faces significant challenges in the stablecoin market. He cites the firm’s business model as not as sustainable as many investors think.

One of Hayes’ criticisms against Circle revolves around the distribution network that powers Tether’s success.

Hayes highlights Tether’s dominance in the stablecoin space. He attributes this to its wide-reaching distribution channels, citing early adoption in the crypto capital markets.

Further, Hayes explains that Tether’s integration into major crypto exchanges fueled its success. More closely, it’s ability to move digital dollars across global markets.

In contrast, Circle lacks the same distribution capabilities. According to Hayes, for Circle to distribute USDC at scale, it has to rely heavily on the Coinbase exchange, with which it has a partnership.

“If you stop reading here, the only question you must ask yourself when evaluating an investment in a stablecoin issuer is this: how will they distribute their product?” Hayes notes.

Hayes claims that Circle has to share 50% of its interest income with Coinbase in exchange for access to its distribution network. This arrangement significantly reduces Circle’s profits compared to Tether, which does not have to pay for its distribution.

According to Hayes, many investors are betting on Circle’s eventual dominance of the stablecoin market, especially following its IPO.

The BitMEX co-founder says Circle’s IPO could begin a stablecoin bubble cycle. He predicts that Circle’s stock price might remain high due to market hype, despite the inherent flaws in its business model.

“The price will continue levitating… the bubble will pop after the launch of a stablecoin issuer on a public market, most likely in the US, that separates fools from tens of billions of capital,” read an excerpt in the blog.

Circle (CRCL) Stock Price Performance. Source: Yahoo Finance

Data from Yahoo Finance shows that Circle’s CRCL stock was trading at $147.45 in after-hours trading.

Tough Road Ahead for Prospective Stablecoin Issuers

Looking ahead, Hayes foresees challenges for new stablecoin issuers attempting to enter the market. He believes that the distribution channels for new entrants are now effectively closed. This comes as all the major exchanges either own or partner with existing stablecoin issuers like Tether and Circle.

Hayes proceeds to warn that social media platforms and banks are likely to create their own stablecoins, further limiting opportunities for new players. This aligns with reports of the Bank of America’s plans to launch a stablecoin.

“Stablecoin issuers must use the pipes of a crypto exchange, a Web2 social media goliath, or a legacy bank,” Hayes argues.

He notes that any new stablecoin issuer will struggle to gain traction in the market without these channels.

“Tether, with a staff of no more than 100 people, can leverage blockchain technology to scale and perform critical functions of the entire global banking system. In contrast, JPMorgan Chase, one of the best-run commercial banks globally, has a workforce of just over 300,000,” analyst Colin Wu stated, citing Hayes.

Despite his criticisms of Circle’s valuation, Hayes cautions against shorting the company. He expects the hype surrounding stablecoin IPOs to continue for the time being.

“Should you short Circle, ABSOLUTELY NOT! Maybe if you believe the Circle/Coinbase ratio is off, you should buy Coinbase,” he says.

This analysis highlights the challenges issuers face in the competitive stablecoin market, with growing entry barriers for prospective new players.