JP Morgan Warns Hyperliquid's Growth Poses Risks to Circle's USDC Economics

JP Morgan has flagged potential risks to Circle's USDC stablecoin economics due to a recent agreement with Hyperliquid, a fast-growing trading platform. The deal is seen as a near-term headwind for both Circle and Coinbase, with JP Morgan describing it as a "prisoner's dilemma" that encourages both entities to compete for the distribution of USDC at potentially harmful costs to their respective revenue.

Analysts at JP Morgan, led by Kenneth Worthington, adjusted earnings forecasts for both Circle Internet (CRCL) and Coinbase (COIN) as a result of the partnership with Hyperliquid. This arrangement allows Coinbase to classify USDC transactions on Hyperliquid as "on-platform," which leads to Coinbase receiving income generated from reserves and redistributing 90% of that to Hyperliquid. Previously, this revenue was split more evenly between the two firms, signaling a shift in their financial dynamics.

Hyperliquid now controls about $6 billion of USDC, approximately 8% of the stablecoin's circulating supply, and has emerged as one of the largest trading venues in the crypto space, processing over $150 billion in trading volume in July alone. The increased market presence of Hyperliquid further complicates the competitive landscape for Circle as well as its partners.

The report indicates that the newfound competition could adversely affect earnings for Circle and Coinbase in an already challenging environment, characterized by falling trading volumes and declining asset prices within the crypto market. JP Morgan's analysis suggests that these pressures may hinder Circle's ability to maintain its revenue from USDC in the longer term.

Moreover, USDC's circulating supply has recently decreased from nearly $80 billion to about $73 billion since March, reflecting a broader contraction in the stablecoin market. Factors contributing to this decline include reduced trading activity and emerging competitive regulated entrants that threaten the dominance of USDC and its main competitor, Tether's USDT.

Despite these challenges, JP Morgan expressed some optimism regarding potential support for USDC revenue stemming from expected higher interest rates, potentially cushioning the overall impact on Circle's earnings related to USDC.