Coinbase’s Q2 earnings point to shrinking USDC margins for Circle, Mizuho says

On the heels of Coinbase releasing second-quarter earnings, Mizuho Securities analysts have reaffirmed their belief that USDC issuer Circle's shares will eventually decline. That's because they believe the stablecoin issuer that recently went public will likely continue to face shrinking margins amid rising distribution costs.

The analysts estimate Circle earned about $625 million in total interest income from USDC reserves in the second quarter, with $332.5 million paid to Coinbase.

"Given that Circle is growing distribution partnerships in addition to Coinbase, this could suggest further pressure on Circle's net reserve income margins as payouts ramp at other distribution partners" like Binance, Mizuho analysts wrote Friday in a note to clients. 

Mizuho expressing a bearish outlook for Circle Internet Group — which had its initial public offering debut on the New York Stock Exchange to tremendous success — is not new. Earlier this month, Mizuho initiated coverage on Circle’s stock with an "underperform" rating and an $85 price target. Circle is currently trading at roughly $170 per share.

USDC, with a total supply of over $63 billion, is the world's second-largest U.S. dollar-pegged stablecoin behind Tether's USDT.

New legislation means more competition

"While USDC...has gained momentum recently, we do not believe Circle's valuation appropriately reflects key risks to the earnings over the medium-term," the analysts said. "Risks include: looming interest rate cuts, relatively stagnant USDC circulation, & structurally high (and growing) distribution costs."

The analysts also believe that soon, thanks in part to the passing of the GENIUS Act, which has provided regulatory clarity across the digital assets sector, competition among USD-pegged stablecoins will heat up. Both JPMorgan Chase and Bank of America are poised to issue stablecoins of their own.

Coinbase and Circle's history

In April, in its IPO prospectus, Circle revealed that in 2023 it acquired "the remaining outstanding 50% equity interest in Centre Consortium" from Coinbase for $210 million worth of shares.

Centre Consortium was a joint venture initially responsible for issuing USDC. Coinbase and Circle were partners in the JV.

Coinbase shares fell more than 16% on Friday, while Circle shares fell about 6%, according to The Block's price data.

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