Foreword

There is a group of companies that profit when the world situation worsens. Defense contractors, oil majors, gold mining companies. These are obvious examples of companies whose business models are built on instability and priced into it.

Circle was not supposed to fall into this category. Its token value is always fixed at $1, and this is by design. Stability is at the core of its products. Yet Circle's stock price has soared from $49.90 on February 5 to about $123 today, more than doubling in just five weeks. Meanwhile, the overall cryptocurrency market remains 44% below its October peak.

As the world becomes increasingly volatile, a company whose products are designed to keep prices stable has become one of the hottest deals in the market.

I want to explain how it works, why it's more interesting than it looks, and what it tells us about the difference between the essence of Circle and what the market is currently paying for.

What is a Circle (of course, we will come back to this later)

Put aside the branding, payment concepts and infrastructure construction, and you will find the essence of Circle: it holds US Treasury bonds. Every USDC dollar in circulation is backed by one dollar of short-term government bonds. The interest on these bonds goes to Circle. That accounts for roughly 90% of the company's revenue each quarter. Its business model is actually not complicated: Circle is a money market fund that issues stablecoins.

This means there is only one key factor in Circle's revenue, and that's the federal funds rate. When interest rates are high, Treasury yields are high, and Circle can earn more for every USDC issued. When interest rates are low, income is reduced. Everything else is secondary.

Here's a look at the sequence of events that led to a 150% rebound from February's lows.

The conflict with Iran has pushed oil prices up about 35% since February 28. Oil prices above $100 imply inflation concerns, and inflation concerns mean the Fed would be seen as reckless if it cut interest rates. There is virtually no doubt that interest rates will remain unchanged on March 18. Even before the war broke out, CME's FedWatch had shown a greater than 90% chance of no change in interest rates. What the war really affects is the market pattern throughout the year. Before the conflict broke out, markets were expecting two rate cuts of 25 basis points each in 2026. After the conflict broke out, the number of interest rate cuts was reduced to one, not until after September at the earliest. The odds of no rate cut at all in 2026 have almost doubled. Circle's Treasury reserve yields continue to move higher as interest rates are set to remain high for an extended period of time. Higher yields mean more revenue. More revenue means higher stock prices. A war breaks out, and one stablecoin issuer benefits from it. This was completely beyond everyone's expectations.

For context, the pessimistic forecast that Circle shares fell to $49 in February was essentially a bet on a rate cut. The market expects the Federal Reserve to cut interest rates multiple times in 2026, which will directly squeeze Circle's reserve income. Rough estimate: At the current USDC supply of $79 billion, each 25 basis point rate cut would reduce Circle’s annualized revenue by $40 million to $60 million. Two rate cuts will reduce its revenue by nearly $100 million by the end of the year. However, the war changed this expectation overnight. This is not because the Circle itself has changed, but because the macroeconomic context that was thought to weaken the argument no longer applies.

How extrusion begins

While the interest rate story kept shares high, the initial burst of gains came from positioning.

About 17.8% of Circle’s outstanding shares were shorted ahead of its fourth-quarter earnings report on February 25. Hedge funds established large short positions. Their logic is that interest rates will eventually fall, reserve income will decrease, and the company has no minimum income guarantee that is independent of interest rates. From a fundamental perspective, this argument seems to make sense. Later, Circle reported earnings of $0.43 per share, beating the consensus estimate of $0.16. Revenue was $770 million, above estimates of $749 million. On-chain USDC trading volume approached $12 trillion in the quarter, a year-over-year increase of 247%. Short positions are closed. Shares soared 35% in one session. 10x Research estimates that hedge funds lost around $500 million on short positions in one day. Subsequently, the short war intensified, continuing the positive results brought by the earnings report.

Coinbase Issues

Here’s the part that didn’t make it into the rally narrative.

Circle's net income in 2025 will be a loss of $70 million, not a profit. Fourth-quarter results were excellent, but the full year was underwhelming. To understand why, you need to understand the Coinbase protocol, which is the most important yet most overlooked key to Circle’s business.

When USDC initially launched in 2018, Circle and Coinbase formed a joint consortium to govern it. The alliance disbanded in 2023, with Circle taking full control of the issuance of USDC. However, Coinbase retains a portion of the revenue share.

Coinbase takes 100% of the revenue from the USDC reserves held on its platform and splits everything else 50/50 with Circle. This arrangement sends $908 million of Circle's total distribution costs of $1.01 billion directly to Coinbase in 2024. Roughly 54 cents of every dollar made by Circle goes to a company that doesn’t issue tokens or handle reserves. By early 2025, Coinbase held 22% of the total USDC supply, up from 5% in 2022. The more USDC grows on the Coinbase platform, the more Circle will make.

The agreement automatically renews every three years and Circle cannot unilaterally withdraw. The outcome of the next renegotiation will have a direct impact on Circle's profit margins. In the fourth quarter of 2025, distribution costs alone were as high as $461 million, a year-over-year increase of 52%. The full-year net loss of $70 million was due in part to a one-time post-IPO equity compensation charge of $424 million, which made the paper loss worse than the actual business situation. But Circle's core business still faces structural cost issues that no rate environment can fully resolve.

The market is pricing Circle as infrastructure. And the income statement shows that it is a rates trading company, but has high distribution costs. These two views can be true at the same time, but the pricing methods are different. Currently, the market is paying for the best versions of both perspectives.

What makes this more than just a macro deal?

USDC supply recently reached an all-time high of $79 billion, while the overall cryptocurrency market is down 44% from its October peak. This departure deserves our attention. Speculative assets typically fall when markets decline. The reason USDC continues to grow is because people are using it to move money rather than holding it as a speculative vehicle. Demand for USDC surged in the Middle East during the Iran conflict precisely because the traditional banking system became unreliable. When normal payment channels were disrupted, people used USDC for remittances and cross-border transfers. This is how payments infrastructure behaves under stress: usage increases, not decreases.

Transaction data also confirms this. In February alone, USDC’s adjusted trading volume reached approximately $1.26 trillion, while USDT’s trading volume was $514 billion during the same period. While Tether still has a market capitalization of $184 billion, USDC’s market capitalization is only $79 billion. From the perspective of total supply, there is a huge gap between the two. But now USDC’s trading volume has surpassed USDT.

Dormant supply and active settlement are two different concepts. The former refers to where people keep their funds, and the latter refers to what people use when they need to transfer value.

Druckenmiller made some illuminating remarks this week. In an interview with Morgan Stanley recorded on January 30 and previously published, he said he expected global payment systems to be run on stablecoins within the next 10 to 15 years, calling cryptocurrencies “a solution in search of a problem.” Today’s most authoritative macro investor sharply divides the cryptocurrency space in two: stablecoins are inevitable infrastructure, while everything else is still looking for a reason to exist. This argument is the rationale behind the bullish sentiment on cryptocurrencies.

Infrastructure Bet

Tokenized assets have grown from approximately $1.5 billion in early 2023 to approximately $26.5 billion today. Many of these products, including BlackRock’s tokenized Treasury fund BUIDL (which currently holds over $2 billion in assets), rely on USDC for subscription, redemption and settlement processing. Prediction markets will handle over $22 billion in transaction volume in 2025, primarily settled in USDC. Polymarket alone. Visa now supports more than 130 stablecoin-linked cards across 50 countries, with annualized settlement volume of approximately $4.6 billion.

Tokenized assets have grown from approximately $1.5 billion in early 2023 to approximately $26.5 billion today. Many such products, including BlackRock’s tokenized treasury fund BUIDL, which currently has over $2 billion in assets, rely on USDC for subscriptions, redemptions and settlements. Prediction markets will have a trading volume of over $22 billion in 2025, with the majority settled in USDC. Polymarket alone has achieved this goal. Visa currently supports more than 130 stablecoin-bound cards in 50 countries, with annualized settlement volume of approximately $4.6 billion.

Circle is also building the infrastructure underneath it all. The Circle payments network connects 55 financial institutions with $5.7 billion in annual transaction volume, enabling banks and payment providers to move USDC across borders and convert it directly into local currencies. Circle’s own Layer-1 blockchain, Arc, is designed to fully support the institutional layer. Its settlement infrastructure does not rely on Ethereum or Solana. While Ethereum and Solana are not currently large enough to impact revenue, they are both strategic investments for the future to account for the possibility of lower interest rates in the future.

Although the amount of the AI layer is small, its structure is quite meaningful. Data released in March by Circle's head of global marketing showed that AI agents had completed 140 million payments totaling $43 million in the past nine months. 98.6% of these transactions were settled in USDC, with the average transaction amount being $0.31. More than 400,000 AI agents currently have purchasing power. Although the amount is still small, the direction of development cannot be ignored. If AI agents need to pay each other for computation, data access, and API calls with extremely high frequency and in extremely low amounts (less than $0.25), then they need a payment method that can be settled instantly and at zero cost. Circle launched Nanopayments for exactly this purpose. Nanopayments offers gas-free USDC transfers as low as $0.000001, with transactions packaged off-chain and settled in batches. The testnet currently supports 12 blockchains including Arbitrum, Base and Ethereum.

That's what the market is currently paying $123 per share for Circle. The company is at the heart of tokenized finance, AI agent commerce, cross-border payments and prediction markets, and will benefit from the regulatory benefits of the GENIUS Act and the potential passage of the CLARITY Act before the summer. Bernstein has a $190 price target, Clear Street has a $136 price target, and Seaport Global, Wall Street's top favorite on Circle, has a $280 price target.

Lingering tension

Here, I want to be candid about something bullish views tend to miss.

Circle's profitability depends on a high interest rate environment. But this is not a long-term solution. The Fed will eventually cut interest rates. By then, the yield on the government bonds supporting USDC will fall, and Circle’s interest income will also decrease.

Circle knows this. It has been expanding into businesses such as transaction fees, enterprise services, payment networks and Arc. The operation of these businesses does not depend on the interest rate environment. But these revenues are currently minimal. Reserve income remains key.

So you have these two situations sitting on the same share price, but they are not the same investment.

The infrastructure argument is that USDC is becoming a true payment conduit. It is regulated, transparent and increasingly integrated into the traditional financial system, and its influence is not affected by interest rate fluctuations. This argument is supported by data such as trading volumes, institutional consolidation, Druckenmiller’s comments, and Macquarie’s reference to stablecoins as a foundational layer of global financial infrastructure. If this argument is correct, Circle's valuation appears low regardless of the interest rate environment because its addressable market spans the entire global payments system.

The interest rate trade thesis is that Circle is a company that is betting on higher rates over the long term, and its stock price has priced in the expectation that the Fed will no longer cut rates significantly. If this thesis is a driver of stock prices, then every percentage point of eventual Fed rate cuts would be a headwind, and the stock is already trading above levels supported by fundamentals at normal rates.

Both views are reflected in the price. The war makes it difficult for the market to determine which side it is leaning towards.

Perhaps the most important thing to know about CRCL right now is not whether it can rise to $190, but whether you are investing in infrastructure or in a more self-promoting alternative to Treasury yields. The former is good for long-term holding, while the latter will expire the moment Jerome Powell changes his mind.

So far, this war has allowed both to survive. The price of oil played a key role, but the company's real value lies somewhere in the white space between the two scenarios: It had figured out how to create an internet currency denominated in U.S. dollars, but now had to figure out how to survive when U.S. dollar yields no longer reached 5%.