Economic analysis by investor Omar at Dragonfly indicates potential significant losses for Circle if interest rates decrease by 1%.
Impact of Interest Rates on Circle's Income
Omar warns that a 100 basis point rate cut could lead to an annual revenue decrease of $618 million for Circle, representing a 23% drop from current figures. Gross profit would also fall by $303 million (30%), resulting in a 3.3-point margin shrinkage, potentially increasing the company's valuation from 42 to 60.4 times its annual gross profit.
Circle's Market Adaptation
Circle derives much of its income from interest on reserves backing USDC. High interest rates yield more income, but Omar emphasizes that rate cuts are inevitable, which will sharply reduce earnings. To offset these declines, USDC supply would need to grow by $28 billion, or about 44% more than the current $64 billion in circulation.
Circle's New Products to Increase Revenue
In response to potential losses, Circle announced an approximately $1.5 billion share sale. This capital will allow the company to invest in new revenue streams. Circle is developing products such as CPN and Circle Chain aimed at generating income from payments and on-chain activities, reducing reliance on reserve interest. This mirrors strategies by other fintech firms adapting to shifting economic cycles.
The analysis indicates that interest rate reductions could significantly impact Circle's financial performance. In light of this, the company is developing new products to mitigate these effects and enhance profitability.
