Circle: Performance 'Inflated', Major Channels 'Bite Back', Expanding Ecosystem is the Only Way Forward

Circle released its Q3 earnings report before the market opened on November 4. Overall, this performance was mainly driven by the sales revenue from Arc tokens, which exceeded expectations. However, excluding this part, the actual performance was average, confirming concerns about funding prior to the earnings report.

Specifically:

1. Reserve Interest Income Declines as Expected

Q3 reserve interest income was $660 million, in line with expectations. Despite an 8% year-on-year increase in USDC market capitalization, interest income decreased by 8% due to a decline in interest rates. On a quarter-on-quarter basis, the average circulation of USDC in Q3 was $73.3 billion, a decrease of 4% compared to Q2.

2. Arc Token Sales Confirmed Faster than Expected

Other income in Q3 was over $200 million, with $180 million confirmed from Arc token sales, surpassing market expectations (estimated at $90 million) and the original annual guidance of $180 million.

However, this income is not stable or sustainable and is more akin to one-time revenue. Based on the unchanged annual guidance for other income of $310-330 million, it is expected that there will be no such income in Q4. The two rounds of presales this year totaled $224 million, and after confirming $180 million in Q3, only $40 million will be confirmed next year.

This Arc token presale attracted significant institutional funding. However, it essentially represents a "share subscription" for the future earnings of the Arc public chain asset, but Circle records it as deferred revenue and then recognizes it as income according to the development progress of Arc chain products.

The share subscription amount equals revenue, which is inherently strange and does not provide a reliable outlook. Unless there is continuous token "financing," this is a one-time income that lacks stable and sustainable business characteristics.

True sustainable income will not materialize until 2027, coming from transaction fees, staking income, and fees from the CPN payment network. The ARC presale merely realizes part of the future value in advance.

3. Major Channels 'Bite Back', Increasing Pressure on Interest Sharing

Since the Arc token sales have virtually zero cost, the $180 million is equivalent to pure profit, leading to an "inflated" profit for Q3. If purified, the real profit trend is downward—due to reduced income and relatively rigid expenses, the GAAP operating profit margin dropped by 1 percentage point to 3.9% compared to Q2.

However, Q3 performance also reflected an optimization trend in expenses due to layoffs. Nearly half of Circle's expenses are personnel salaries, so adjusted operating expenses (excluding severance compensation) decreased by 5% quarter-on-quarter, reflecting a 5% reduction in staff during the quarter.

It is worth mentioning that starting from Q3, the profit side will gradually reflect the impact of Hyperliquid's interest sharing. A rough calculation suggests that for Circle, the direct loss of gross profit each year is nearly $100 million, with significant impacts expected to start appearing as early as Q4 due to the revenue fluctuation pressure caused by channel resistance:

Hyperliquid is the largest on-chain perpetual contract exchange, operating its own public chain. Users trading on it must first deposit USDC as collateral, resulting in a substantial amount of USDC being held on the platform, approximately $6 billion. For Circle, this is one of the few large USDC liquidity pools outside of exchanges.

In the midst of different stakeholders pulling on the CLARITY Act, starting in September, Hyperliquid required Circle to return the reserve interest corresponding to USDC. However, Circle has a pre-existing revenue-sharing agreement with Coinbase—Coinbase retains 100% of the interest on USDC held on its platform, while for USDC held outside of Coinbase and Circle, Coinbase takes 50%.

Therefore, to meet Hyperliquid's interest return requirements, Circle must go through Coinbase. The result of this is:

(1) Hyperliquid retrieves the vast majority of the interest (estimated at 90%);

(2) Coinbase and Circle each lose 50% of the interest share, while gaining this additional 90% of USDC held on the platform (AUC), with Circle retaining 10%;

Currently, the total amount of USDC in the Hyperliquid ecosystem is $6.3 billion, with a reserve interest income calculated at 3.5%, amounting to $228 million annually, of which Hyperliquid will take 90%, or $200 million. The remaining interest of less than $30 million will be split between Coinbase and Circle.

In other words, the originally confirmable $228 million interest income and $100 million gross profit (after deducting issuance costs and the originally agreed 50% share to Coinbase) ultimately results in only $10 million in gross profit.

Q3 gross margin was 52.4%, and after excluding the pure profit of $180 million from Arc token sales, the gross margin drops to 39.5%, showing some impact compared to Q2.

Meanwhile, USDC's share in Coinbase rapidly increased to 30%, but the share of revenue from this in Circle's revenue-sharing costs quickly dropped to 35%, further confirming the impact of Hyperliquid's "resistance".

4. Key Indicators Overview

Dolphin's Viewpoint

The Q3 performance merely reflects the "inflation" caused by differences in confirmation rhythm, thus failing to bring any real surprises.

In terms of guidance, both revenue and profit remain unchanged. The RLDC profit margin (revenue minus distribution costs, similar to gross margin) is expected to remain around 42% for the year, suggesting that Q4 gross margin may drop to over 30%, indicating a further deepening of the impact from Hyperliquid.

However, the Hyperliquid incident was disclosed in September and its impact is quantifiable, so the market has likely already priced it in. The risk point lies in whether a second Hyperliquid will emerge in the future.

In addition, competition among stablecoins is also intensifying. USDC's advantages mainly lie in its collateralization with U.S. Treasury bonds and high compliance, while being strongly tied to Coinbase, the major centralized digital currency exchange in the U.S.

However, the dynamics of the game among financial institutions are also changing. With USDC's relationship with Binance strengthening—Binance invested $100 million in Circle's equity, expanding and renewing their strategic partnership.

Although the cooperation with Binance mainly targets emerging markets, it inevitably creates subtle effects on the relationship with Coinbase. The Open USD alliance coin, launched by Coinbase and several traditional financial payment chain players, also went live on September 30.

However, Dolphin believes that aside from USDT, USDC still has significant advantages over alliance coins, which may struggle to form effective synergy due to too many stakeholders. In contrast, other financial institutions' constraints on Circle are more likely to come from risks and impacts brought by channel giants like Hyperliquid demanding interest returns.

Therefore, although management remains optimistic about the long-term guidance for the expansion of USDC circulation (CAGR of 40%), in the short to medium term, it will still rely on the prosperity of the Crypto market (the main scenario for USDC) and USDC's ability to break through competition.

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