Circle stock price has crashed in the past few months, moving from a high of $298 in June to $113 today. CRCL is now hovering at its lowest level since June, while its market cap has dropped to $25 billion. This article explores how the Federal Reserve cuts will affect Circle.
Fed Cuts Will Impact Circle Internet
Circle Internet is the second-biggest player in the stablecoin industry after Tether. This is an industry that most analysts expect will have strong growth, especially after Donald Trump signed the GENIUS Act.
Circle’s business resembles that of a bank, but with a major limitation. In a bank, customers deposit funds, which it then monetizes through loans to individuals, companies, and governments.
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In Circle, customers change their fiat for USD Coin (USDC), a stablecoin. The limitation is that, by law, the company can only invest in short-term government bonds. These bonds are highly affected by the benchmark interest rates.
Therefore, if the Federal Reserve cuts rates, there is a likelihood that its business will be affected. Indeed, short-term bond yields have been on a freefall, with the two-year being at 3.5% and the ten-year at 4.05%.
This performance has happened as investors predict that the Fed will cut rates by either 0.25% or 0.50% next week. Most analysts expect more cuts next year when Trump replaces the Fed Chair.
Lower interest rates mean that Circle Internet will make less money in this period. This is similar to how banks normally generate a low net interest margin in periods of low rates.
However, the company can also benefit from low rates as they would draw more people to risky assets like cryptocurrency. Indeed, data shows that the total USDC supply has jumped to $72 billion from $35 billion last year.
A higher USDC supply would help to offset the impact of rate cuts to some extent.
For example, assuming rates at 4% and a total USDC supply of $72 billion, it means that its annual revenue would be about $2.88 billion. If rates fall to 1% and its assets jump to $150 billion, its interest income would be $1.5 billion.
Circle Stock in Case of Fed Cut
Therefore, there is a likelihood that the Circle stock price will drop when the Fed starts cutting interest rates, as investors predict weak earnings going forward.
However, there is also a possibility of a short-term rebound when the rate cut starts as they have already been priced in. Indeed, the chart above shows that it has formed a falling wedge pattern, which normally leads to more upside.
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