Arthur Hayes, the co-founder and former CEO of BitMEX, has recently cast doubt on the valuation and market prospects of Circle, the issuer behind the USDC stablecoin.
Hayes, known for his critical insights on the cryptocurrency market, argued that Circle’s business model cannot compete with Tether, the dominant player in the stablecoin sector. His comments came shortly after Circle’s Initial Public Offering and debut on the New York Stock Exchange, which generated significant buzz and raised questions about the future of stablecoins and their issuers.
At the core of Hayes' critique is Circle’s reliance on Coinbase, one of the largest cryptocurrency exchanges in the world, to distribute its USDC stablecoin. In contrast, Tether, which has consistently led the stablecoin market, benefits from a broad, independent distribution network. Hayes points out that Tether’s early adoption in crypto markets, combined with its integration into major exchanges, gave it the leverage to move digital dollars efficiently across global markets without relying on external entities.
Hayes emphasizes that Circle’s success is largely tethered to its partnership with Coinbase. According to him, for Circle to distribute USDC at scale, it must depend on Coinbase’s platform, which limits its potential growth. “If you stop reading here, the only question you must ask yourself when evaluating an investment in a stablecoin issuer is this: how will they distribute their product?” Hayes said.
He further claims that Circle must share approximately 50% of its interest income with Coinbase in exchange for access to the exchange's distribution network. This arrangement, Hayes argues, significantly reduces Circle’s profitability compared to Tether, which has the advantage of operating without having to pay for its distribution channels.
This business model, Hayes contends, makes Circle’s future in the stablecoin space uncertain. While many investors are betting on Circle’s potential dominance, especially after its successful IPO, Hayes believes that the company's reliance on a single exchange for distribution limits its long-term sustainability.
Circle’s IPO: Hype or Real Value?
Hayes also expressed skepticism about the valuation of Circle following its IPO. The debut of Circle on the NYSE has led to a surge in interest, but Hayes suggests that this hype-driven momentum could be masking underlying issues with the company’s business model.
“The price will continue levitating,” he predicts. “The bubble will pop after the launch of a stablecoin issuer on a public market, most likely in the US, that separates fools from tens of billions of capital.”
This view aligns with Hayes' broader belief that, despite the current market enthusiasm, Circle’s business model cannot compete with Tether’s dominance. While Circle's IPO raised $1.1 billion, Hayes points to the differences in their operational scale and distribution strategy as a reason for his cautious outlook.
According to Yahoo Finance, Circle’s stock (CRCL) was trading at $147.45 in after-hours trading at the time of writing, but Hayes warns that the price may be inflated due to speculative hype. Investors seem to be buying into the idea that Circle's USDC stablecoin could rival Tether’s USDT, but Hayes remains unconvinced, urging caution.
The IPO has undoubtedly made Circle more prominent in the eyes of the mainstream financial sector, but the company's reliance on Coinbase as its distribution partner remains a potential Achilles' heel. In Hayes' view, this dependency weakens Circle's position in the stablecoin market, especially when compared to Tether's independence.
Challenges for New Stablecoin Issuers
Looking beyond Circle, Hayes also highlighted the increasing difficulties that new stablecoin issuers face. With major exchanges like Binance, Coinbase, and Kraken already having partnerships with existing stablecoin issuers like Tether and Circle, Hayes believes the entry barriers for new players are effectively becoming insurmountable.
He also pointed out that traditional financial institutions and Web2 platforms, including banks and social media companies, are positioning themselves to issue stablecoins, further consolidating the market.
“Stablecoin issuers must use the pipes of a crypto exchange, a Web2 social media goliath, or a legacy bank,” Hayes argued. He also noted that any new stablecoin issuer without these established partnerships would struggle to gain traction, reinforcing the idea that the market is becoming increasingly closed off to newcomers.
Tether, with its lean team of fewer than 100 employees, has been able to scale rapidly and perform critical functions for the global banking system, according to Hayes. In contrast, even global financial institutions such as JPMorgan Chase, with over 300,000 employees, are finding it challenging to replicate Tether's success.
Despite the robust infrastructure that Tether has built over the years, Hayes admits that the company operates within a relatively small team, which makes its success even more impressive. This reality poses a significant challenge for Circle and any new entrants looking to challenge Tether's dominance in the stablecoin market.
A Shift Toward Centralized Institutions?
Hayes also predicts that in the near future, more stablecoin issuers will be forced to align themselves with centralized institutions or platforms. He suggests that social media platforms and banks are likely to issue their own stablecoins, which could further concentrate the market in the hands of a few dominant players. The idea that these entities will control stablecoins adds another layer of complexity to the evolving regulatory environment.
The Bank of America’s recent plans to launch a stablecoin, for example, signals that large banks are moving quickly to establish their presence in the digital asset space. As traditional financial institutions and tech giants explore the benefits of stablecoins, the landscape for new entrants becomes even more competitive.
Despite his concerns, Hayes advises against shorting Circle’s stock, citing continued market hype and potential upside from speculative investors. "Should you short Circle? ABSOLUTELY NOT!" Hayes says, recognizing that even with the inherent weaknesses in Circle’s business model, the ongoing hype surrounding stablecoin IPOs may continue to push the stock price higher.
Instead, Hayes suggests that those who believe in Circle's potential should consider investing in Coinbase (COIN), as the firm has a much more diversified business model and could benefit significantly from Circle’s IPO and continued stablecoin growth.
Final thoughts
The future of Circle and other stablecoin issuers remains uncertain. While the industry is growing rapidly, it is also becoming more concentrated, with dominant players like Tether and large institutional players like banks and social media platforms controlling a large portion of the market.
Circle’s IPO has brought the company into the mainstream, but Arthur Hayes remains skeptical about its long-term viability due to its reliance on Coinbase for distribution. As the stablecoin market matures, new entrants may struggle to break into the space, and competition from established players will only increase.
In the coming months, the focus will likely shift toward regulatory developments and the role of stablecoins in the broader financial ecosystem. The ongoing conversations about stablecoin regulation, particularly in the U.S., will play a significant role in shaping the future of this market.