JPMorgan Warns Hyperliquid's Growth Poses Risk to Circle's USDC

Partnership Dynamics Could Threaten USDC Profitability

JPMorgan has voiced concerns that the recent collaboration between Hyperliquid, Circle, and Coinbase may jeopardize the profitability of Circle's USDC stablecoin. The bank's analysis suggests that this partnership could create a competitive environment, likened to a "prisoner's dilemma," where both Circle and Coinbase compete for the distribution of USDC, thereby undermining their financial outcomes.

According to JPMorgan, Hyperliquid, a rapidly growing crypto trading platform, now manages around $6 billion in USDC, which represents approximately 8% of the total circulating supply. This growth in Hyperliquid's influence is significant, especially after it processed over $150 billion in trading volume in July alone, increasing its market share relative to Binance to 11.5%.

JPMorgan has revised its earnings forecasts for both Circle and Coinbase due to the implications of their partnership with Hyperliquid and the overall decline in crypto trading volumes and asset values. Analysts led by Kenneth Worthington highlighted that the changes in their relationship could lead to increased competition between Circle and Coinbase over USDC distribution, affecting their profitability.

With the new agreement, Coinbase will categorize USDC on Hyperliquid as "on-platform," which allows it to retain earnings from reserves while remitting 90% of revenue to Hyperliquid. This is a shift from earlier estimates where revenue was shared more evenly with Circle.

The stablecoin market is currently experiencing a downturn, with USDC's circulating supply dropping from nearly $80 billion in March to around $73 billion. This decline is part of a broader reduction of $10 billion across the stablecoin sector since May, driven by decreased trading activity and the emergence of new regulated competitors.

Despite these challenges, JPMorgan anticipates that higher interest rates may eventually bolster USDC-related revenues in the future. Additionally, recent developments, such as Circle's potential approval from the U.S. Office of the Comptroller of the Currency to establish the First National Digital Currency Bank, have been viewed as positive, though some investors may be overestimating its significance.