Circle's Reserve Income Surges on USDC Growth, Yet Overvaluation and Rate Risks Persist

What happened

Circle Internet Group reported a 60% year-over-year increase in reserve income for Q3 2025, driven by rising USDC adoption that nearly doubled circulation to $73.7 billion. This growth contributed to total revenue of $740 million, as highlighted in the DeepValue report, which notes USDC's recovery to record levels post-2023 depeg. However, 96% of revenue still comes from interest on reserves, making earnings acutely sensitive to Federal Reserve rate cuts anticipated in 2026. Despite the adoption momentum, Circle's valuation at 69x EV/EBITDA already prices in sustained high USDC growth and only gradual rate easing, leaving minimal margin of safety. Moreover, heavy revenue-sharing with partners like Coinbase and ongoing insider selling underscore financial vulnerabilities that the growth alone cannot mitigate.

Implication

The reserve income surge confirms USDC's adoption strength but does not resolve Circle's core investment risks, with earnings still 95%+ tied to interest spreads vulnerable to Fed cuts. High valuation multiples assume flawless execution of USDC expansion and stable rates, scenarios that face increasing uncertainty from competitive and regulatory pressures. Revenue diversification from Arc and CPN remains embryonic, guided to only $90-100 million for FY25, far from offsetting reserve income dependence. Insider selling and aggressive stock-based compensation further erode per-share value, signaling alignment issues at current prices. Therefore, the DeepValue report's WAIT rating is justified, suggesting better entry points or clearer evidence of durable fee-based monetization are needed before considering a position.

Thesis delta

The Q3 2025 reserve income growth reinforces USDC's adoption trajectory but does not materially shift the investment thesis. Circle's earnings power remains heavily dependent on interest rates and USDC balances, with valuation already reflecting optimistic scenarios. Until non-reserve revenue scales beyond token levels or the stock prices in more conservative assumptions, the thesis of overvaluation and high risk remains unchanged.