JPMorgan Warns Hyperliquid Deal Could Crush Circle and Coinbase Profits

JPMorgan (JPM) has lowered its forecasts for Circle Internet (CRCL) and Coinbase (COIN), warning that their revamped agreement with Hyperliquid weakens the economics of Circle's USDC and poses a bigger long-term threat to the stablecoin issuer.

The Prisoner's Dilemma

The bank said the deal created a "prisoner's dilemma," incentivizing stablecoin issuer Circle and crypto exchange Coinbase to compete for distribution of the dollar-pegged token at the expense of each other's economics.

Hyperliquid, now one of the largest crypto trading venues, holds about $6 billion of USDC, or roughly 8% of the circulating supply, JPMorgan estimated.

"We think the change in the Hyperliquid relationship showcases the challenge for Circle and Coinbase partnership agreements because it can create 'a prisoner's dilemma' that drive Coinbase and Circle to compete with each other when promoting USDC distribution," analysts led by Kenneth Worthington said in the Tuesday report.

Hyperliquid's Growing Dominance

Hyperliquid is one of crypto's fastest-growing trading venues and the leading decentralized perpetual futures exchange. The platform processed more than $150 billion in trading volume in July alone, while its volume relative to Binance climbed to 11.5%, underscoring its growing share of the derivatives market. USDC balances on Hyperliquid have swelled to roughly $6 billion, making it an increasingly important distribution channel for the stablecoin.

The New Deal Structure

Under the new arrangement, Coinbase will classify USDC on Hyperliquid as "on-platform," collecting the income generated by reserves and paying 90% of it to Hyperliquid. JPMorgan estimated Coinbase previously split nearly all of the revenue evenly with Circle.

The bank cut earnings estimates for both companies, citing the Hyperliquid agreement and weaker crypto markets, though it expects higher interest rates to provide some support for USDC-related revenue over the longer term.

USDC's Broader Struggles

USDC has also lost momentum in recent months. Its circulating supply has fallen to about $73 billion from nearly $80 billion in March, part of a broader $10 billion contraction in the stablecoin market since May as crypto trading activity cooled and new regulated rivals chipped away at the dominance of USDC and Tether's USDT.

Japanese investment bank Mizuho said in a report last week that Circle's final approval from the U.S. Office of the Comptroller of the Currency to establish First National Digital Currency Bank is a positive milestone, but investors may be overestimating its significance.

Read more: Hyperliquid's USDC deal could supercharge HYPE, pressure Circle, Coinbase margins, analysts say