USDC’s Strategic Advantage in Stablecoins

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IN THIS WEEK’S NEWSLETTER:

📉 Better Than Expected CPI
📈 Coincidentally, The Best Day With The Highest Stock Market Returns
🏅 Gold Replaces The Euro As The World's Second-Largest Reserve Asset
💵 Successful Treasury Auctions
🧾 Why Are Tariffs Not Impacting Inflation?
💠 Analysis of USDC’s (Circle) Unique Advantage

QUOTE OF THE WEEK:

“United States is not alone. If China starts to aggressively diffuse its AI technology, so long as all the AI developers are in China, I think China is going to win. So we just have to be mindful of near-term actions on long-term unintended consequences.” - Jensen Huang, Nvidia CEO.

KEY US ECONOMIC EVENTS NEXT WEEK:

MARKET CLOSE:

WEEKLY MARKET WRAP:

CURATED INSIGHTS & ANALYSIS:

• Why Tariffs are not Impacting Inflation?
  
  I saw many commentators in mainstream media asking questions as to where the tariff impact is in the inflation. Below are the key reasons why tariffs are not impacting inflation as widely expected:

  • The mainstream media had overestimated the tariff situation and its impact, which should not have been as high as initially thought. Check my detailed analysis in the April 6th issue.

  • In addition to my analysis on April 6th, there are two more things to note which I haven’t seen mainstream media hilighting:

    • Tariffs are charged on the import cost and not on the final price. For example, if a merchant is importing an item for $100, the store price may be significantly higher, let’s say $180. So, tariffs are charged on $100, not on $180. The earlier tariff rate was 2%, and now it’s between 10% and 14%. Hence, the tariff on this product will increase from $2 to approximately $12, i.e., a $10 increase.

    • This $10 tariff in this example has three avenues for absorption: among the importer, exporter, and the consumer. Companies will try to absorb this additional cost as much as possible to minimize its impact on the final consumer, as no one wants to lose market share. So, the bottom line of both corporations in exporting countries and importers in the US will take a hit on earnings. Hence, the net impact of the tariffs will be on corporate earnings rather than on inflation.

    • Corporate earnings in the US were expected to grow by 12% at the start of this year, but that growth rate is expected to fall. Markets are now realizing that there will be a slowdown in earnings, but no negative growth as such.

    • There will be some exceptions, such as businesses like Walmart, which operate with lower net profit margins of ~3%. These merchants will increase prices, but they will also try to minimize the impact on the end consumer.

  • One reason given, and it may be true, is that corporations are still selling inventory acquired before tariffs were implemented.
    
    Overall, inflation is expected to increase by 0.5% by the end of this year, according to most institutional estimates, if the tariff rate remains around 10-14%. I won’t be surprised, though, if the impact is lower than this.
    

• Friday The 13th:
  
  In a unique coincidence, Friday the 13th is reportedly the best day for stock market returns, according to an Axios article.

  

  Source: Axios

  
  

• Stablecoins Going Mainstream:
  The chart below illustrates the growth of the stablecoin market cap over the last five years. With the new administration being highly favorable to crypto and the introduction of the GENIUS Act, stablecoins have arrived. There are two major global players in this race, the USDC (issued by Circle) and USDT (issued by Tether). We can see that the 80% market share is currently captured by these two. The competition is intensifying, with central banks and numerous financial services firms announcing plans to launch their stablecoins, with Société Générale being the first to do so. However, I think USDC (Circle) has a unique advantage, which is discussed further below.

  

  
  Circle Advantage:
  
  USDC has multiple things going in its favor. Below is my table showing why it will dominate the stablecoin universe in the coming years.
  

  • Safest among all: USDC is the safest stablecoin among all current players, boasting a straightforward business model. Circle has kept things safe and simple with all of the collateral backing the USDC is either cash or liquid money market funds. With a market cap of approximately $60 billion, it generates around $2.7 billion in interest income from these assets, minus operational costs. The leading competitor, USDT, however, has ~20% invested in other collateral types, which may be of lower quality or illiquid. Additionally, firms like PayPal are heavily reliant on reverse repos, which may create issues for their users in the event of a severe disruption to secured funding markets during times of stress. USDC has no such issues, thanks to its current model.

    

    Source: Financial Times

    
    Bank-issued stablecoins won’t be a threat: If banks proceed with issuing their stablecoins, as recently announced by Société Générale, I don’t think it will pose a real threat to the vanilla stablecoin issuers like Circle. The banks have diverse businesses, which increase risks. Even if banks maintain collateral in accordance with the GENIUS Act requirements, collateral backing stablecoins will still be commingled with the collateral they hold for all other activities. This will make bank-issued stablecoins risky compared to the likes of USDC. In the event of a collapse, a bank-issued stablecoin is likely to fail. Imagine if Silicon Valley Bank had its stablecoin. What would have happened? So I don’t think bank-issued stablecoins will be a real alternative. Only if the Fed issues its stablecoin will it pose a real threat; however, we are uncertain when this will happen. By then, if the USDC is widely adopted, it will be tough for it to be replaced everywhere, from crypto exchanges to De-Fi.
    

  • Domiciled in the US:
    Another significant advantage for USDC is that it is domiciled in the United States. This comes with unique trust that its major competitor, USDT, can’t match. Instead, the Tether CEO has recently stated that they will focus more on foreign markets outside the US, especially if the GENIUS Act is implemented. The ~20% of other types of collateral that USDT holds will likely create issues for it, as the GENIUS Act has strict collateral eligibility rules, which I covered earlier.

  • Conclusion - Double US Market Share with Monopoly:
    All the above reasons put USDC in a unique position to dominate at least the US markets, with Tether willing to cede the US markets, according to its CEO’s recent statements, and also the fact that the Trump administration will likely favor a US issuer above all else. USDC is well-positioned to capture the majority of USDT’s US market share, which, according to many estimates, is approximately $60 billion — roughly the same size as USDC’s current market share in the US. So, if all goes well, USDC can easily double its usage in a short time, which would add approximately $2.5 billion in income at current interest rates.
    

    

    Marketcap and US Footprint

    
    Break-up of USDTs, US market share up for grabs unless USDT changes its model:

    

    USDTs US Market Share

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EARNINGS UPDATE:

EARNINGS PREVIEW:

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This newsletter's content is for informational and educational purposes only and should not be considered trading or investment recommendations. All the opinions in this newsletter are personal and do not belong to any organization.