TBW - Analysis: what impact will interest rate cuts have on the profitability of Tether and Circle?

Until now, the stablecoin giants have posted outstanding profitability, to the point of being among the most profitable companies in the world in relation to the number of employees. But the change in direction of US monetary policy could well cause an earthquake: Circle and Tether, long seated on a throne of comfortable profits, are seeing their model called into question.

The rate cut and the reaction of the bond market

In mid-September, the US Federal Reserve cut its key rate by 25 basis points. It was an expected decision, following particularly poor employment figures in September's NFP report, made even worse by revisions in previous months.

As is often the case, the markets had already anticipated this move.

Result: little visible effect on risky assets. Equities hardly moved, and neither did cryptos. Bitcoin, Ether and Solana even fell back in the wake of the announcement, a sign that the fall had already been priced in.

Another striking post-Fed signal can be read on the yield curve. As a reminder, this reflects the difference between the yield on 10-year and 2-year Treasury bonds. When it steepens, this reflects a higher valuation of long-term yields, a situation considered normal. Conversely, an inversion of the curve is seen as a negative sign, heralding a risk of recession.

However, since the rate cut, the curve has clearly recovered:

US 2-year yields are now lower than those on long bonds (10, 20 or 30 years), which has led to a steepening of the yield curve. The 2-year is used as a benchmark: it reflects the direction that the markets attribute to the Fed's monetary policy. Currently at 3.58%, it hints at further rate cuts, perhaps around 75 basis points, confirming that a cycle of easing has begun, even if it remains limited.

The short end of the curve reacted immediately to the Fed's decision, but the spread between the 10-year and the 3-month remains very small, a sign that the markets are still sceptical about the extent of this movement.

The US 3-month rate, which is highly sensitive to Fed decisions, is around 4%. The 10-year is a little higher, as it incorporates time-related risk, such as inflation or economic instability.

Today, the 3-month rate is higher than the 2-year, giving a "humped" yield curve. There are two explanations for this. Firstly, at the start of a rate-cutting cycle, the 3-month rate reflects the immediate situation, while the 2-year rate reflects the Fed's final target, where it wants to take its policy. Secondly, short-term concerns (inflation fuelled by tariffs, the threat of recession with poor employment figures, and fragilities in the global economy) are pushing investors to demand higher yields on very short maturities.

Clearly, the market considers that the Fed has just begun a rate-cutting cycle, but that it should remain limited.

The business model of Tether and Circle in the face of rates

The bulk of Tether and Circle's income comes from short-term US Treasuries, with maturities of less than one year. These securities, issued without coupons, are purchased at a discount and redeemed at their face value at maturity.

Highly liquid, they are directly dependent on Fed policy: when rates fall, their yields fall rapidly, which mechanically affects the profitability of stablecoin issuers.

The balance sheets of the two companies reflect this dependence.

At Circle, Treasury bills account for 95.65% of total assets, making it almost exclusively exposed to US government debt.

Tether has a slightly more diversified allocation, with 78% of its assets invested in T-Bills. This difference reflects two strategies: one focused on a single asset, the other more open to other investment classes.

Tether does not publish a detailed income statement. The estimates available are therefore based on approximations from the composition of its reserves. According to data provided by the company, 78% of deposits are invested in US Treasuries with maturities of less than 90 days.

In the second quarter of 2025, the issuer claimed $4.9 billion in net profit, including $2.8 billion from the revaluation of its bitcoin and gold positions, and $2.1 billion generated by its interest-bearing investments. Over the first half of the year as a whole, Tether thus posted a cumulative profit of $5.7 billion.

These figures do, however, raise questions. With an average return of 4.3% on its reserves, 99% of these revenues are turned into profit, suggesting that the company bears virtually no operating or distribution costs. This lack of transparency is fuelling scepticism about its results.

And above all, the first signs of erosion are already appearing. Since mid-August, the yield on one-month T-Bills has fallen by 7%. In September, this translates into a 5.8% fall in monthly income from these securities compared with August.

It is true that the ever-increasing demand for USDT is partially offsetting this decline by inflating the volume of deposits. But if the 78% allocation to T-Bills is maintained, Tether could see its income from reserves fall by around 3.3% over one month.

Beyond the fall in bond yields, Tether and Circle are having to deal with another constraint: the explosion in their distribution costs. These expenses, which now account for 62% of their total revenues, correspond to the financial incentives paid to market makers, exchange platforms and other partners to ensure the liquidity and ubiquity of their stablecoins on the market.

>> Circle and Coinbase: the secrets of a $172 million-a-year pact

For Circle, the bill is particularly heavy. The second quarter ended with a net loss of $408 million, largely linked to the generous remuneration packages paid to employees since its IPO.

While the stock briefly rebounded after the announcement, it then fell by 70% between July and September, reflecting investors' mistrust of a faltering profitability model.

Case study: The effect of forthcoming rate cuts on Tether and Circle

Evaluating the future profitability of the two stablecoin giants first comes down to analysing their exposure to US Treasuries. Three variables are decisive: the expected change in the yield on one-month T-Bills, the pace of growth in deposits invested in these securities, and the increase in distribution costs.

The exercise is based on two scenarios: one with an unchanged average annual yield of 4.11%, the other with the rate reduced to 3.5%, the Fed's final target for this cycle. Added to this are the dynamics specific to the two stablecoins: over the last four quarters, USDT supply has risen by 9.73% while USDC supply has jumped by 20.19%.

On the margin side, the difference is striking. Circle has a gross margin of 38%, while Tether claims a profit rate of 99%, a figure that is hardly credible in this model. For this reason, the impact of rate cuts will be assessed on the basis of data from Circle, the only company listed on the stock exchange and obliged to be transparent.

The projections relate to the fourth quarter of 2025. If the average growth observed resumes, the amounts invested in T-bills would reach $147.95 billion for Tether and $85.1 billion for Circle at the end of the year.

If the yield on T-Bills were to fall to 3.5% while maintaining current deposit growth momentum (+9.73% for the USDT and +20.19% for the USDC), the impact would be severe. The fall in income from reserves would reach $225.6m for Tether and $129.8m for Circle.

Related to the quarter, this would represent a 14.8% fall in income from Treasury bills. A sharp contraction that would erode one of the pillars of the business model of the two stablecoin issuers.

Applying the 38% gross margin posted by Circle, the impact of rate cuts mechanically translates into the same contraction: a 14.8% decrease in gross profit compared with a scenario in which yields would remain unchanged.

In other words, the pressure on reserve income has no cushioning effect on operating profitability, confirming the vulnerability of the model to a less favourable monetary environment.

To preserve their profitability, Tether and Circle must now compensate for the fall in bond yields by accelerating the growth of their deposits invested in Treasury bills. In practical terms, the increase in invested capital will have to outstrip both the rise in distribution costs and the fall in reserve income. Otherwise, their profits will erode quarter after quarter.

Two options are emerging. The first, which is purely quantitative, is to continue to grow faster than margins deteriorate. The second involves diversifying revenues.

Tether has already begun this shift by increasing alternative investments and collateralised loans, while Circle is banking on the launch of its own blockchain, Arc, to reduce its dependence on Fed-dictated yields.

The Big Whale's analysis

Lower rates pose a serious threat to the profitability of stablecoin issuers. Both are massively exposed to US Treasuries, with extreme dependence at Circle, where almost 96% of assets are based on these securities.

This explains why the company will be the hardest hit: its profitability is integrally correlated to bond yields and the Fed's monetary policy. The market has already taken this into account: its share price fell by 70% between July and September. To diversify its revenues, Circle is now banking on the launch of its own blockchain, Arc, intended to become the benchmark infrastructure for USDC payments.

Tether has chosen a different path. The company has begun to expand its balance sheet by reinvesting its surpluses in collateralised loans and other asset classes: bitcoin, stakes in mining companies, agriculture, and even precious metals. The issue of its gold-backed stablecoin forced it to build up large reserves of the metal, which helped boost its earnings.

The company claims $2.8 billion in profits from the revaluation of its bitcoin and gold holdings. But these are only unrealised capital gains: these profits would only be realised in the event of a sale.

The continued growth of deposits invested in T-Bills ensures a substantial revenue stream, but the model remains highly sensitive to currency cycles. To preserve their margins, Circle will have to both reduce its distribution costs and diversify its sources of revenue with cash-generating activities, rather than simply accounting gains. Tether, meanwhile, is banking on its ability to turn short-term profits into a diversified empire, but remains exposed to the volatility of its assets.

With rumours of a $500 billion valuation for Tether, one question remains: will the company be able to avoid Circle's fate, and will these two behemoths manage to make their profits less "cyclical"?

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