Arthur Hayes on Circle and Coinbase: Stablecoin-Linked IPOs Are Risky

Key Insights

• Arthur Hayes warns Circle stock overvalued despite trading success potential.
• Stablecoin IPO wave expected to feature Circle copycats with poor fundamentals.
• Distribution barriers prevent new stablecoin issuers from achieving scale.

Arthur Hayes analyzes Circle’s public listing and warns investors about upcoming stablecoin-related IPOs. The crypto analyst highlights distribution challenges facing new entrants and also cautions against shorting overvalued stablecoin stocks despite fundamental concerns about their business models.

Arthur Hayes’ Warning

Arthur Hayes warns Circle as overvalued despite being the second-largest asset-under-custody stablecoin issuer. Hayes clarifies that Circle’s market capitalization represents 39% of Coinbase’s valuation, despite Circle paying 50% of its interest income to Coinbase under their revenue-sharing model.

He draws parallels between Circle’s business model and the diversified nature of Coinbase’s business and describes Coinbase as a mature crypto financial services company with multiple profitable lines of business and tens of millions of clients across the globe. Circle’s stablecoin single-focus business cannot match the scale and diversity of Coinbase’s platform ecosystem.

The analyst warns against shorting Circle stock even when overvalued and recommends that investors look to buy Coinbase if they believe the Circle-to-Coinbase ratio is off. Hayes sees Circle retaining value in the long term with investors regretting what could have been when they look back on the stablecoin market cycle down the line years later.

Circle’s current positioning has first-mover advantage in regulated stablecoin markets, though Hayes remains doubtful of the long-term sustainability of current valuations against generating revenues. Current distribution by the firm within Coinbase benefits from competitive strengths uncallable for younger, new players.

Hayes contends that although there are underlying overvaluation problems, stockholders in Circle will have a better ability to preserve capital than holders of future stablecoin IPOs lacking established distribution channels and proven business models.

Circle Copycats Face Distribution Challenges Despite Fundraising Success

Hayes foresees a wave of Circle copycats listing companies with still more outrageous Price-to-Assets Under Custody ratios than Circle, but these firms will never be able to come close to Circle’s capacity to generate revenues.

These new stablecoin issuers aim to leverage finance sector credentials in an effort to convince investors that they possess the contacts and capability to disrupt traditional banking in cross-border dollar settlements.

The sponsors will tout collaborations with established banks or exposure to their distribution channel as competitive advantages. Hayes predicts these pitches to be effective at raising significant amounts of capital from investors, regardless of the underlying flaws in their business models relative to established players.

These new issuers are faced with closed distribution channels that exclude them from access in order to obtain the scale necessary to be successful. Hayes identifies three major distribution avenues for stablecoin success: crypto exchanges, Web2 social media, or conventional banks. In the absence of demonstrated access to drive products through these channels, new issuers have little hope of building enduring businesses.

The analyst depicts the future fundraising environment as being in the favor of shady business models, with suit-wearing promoters getting away with convincing public investors to invest in worse stablecoin businesses. Hayes finds it predictable and fun to visualize seeing these pitches succeed, following identical trends in cryptocurrency trading.

Despite underlying problems, Hayes warns people against shorting these overhyped stocks and expects them to perform well under favorable market conditions.

Arthur Hayes on Regulatory Framework and Financial Engineering Potential

Hayes identifies US stablecoin regulation as the determining factor for the scale of potential market manipulation in upcoming IPOs. The regulatory approach will dictate what assets can back stablecoins and whether issuers can pay yield to holders.

Under a light-touch or minimal regulatory regime, Hayes anticipates potential repeats of the Terra/Luna collapse scenario. New issuers could create algorithmic stablecoin schemes that function as Ponzi operations and offer high yields to holders while the returns derive from leveraged asset positions rather than sustainable business operations.

The analyst warns that increased regulatory freedom allows issuers to apply more sophisticated financial engineering techniques to hide underlying problems with their business models. This flexibility creates opportunities for promoters to structure complex products that appear attractive to investors while hiding fundamental risks.

Arthur Hayes maintains a pessimistic outlook on new entrant prospects and emphasized that distribution channel access remains the primary barrier regardless of regulatory conditions. He advises treating stablecoin stocks like volatile trading instruments rather than long-term investment.