Shares of Circle Internet Group (NYSE: CRCL) fell about 6 percent on Monday after Morgan Stanley downgraded the stock, saying the stablecoin issuer faces a tougher road ahead as growth in its flagship USDC token slows and competition intensifies.
The investment bank lowered its rating on Circle to underweight from equal-weight and sharply reduced its price target to $38, down from $106, citing a weaker long-term earnings outlook.
The downgrade adds to a difficult year for the company. Circle’s shares have already fallen roughly 30 percent since the start of the year as investors reassess the outlook for the stablecoin business.
Why the downgrade?
Morgan Stanley analyst James Faucette said the bank expects USDC, Circle’s dollar-backed stablecoin, to grow more slowly than previously anticipated, putting pressure on one of the company’s biggest revenue sources.
Circle earns much of its income from the reserves backing USDC. As users hold more USDC, the company generates more interest income from those reserves. If the amount of USDC in circulation slows or begins to decline, that revenue becomes more difficult to sustain.
“We downgrade Circle, as USDC contraction exposes reserve income sensitivity and points to a lower-margin shift toward transaction revenue,” Faucette wrote in a research note.
Morgan Stanley believes Circle will increasingly rely on transaction-related revenue, which generally generates lower profit margins than interest earned on reserves.
As a result, the bank reduced its forecasts for the amount of USDC expected to be in circulation by around 33 percent in 2027 and 44 percent in 2028.
Those lower expectations also translated into weaker earnings forecasts. Morgan Stanley now expects Circle’s GAAP earnings per share to come in roughly 3 percent below Wall Street expectations in 2027 and about 20% below consensus estimates in 2028.
Morgan Stanley highlights growing competition
Tokenized money market funds, tokenized bank deposits and newer blockchain-based payment products are beginning to compete more directly with stablecoins like USDC. As those alternatives gain traction, Morgan Stanley believes they could reduce both the amount of USDC held by users and the reserve income Circle earns from backing the stablecoin.
The report reflects a broader debate playing out across the digital asset industry.
Stablecoins have become a key part of crypto trading, decentralized finance and cross-border payments, but they are no longer the only blockchain-based option for moving and storing value. Traditional financial institutions are increasingly launching tokenized cash products that offer similar functionality while remaining closely tied to the banking system.
That evolving landscape could make it harder for Circle to maintain the growth investors had previously expected.
Despite the downgrade, Circle remains one of the world’s largest stablecoin issuers, with USDC continuing to play an important role across the crypto ecosystem.
Still, Morgan Stanley believes the market may be underestimating how closely Circle’s financial performance is tied to the growth of USDC and how much pressure rising competition could place on its business over the next several years.
The market reacted swiftly to the report, sending Circle shares lower as investors weighed the challenges outlined by the bank against the company’s long-term ambitions in the rapidly evolving digital payments industry.
