"The Prisoner's Dilemma": JPMorgan Warns of a Threat to Coinbase and Circle's Profits

According to JPMorgan Chase, the cryptocurrency exchange Coinbase and Circle Internet Group are facing growing pressure on their stablecoin businesses—cryptocurrencies whose value is pegged to real-world currencies. In its view, the companies find themselves facing a “prisoner’s dilemma”: both are interested in jointly promoting USDC, but in the battle for distribution channels, they are forced to compete with each other by offering third-party platforms increasingly favorable terms, thereby reducing their own profits.

On Tuesday, July 14, JPMorgan lowered its earnings forecasts for two leading publicly traded crypto companies, according to Bloomberg. This was prompted by the revised terms of Coinbase’s partnership with the crypto exchange Hyperliquid, signed in May, which change the way USDC revenue is distributed among the partners responsible for its distribution.

JPMorgan also lowered its price target for Coinbase shares from $283 to $196. This is 21% above Tuesday’s closing price. According to TipRanks, the bank’s most recent rating for Circle shares was in May: a target price of $155 and an “outperform” recommendation. Coinbase shares rose 2.6% to $161.5 during Tuesday’s trading session. Circle shares rose 0.4% to $63.2.

According to the May agreement, Coinbase became responsible for transferring USDC to the Hyperliquid system and agreed to pass on most of the revenue from the reserves to Hyperliquid, Bloomberg reports. JPMorgan’s model suggests that Coinbase will share a significant portion of the revenue generated by the use of USDC on Hyperliquid, which will limit the additional revenue the company could otherwise have earned.

“Ultimately, we believe this agreement will put pressure on the revenue of both Circle and Coinbase in the short term,” JPMorgan analysts wrote in a note cited by Bloomberg. “In our view, the change in the relationship with Hyperliquid highlights the complexity of Circle and Coinbase’s partnership agreements: they can create a ‘prisoner’s dilemma,’ forcing the companies to compete with each other in promoting USDC.” In game theory, the “prisoner’s dilemma” describes the behavior of one or more players who cannot achieve their goal because they are guided solely by their own interests rather than the common good.

JPMorgan added that Coinbase’s deal with Hyperliquid reflects a broader issue: as exchanges and payment platforms strengthen their bargaining positions, stablecoin issuers are forced to give them an increasing share of the interest income from reserves in order to gain access to distribution channels. “We also believe that Coinbase and Circle are being negatively impacted by more challenging conditions in the cryptocurrency market, which are holding back both transaction activity and the value of crypto assets,” the analysts wrote.

The JPMorgan note was released amid growing investor concerns that competition is undermining the economics of issuing stablecoins, according to Bloomberg. This came after the Open Standard consortium —backed by Visa, BlackRock, Alphabet, and Coinbase—unveiled a competing stablecoin, Open USD, which will pass on nearly all of the revenue from its reserves to its distribution partners.

On Tuesday, Mizuho Securities downgraded its recommendation on Circle shares from “neutral” to “underperform,” warning that new competitors offering banks, exchanges, and payment companies more favorable revenue-sharing terms, could reduce profitability across the entire industry. The brokerage firm also stated that the upcoming renewal of Circle’s revenue-sharing agreement with Coinbase could intensify the pressure, according to Bloomberg.

This article was AI-translated and verified by a human editor