Circle Internet shares dropped nearly 4% on Monday after Morgan Stanley downgraded the USDC stablecoin issuer from equal-weight to underweight, slashing its price target from $106 to $38.

The decline extends a difficult year for the company, with the stock now down approximately 30% year-to-date. Circle priced its IPO at $31 just over a year ago and saw shares open at roughly $69 on their first day of trading.

Morgan Stanley's Bearish Thesis

Morgan Stanley analyst James Faucette outlined a case centered on Circle's core business facing pressure from multiple structural challenges simultaneously.

The bank reduced its USDC supply forecasts by approximately 33% for 2027 and 44% for 2028. Morgan Stanley expects the amount of USDC in circulation to contract materially over the next two years, posing a significant challenge for a company whose revenue depends heavily on interest earned from the reserves backing those tokens. USDC, the second-largest stablecoin by market capitalization behind Tether's USDT, is widely used across cryptocurrency trading, decentralized finance, and cross-border payment flows, making its outstanding supply a barometer for broader digital asset market activity.

The firm's revised GAAP EPS projections for 2028 sit roughly 20% below the current Wall Street consensus.

Faucette identified several structural headwinds. Reserve income is highly sensitive to both USDC supply levels and prevailing interest rates. Circle holds the dollar-denominated assets backing USDC predominantly in short-dated US Treasury bills and cash, meaning that declines in the federal funds rate would compress the yield Circle earns on those reserves independent of any supply changes. As Circle diversifies beyond stablecoin issuance, it is shifting toward revenue streams with lower margins. Additionally, the competitive landscape is intensifying rapidly.

Increasing Competition

BlackRock has been expanding aggressively into tokenized cash products. Alternative stablecoin models such as Open USD approach the market with fundamentally different architectures. Tokenized money market funds add another layer of competition, offering institutional investors a more conventional wrapper around a similar economic proposition. The competitive pressure comes at a time when the total stablecoin market capitalization has grown to over $250 billion, with multiple issuers and traditional financial institutions positioning themselves for a share of tokenized payment and settlement infrastructure.

Broader Wall Street Skepticism

Morgan Stanley is not the first major bank to express a negative outlook on Circle. JPMorgan initiated coverage in June 2025 with an underweight rating and an $80 price target, citing skepticism about the company's valuation at that earlier stage.

Circle completed its IPO on June 5, 2025, following years of attempts to reach the public markets. The company had previously pursued a SPAC transaction that ultimately collapsed, making the traditional listing a long-anticipated milestone.

Key Metrics to Monitor

The projected contraction in USDC supply is a central consideration. If Morgan Stanley's estimates hold, Circle would face a shrinking market at a time when it needs to demonstrate growth potential. A 44% reduction to 2028 supply forecasts significantly narrows the room for an optimistic narrative.

For investors holding CRCL, two metrics warrant close attention in upcoming quarters: USDC supply trends and the company's progress in developing non-reserve revenue streams. If supply declines materialize as projected while diversification efforts yield only lower-margin income, the $38 price target may shift from an outlier to a baseline scenario.