How a Single Fed Rate Hike Can Boost Stablecoin Issuers While Hurting Bitcoin Borrowers

When you hold a dollar-pegged stablecoin, another entity is often earning interest on the assets backing your balance, whereas a company borrowing to purchase Bitcoin must generate the funds to service its debt to lenders.

Both entities are native to the cryptocurrency sector, yet a rise in interest rates can reward the former while eroding the economics of the latter.

This divergence is often overlooked when every movement in Treasury yields is interpreted as a definitive signal of whether liquidity is tightening or loosening for the entire industry.

Different interest rates impact various businesses through their specific contractual obligations. Consequently, a bond market shift that discourages investment in speculative assets can simultaneously enhance the income generated by certain crypto reserves.

This dynamic is evident in Circle’s second-quarter filing: reserve income accounted for 95.2% of revenue in the three months ending June 30, 2026. Its reserve returns closely track the prevailing Secured Overnight Financing Rate (SOFR), meaning revenue is heavily dependent on the volume of outstanding stablecoins and the yield their backing assets generate.

The specific rate used in this calculation is critical because overnight returns and the 10-year Treasury yield can move independently. Treating both as identical measures of the cost of money can lead to incorrect expectations of windfall profits for an issuer whose reserve income is actually trending in the opposite direction.

Money has more than one price

The Federal Reserve’s decision on September 16 to raise its target range by a quarter of a percentage point, to 3.75%-4%, exacerbated this split. Higher overnight rates can boost returns on short-term stablecoin reserves as assets mature or reset, while borrowers whose debt is tied to these rates may face increased interest expenses.

Short-term rates influence returns on instruments that mature or reset quickly, whereas the 10-year Treasury yield incorporates expectations regarding future short-term rates and provides compensation for holding a longer-duration bond.

The New York Fed’s term-premium research utilizes a model to separate these components, as the additional compensation itself cannot be directly observed.

Investors might demand higher compensation for owning long-dated government debt while simultaneously expecting overnight rates to decline in the future. This scenario leaves long-term financing more expensive even as short-term reserve returns fall.

Under such conditions, a company funding a long-term construction project and an issuer reinvesting maturing Treasury bills could both end up worse off, albeit for different reasons.

Bitcoin holders face a different calculation because direct ownership of the asset does not generate contractual interest income. They can profit only if the asset’s price appreciates, but higher available bond yields provide a larger guaranteed income stream to compare against a return that depends on future market prices.

This comparison relies on the investor’s specific circumstances, including inflation, tax implications, and the investment horizon.

Long-term Treasury bonds can lose market value when yields rise, as explained in the SEC’s guide to interest-rate risk. Consequently, an investor needing to sell in the near term faces a different reality than one holding the bond to maturity.

The relationship between real yields and Bitcoin valuations represents only one facet of crypto’s exposure. Companies earning interest on reserves can collect more cash even when investors find speculative assets less appealing, without any contradiction in these outcomes.

Your dollars can pay somebody else’s interest rate income

Consider a hypothetical issuer with $10 billion in reserves earning 4% annually, generating $400 million in yearly income before expenses and partner payments.

If the return drops to 3%, income falls to $300 million. Recovering the original capital would then require approximately $13.33 billion in reserves, an increase of roughly one-third.

These illustrative figures highlight why an issuer can attract more customers yet earn less per dollar of reserves. While more tokens in circulation help, the additional balances must offset the lower return, and gross reserve income must still cover distribution and operating costs.

Token holders may receive none of this income unless the product’s terms grant them a right to it, as they are primarily purchasing the ability to hold and transfer a dollar-linked balance.

This service remains valuable, particularly in regions with limited access to conventional dollar accounts. However, a higher reserve return can increase the issuer’s income while simultaneously increasing the opportunity cost for its customers, who forgo interest elsewhere.

Borrowers face the inverse side of this equation. A hypothetical company raising $100 million in fresh interest-bearing debt would pay an additional $2 million annually if its borrowing rate increased by two percentage points.

The business must then generate this additional cost through earnings, further financing, or asset sales, even if the assets acquired have not become more productive.

The impact on a company borrowing to accumulate Bitcoin depends on the structure of its debt, as existing fixed-rate borrowing does not automatically become more expensive when Treasury yields rise.

Floating-rate loans can reset more frequently, while refinancing brings the borrower back to the market when old obligations mature, allowing lenders to reset the terms.

Related Reading

Why surging US real yields are quietly forcing Bitcoin under $84,000

Convertible debt further complicates this comparison because lenders may accept a lower coupon rate in exchange for the potential to receive equity.

Focusing solely on interest payments overlooks this value and the potential dilution borne by shareholders. Consequently, two companies with similar coupons can still have vastly different financing arrangements.

Miners considering data-center projects face the same need to align financing with future income, but construction spending begins before the completed site generates its intended revenue.

In a project with a narrow expected surplus, a larger interest bill can consume that surplus before the first customer begins paying, although the outcome depends on construction costs, customer contracts, and the debt-equity mix.

A company with fixed funding and credible customer commitments may therefore be in a stronger position than a rival with seemingly cheaper debt that requires refinancing in the near term.

Understanding this distinction requires examining the contracts, as the Treasury yield alone does not reveal which business can afford to complete its project.

DeFi has to explain the extra return

Onchain lending introduces another method for setting rates. Aave’s documentation on supplying tokens explains that supplier returns depend on borrowing utilization and protocol parameters.

Treasury yields influence the alternative options available to users, but demand within a lending pool helps determine the actual payout.

When borrowers seek a large share of available stablecoins, rates can rise, while weaker demand or increased supply can drive them down. Governance settings and incentives also affect the quoted return, meaning the percentage displayed on a dashboard requires context regarding the source of the payment.

Imagine a short-term government investment offering 4% and an onchain position advertising 7%.

The extra three percentage points must be weighed against additional contractual, liquidity, technical, and counterparty risks. A higher advertised return does not necessarily mean the investor is being adequately compensated for bearing those risks.

Users also have varying alternatives, as some cannot access the same government debt products, while others require their tokens to be available for collateral or payments.

An investor can rationally accept a lower return in exchange for a necessary service, which helps explain why yields do not immediately converge across conventional and onchain markets.

Crypto’s exposure to interest rates therefore involves several simultaneous decisions: issuers seeking reserve income, borrowers trying to earn more than their financing costs, and Bitcoin holders weighing potential appreciation against alternative income streams.

Tracing who gets paid, who owes interest, and when those terms reset explains how the same bond market can finance one part of the industry while making another part’s business model harder to sustain.

The post The same Fed rate hike can help stablecoins and hurt Bitcoin borrowers appeared first on CryptoSlate.