Position commentary from Castellan Capital.

Overview

This note covers the 58-day period from 6 July to 2 September 2026. We established both positions on the same date — a long in Circle Internet Group (CRCL) at $68.34 and a short in Solstice Finance (SLX) at approximately $0.650. Both have moved materially in our favour. SLX has been closed; CRCL remains held.

SLX — Why we closed

We established the SLX short one week after the token's all-time high of $0.6604, on the basis of six structural observations: extreme token concentration in the top 10 wallets (estimated 70–95% of supply); a 24.3% circulating float with three-quarters of total supply yet to unlock; a documented USX stablecoin depeg to $0.10 in December 2025; strcUSX's exposure to Strategy Inc.'s STRC preferred shares, already trading below par under active securities fraud investigation; launch-day volume-to-market-cap dynamics inconsistent with organic price discovery; and the mechanical overhang of the Season 2 Flares claim window on 9 July.

The position played out as follows. The 9 July unlock created exactly the sell pressure we modelled — SLX fell from $0.45 to $0.16 in a single session on $53M of volume against insufficient buy-side depth. It continued declining through July and August as funding rates normalised, STRC/MSTR deterioration continued, and no new catalysts emerged. By 2 September the token had fallen 89.5% from our entry to approximately $0.068, a market cap of $16.5M versus $137M+ at entry.

CRCL — What changed since we entered

CRCL is up 32.4% from our entry at $68.34 to approximately $90.50. The path has been volatile and several developments have changed the analytical picture materially — including one that did not go as we expected.

Q2 2026 earnings (5 August). Revenue of $701M grew 7% year-on-year, missing the ~$717M consensus. USDC circulation fell sequentially from $77B in Q1 to $73.3B at quarter end, though average circulation for the quarter reached an all-time high of $76.5B. The Coinbase partnership was renewed on existing terms — unchanged from the prior agreement. Arc mainnet was confirmed for 16 September with founding validators including BlackRock, DTCC, Visa, Mastercard, Goldman Sachs, and JPMorgan. Other revenue guidance was doubled to $310–330M, incorporating $180M of Arc presale revenue recognition. RLDC margin guidance was raised to 41.7–43.7%.

Coinbase deal renewed unchanged. Our original entry thesis modelled an improvement in Circle's Coinbase revenue-sharing terms as the base case, given regulatory developments that we believed had shifted bargaining power toward Circle. This did not occur. The agreement was renewed without disclosed changes. The Hyperliquid arrangement — where approximately 90% of Hyperliquid's USDC sits on Coinbase's platform, leaving Circle with near-zero economics on significant USDC volume — illustrates how the structural problem has intensified rather than resolved. This is the most significant miss against our original analysis and we record it as such.

Arc mainnet — 16 September 2026. The mainnet confirmation with BlackRock (deploying BUIDL), DTCC, JPMorgan, and Visa as founding validators is materially ahead of our original base case. We modelled Arc as a free embedded option excluded from guidance and consensus models. That option is now beginning to convert: $180M of Arc presale revenue will be recognised in 2026 as product milestones are achieved, and the September 16 launch has a hard date and credible institutional commitment behind it.

Chelsea FC sponsorship (28 August). Circle announced as principal shirt sponsor of Chelsea FC for the 2026/27 season. Reports place the annual value at approximately $88M. USDC branding will appear on men's, women's, and academy shirts. The deal is strategically logical for brand reach and USDC adoption; it is also a meaningful opex commitment at a time when cost discipline is already a market concern. We view it as net-neutral to slightly negative on near-term fundamentals.

WSJ — bank stablecoins (26 August). The Wall Street Journal reported that major US banks are actively exploring issuing their own stablecoins under the GENIUS Act. We flagged this as a medium-term structural risk in our original analysis. It is now accelerating. The GENIUS Act, which we characterised as legitimising Circle's competitive position, also provides the regulatory framework for well-capitalised bank competitors.

Where our original analysis held up

• The OUSD overreaction thesis. CRCL recovered from ~$61 post-earnings to ~$90, consistent with our framing of the 30 June selloff as sentiment-driven. OUSD has not launched at scale. Our analysis of the USDG precedent and the structural challenges facing consortium stablecoins has proved correct so far.
• Volume growing faster than rates falling. USDC's share of stablecoin transaction volume reached approximately 70% in June 2026, up from 36% the prior year. Circle Payments Network reached $23B annualised volume by 31 July. The transaction utility thesis underpinning the long remains intact.
• Arc is de-risking ahead of schedule. The September 16 mainnet launch is stronger than we modelled. The embedded option has begun converting.

Where our original analysis missed

• The Coinbase renegotiation. We modelled term improvement as base case. It did not occur.
• Sequential USDC supply decline in Q2. We did not model a sequential fall. The year-on-year metrics remain strong but the quarter-on-quarter softness is a data point we are monitoring.
• Chelsea sponsorship opex. An $88M/year commitment was not in our cost assumptions and compresses the margin profile we modelled at entry.

Current position on CRCL

We continue to hold the long position. The original thesis is narrower than at entry — the Coinbase renewal miss removes a material margin catalyst — but the remaining pillars are intact and the Arc mainnet on 16 September is the next significant data point. At approximately $90.50, the position is up 32.4% from entry. We are not adding at current levels. Our internal valuation, incorporating the Coinbase miss, the Chelsea opex addition, and the Arc de-risking, implies a through-cycle fair value range of $95–120. The primary risk to the long remains Morgan Stanley's structural view — that OUSD will erode long-run USDC supply by 33–44% in 2027–28 — which we disagree with but continue to monitor against incoming OUSD adoption data.

What we are watching next

• Arc mainnet (16 September 2026). Commercial transaction volume, fee revenue, and developer activity in the first 30–60 days post-launch. Whether BlackRock's BUIDL deployment and the DTCC commitment translate into live settlement activity.
• OUSD launch and supply data. Once live, we will track weekly supply against the USDG precedent as the primary empirical test of our overreaction thesis.
• Q3 2026 earnings (expected November). The first quarter to fully reflect the Hyperliquid/Coinbase economics, the first Arc commercial revenue line, and the Chelsea opex. The most important CRCL earnings release since entry.
• Bank stablecoin announcements. Any major US bank publicly confirming a stablecoin issuance timeline would represent the most significant structural headwind to emerge since OUSD.

Why we entered at $68.34

On 30 June 2026, CRCL fell 17.55% in a single session following the announcement of Open USD (OUSD) — a consortium stablecoin backed by 140+ companies including Visa, Mastercard, Stripe, BlackRock, and Coinbase — compounded by removal from FTSE Russell growth indexes. At $68.34, the stock was at its June 2025 IPO opening-day price despite the business having grown revenue 64% in FY2025 to $2.7 billion. Our assessment was that the selloff reflected a maximum-pessimism repricing of Circle's business model based on a coin that had not yet launched, rather than a fundamental impairment of the underlying business.

The OUSD analysis

We constructed a six-argument case against the market's reaction:

• The closest precedent suggests slow adoption, not immediate displacement. Paxos USDG — the only live consortium stablecoin with a similar yield-sharing model — reached $3B in 18 months versus USDC's $73B. For OUSD to meaningfully threaten USDC's base within two years would require growth at approximately 25 times USDG's pace.
• Logo membership is not live integration. The 140+ partner list represents commitments, not integrations. Meta's Libra assembled a larger consortium in 2019 and never launched at scale.
• OUSD's zero-fee model raises sustainability questions. Distributing nearly all reserve income to partners limits the capital available to fund compliance infrastructure, multi-chain engineering, and the institutional relationships that underpin a global stablecoin network.
• Stablecoin adoption is not primarily yield-driven. Tether — $145B+ in supply — pays zero yield. USDC's Q1 2026 transaction volume grew 263% year-on-year during a period of declining reserve return rates.
• Standard Chartered partnership announced 2 July. Two days after the selloff, Circle announced a G-SIB institutional minting/redemption partnership — with an institution that is simultaneously an OUSD partner — demonstrating bilateral positioning rather than exclusive defection.
• The market cap destruction was disproportionate. CRCL lost approximately $2.8B in market cap. For this to be rational, OUSD would need to impair Circle's future earnings by a comparable NPV amount within a credible adoption timeline — which we could not construct.

The three pillars at entry

• Volume growing faster than rates falling. Reserve return rate had fallen 66 basis points to 3.5% in the year to Q1 2026; USDC onchain transaction volume grew 263% in the same period. Management guides 40% CAGR in USDC circulation through the decade.
• Coinbase renegotiation. The Circle-Coinbase revenue-sharing agreement was due for renewal in August 2026. Regulatory developments — the OCC's proposed rule targeting affiliate yield arrangements — had, in our analysis, shifted bargaining power toward Circle. We modelled improved terms as our base case. (We note in our September 2026 update that this did not occur.)
• Arc blockchain as embedded option. A $222M institutional presale at a $3B FDV — backed by BlackRock, NYSE parent ICE, a16z, and Apollo — was entirely excluded from guidance and consensus models. Circle retains 25% of ARC token supply. We assessed this as an asymmetric call option available at no additional cost at entry.

Key financial metrics at entry

E = Castellan estimate at time of entry. Sources: Circle SEC filings, Zacks, Castellan analysis.

Why we established the short

We established a short position in SLX one week after the token's all-time high of $0.6604 on 29 June 2026. Our analysis identified six structural concerns that we believed were substantially underpriced at $0.650.

• Extreme token concentration. Third-party wallet analytics indicated the top 10 wallets held 70–95% of SLX supply (estimates varied by snapshot and methodology). Only 24.3% of total supply was circulating at entry, leaving three-quarters yet to unlock over time.
• Documented USX depeg. In December 2025, the flagship USX stablecoin — marketed as Solana's largest native settlement asset — traded as low as $0.10 on secondary markets before a discretionary liquidity injection by Solstice and its market makers restored parity. PeckShieldAlert attributed this to secondary-market liquidity fragility rather than collateral failure. We noted that recovery relied on centralised intervention rather than a trustless mechanism — a material divergence from the protocol's institutional-grade framing.
• strcUSX collateral deterioration. The strcUSX vault — Solstice's "structured credit" product — tokenises Strategy Inc.'s STRC preferred shares. At entry, STRC was trading at approximately $71.25, roughly 29% below its $100 par value. MSTR common was down approximately 82% from its peak. Rosen Law Firm had announced a securities fraud investigation covering all five Strategy public securities. We assessed that Solstice had packaged a distressed, leveraged instrument as institutional structured credit yield.
• July 9 unlock mechanic. The Season 2 Flares claim window was scheduled to open on 9 July, creating predictable near-term sell pressure from retail claimants whose incentive to hold — a 20% APY staking program — had expired on 30 June.
• FDV/market cap overhang. At entry, FDV was approximately $564M against a circulating market cap of ~$137M — a roughly 4:1 ratio implying three-quarters of total supply at yet-to-be-realised price. This structure has historically preceded sustained selling pressure as unlocks occur.
• Volume/market-cap dynamics at launch. On TGE, 24-hour trading volume exceeded $226M against a market cap below $45M — a ratio more consistent with coordinated market-making than organic price discovery.

The bull case we considered

We weighed the structural concerns against a genuine bull case: a multi-year live yield track record with a claimed 13.96% net IRR and zero negative months; credible backing from Deus X Capital, Galaxy Digital, and Anchorage Digital; real TVL growth to over $500M; and no traditional VC allocation at TGE. Our judgement was that these were meaningful positives that did not offset the structural supply and collateral risks at the prevailing price.

Relative value context

*TVL is company-reported. Sources: CoinGecko, DeFiLlama, Castellan analysis at time of entry.

At entry, SLX was trading at a Mcap/TVL multiple of 1.7–2.3× that of Ethena — a far larger, more battle-tested protocol — despite carrying materially higher concentration risk, a shorter operating history as a token, and its own documented depeg event. In our assessment this premium was not supported by fundamentals.