Kraken

Investment Idea Details

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About the company

Kraken, a United States-based cryptocurrency exchange, provides access to trading between 40+ digital assets. Kraken is the fourth-largest crypto exchange by trading volume. It has nearly 7 million clients globally and was founded in 2011 in San Francisco, California.

Over the past year, Kraken recorded a surge in business growth and the number of new users that signed up on the platform. In the first quarter of 2021, the number of new users jumped four times, compared to the second half of 2020. In addition, spot trading volume in Q1 grew 1.5 times over spot trading volume recorded throughout 2020 to reach a record level of $160 billion. In comparison, trading volume on Coinbase was $335 billion in Q1 2021.

There has been a rising interest in cryptocurrency adoption among corporate players. Several investment banks have set their price target for bitcoin. Guggenheim Investments predicts that it will reach $400,000 over a short period of time, while Citibank believes bitcoin should be worth $300,000.

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Risks

Sources of Kraken’s revenue are dependent on crypto assets and the broader cryptoeconomy. Due to the highly volatile nature of the cryptoeconomy and the prices of crypto assets, its operating results have, and will continue to, fluctuate significantly. The future development and growth of crypto is subject to a variety of factors that are difficult to predict and evaluate. If crypto does not grow as expected, Kraken’s business, operating results, and financial condition could be adversely affected.

It is possible that Kraken will close a new funding round at a lower valuation that was anticipated earlier due to overall market volatility and the performance of Coinbase shares.

Kraken is subject to an extensive and highly-evolving regulatory landscape and any adverse changes to, or its failure to comply with, any laws and regulations could adversely affect brand, reputation, business, operating results, and financial condition.

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Market Opportunities

In April 2021 the value of the cryptocurrency market topped $2 trillion for the first time. In just over two months, the market capitalization of the cryptocurrency market has doubled. Bakkt Holdings, the digital-asset financial firm, estimates that the market of digital currencies will increase to $5.1 trillion by 2025.

The crypto market has been seeing rapid growth over the past year, encouraging exchanges to go public. Kraken’s major rival in the US Coinbase became public via direct listing on the 14th of April. Jesse Powell, the CEO of Kraken confirmed that Kraken is looking at different ways of going public but would “probably” opt for a direct listing later this year in early 2022.

The crypto market has been seeing rapid growth over the past year, encouraging exchanges to go public. Kraken’s major rival in the US Coinbase became public via direct listing on the 14th of April. Jesse Powell, the CEO of Kraken, said that Kraken would “probably” go public through a direct listing later this year in early 2021.

Additionally, Powell said that the company is in talks with investors regarding a new funding round. Noting that Kraken has a strong balance sheet, Powell added that the company is not in a rush to raise capital. Kraken is currently in talks with investors for a new round of funding, which could reportedly value it at as much as $20 billion. In the interview to Bloomberg TV at the beginning of March, Powell said he would reject a $10 billion valuation, and suggested the company could raise double that—which appears to confirm Kraken is seeking the higher valuation. A valuation of $20B corresponds to $90-100 share price.

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Financials and Valuation

Kraken has raised a total of $119 million in funding over 8 rounds from 11 investors including Digital Currency Group (invested in Coinbase, Luno, Curv), Blockchain Capital (invested in Coinbase, Bitnet) and others. Their last funding was raised in May 2020 at $4 billion valuation.

Based on public information on trading volumes and fees, we estimate that revenue of Kraken amounted to $100-$200 million in 2019 and grew to $300-$400 million in 2020. Kraken shares are worth $73 on the secondary market, which suggests a valuation of $14.6 billion. The company can be compared with Coinbase, which went public in April 2021. It is currently trading at 48x LTM sales with a market capitalization of $60 billion. The trading volume on crypto exchange Kraken over the past 12 months has amounted to $200 billion. In comparison, the trading volume on Coinbase — $400 billion.

Kraken’s projected market capitalization, given it maintains the current growth trajectory, will amount to $30-40 billion on the public market within a year. Estimated return on investment — 150%.

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