Undervalued Kraken: How Long Until the Rebound?

• Bitcoin has reached a historic new all-time high, surpassing $86,000, even touching $89,000 in peak moments.
• With a market capitalization of $1.7 trillion, Bitcoin has now surpassed silver, claiming its position as the 8th largest asset globally.
• In a groundbreaking move, the U.S. Federal Reserve is considering a bill to buy up to 200,000 bitcoins per year over the next five years, aiming for a 1 million BTC reserve—potentially a game-changer for national debt offset.
• The spotlight on crypto exchanges has intensified. Coinbase’s revenue stands at $5.2 billion, compared to Kraken's $2 billion. However, Kraken's valuation is currently only a fraction of Coinbase’s $80 billion cap, which has surged by 70% in just five days.

This valuation disparity begs the question: is Kraken poised for a rebound? The current arbitrage opportunity between private and public markets is a once-in-75-years event, comparable to Halley’s Comet. Kraken’s secondary market valuation has risen to $3.3 billion, yet it still falls significantly below Coinbase’s.

What valuation will Kraken gain in a month? What's your bet? 😎

• Kraken’s last fundraising round in 2021 valued the company at $10.8 billion.
• In 2023 the market took a downward turn. During the lowest points, Kraken shares could be found trading at a steep discount, with valuations dipping as low as $1.1 billion.
• By early 2024, optimism had started to creep back in, bringing Kraken's valuation up to around $2.4 billion.
• A month ago Kraken hovered around just $2.7 billion. Now it is $3.3 billion.

Setting aside the recent bull rally triggered by Trump’s election, even before this surge, Coinbase was trading at a substantial $54 billion valuation, while Kraken hovered around just $2.7 billion. The undervaluation is striking (keep in mind $5.2 billion revenue of Coinbase and $2 billion revenue of Kraken).

Since mid-2023, Kraken’s valuation has tripled, yet it still trades far below Coinbase and far below its last-round valuation. Now Kraken is preparing for the $100 million pre-IPO round (and a higher valuation, fingers crossed 🤞) and a potential IPO in 2025. Kraken’s developments indicate substantial growth potential (see below).

If we apply Coinbase’s valuation-to-revenue multiple from before the recent bull run, which stood around 10x, Kraken’s fair market value would be closer to $20 billion. But with Coinbase’s current multiple after the Trump rally, now around 15x, Kraken’s potential public market valuation could soar to over $30 billion. This reveals a considerable upside, highlighting Kraken as a compelling opportunity for those who recognize its growth potential.

Impact of Trump's Election on Crypto and Kraken

The recent U.S. presidential election resulting in Donald Trump's victory is perceived as a significant positive development for the cryptocurrency industry. Here's why:

1. Deregulation: Trump's administration is expected to pursue deregulation policies, simplifying the launch of new crypto products and services, and reducing barriers for companies like Kraken.
2. SEC Leadership Changes: A potential shift in the Securities and Exchange Commission (SEC) leadership could lead to more crypto-friendly regulations.
3. Support for Digital Assets: Trump has shown increasing support for digital assets, viewing them as viable alternatives to traditional banking, which could accelerate mainstream crypto adoption.
4. Promotion of American Companies: Emphasizing economic independence, Trump's policies will favor U.S.-based companies like Kraken, enhancing their competitive edge.
5. Tax Incentives: Proposed tax reforms could facilitate capital raising and investment in the crypto sector.
6. Market Optimism: Trump's election has already spurred market optimism, with immediate increases in the prices of Bitcoin and Ethereum, indicating positive investor sentiment.

Kraken has actively engaged in political advocacy, contributing $1 million to Trump's campaign and spending $1.2 million on lobbying efforts in 2023 to promote favorable crypto regulations.

Leadership Restructuring: Preparing for Growth and IPO

Kraken has undergone significant leadership changes to steer the company toward its ambitious goals, including a potential IPO in 2025.

• Jesse Powell, Kraken's founder, has transitioned from CEO to Chairman of the Board. This move allows him to focus on the company's broader vision and advocacy for the crypto industry.
• David Ripley, previously the Chief Operating Officer (COO), has been appointed as co-CEO alongside Arjun Sethi.
• Arjun Sethi joins as co-CEO, bringing extensive experience as a co-founder and partner at Tribe Capital, a venture capital firm with over $1.6 billion under management. Sethi's background includes leadership roles at Yahoo and successful investments in notable tech companies.
• Stephanie Lemmerman has been appointed as the new Chief Financial Officer (CFO). With her rich experience in both traditional finance and crypto companies like Dapper Labs, she is poised to guide Kraken through the complexities of financial reporting and compliance required for a public company. Regulatory requirements for financial reporting differ significantly between public and private companies, which is why companies often appoint a new CFO as they prepare to go public.

These leadership enhancements are strategically aligned with Kraken's preparation for an IPO, aiming to strengthen operational efficiency, product innovation, and regulatory compliance.

Kraken's Innovative Product Portfolio and Its Strategic Importance

Kraken has been aggressively expanding its product offerings to meet the evolving needs of the crypto market, enhance its revenue streams, and position itself competitively. Here's an overview of their latest products and why they matter:

1. Proof of Reserves Audit:

• What it is: An independent verification process confirming that client balances are fully backed by real assets held by Kraken.
• Importance: Builds trust with clients by ensuring transparency and security. It differentiates Kraken as one of the few exchanges offering this level of accountability.
• Competitors: While some exchanges have started providing proof of reserves, Kraken was among the first, setting industry standards.

2. Derivatives Trading Platform (New!):

• What it is: A regulated platform offering perpetual and fixed-term futures contracts, with various collateral options including fiat and over 30 cryptocurrencies.
• Importance: Meets the growing demand for derivatives, which now account for a significant portion of crypto trading volume. Provides tools for hedging, leverage, and arbitrage.
• Competitors: Competes with platforms like Binance Futures and CME Group, but Kraken's regulatory compliance gives it an edge among institutional investors.

3. ETH Re-Staking via Eigenlayer (New!):

• What it is: Allows clients to re-stake their Ethereum (ETH) to secure additional decentralized applications (dApps) and earn extra rewards.
• Importance: Enhances user earning potential and promotes participation in securing the broader Ethereum ecosystem. Simplifies re-staking, which can be technically complex.
• Competitors: While staking services are common, re-staking is a relatively new offering, positioning Kraken as an innovator in DeFi services.

4. kBTC – Kraken's Wrapped Bitcoin Token (New!):

• What it is: A tokenized version of Bitcoin on the Ethereum blockchain, fully backed by Bitcoin held in Kraken's custody.
• Importance: Enables Bitcoin holders to participate in DeFi applications for lending, borrowing, and earning yields, which is not possible with native Bitcoin.
• Competitors: Similar to Wrapped Bitcoin (WBTC) and offerings from competitors like Binance (BTCB), but Kraken's robust security measures and regulatory compliance make kBTC a trusted option.

5. Ink – Kraken's Layer-2 Blockchain (Launching in Early 2025):

• What it is: A proprietary Layer-2 blockchain designed to simplify decentralized finance access for users, integrated with Kraken Wallet.
• Importance: Aims to reduce transaction fees and increase scalability, making DeFi more accessible. By controlling its own blockchain, Kraken can optimize user experience and security.
• Competitors: Comparable to Binance Smart Chain (BNB Chain) and Coinbase's Base.

6. Kraken Wallet:

• What it is: A self-custody wallet with open-source code, supporting multiple blockchains including Bitcoin, Ethereum, Solana, and more.
• Importance: Offers users control over their assets with enhanced privacy features. By routing data through Kraken's infrastructure, it protects user identities and locations.
• Competitors: Competes with wallets like MetaMask and Coinbase Wallet.

Strategic Impact of Product Innovations

• Diversification of Revenue Streams: By expanding into derivatives, staking, and DeFi products, Kraken reduces reliance on trading fees and captures revenue from growing market segments.
• Attracting Institutional Clients: Enhanced security features, regulatory compliance, and sophisticated trading products appeal to institutional investors seeking trustworthy platforms.
• Competitive Positioning: Introducing products similar to or better than those of competitors ensures Kraken remains a top choice for both retail and institutional clients.
• Preparing for IPO: A robust and diversified product lineup enhances Kraken's valuation and attractiveness to potential investors ahead of its planned IPO.

Financial Performance and Market Presence

• Global Reach: Kraken operates in 190 countries, with strong positions in Europe, the U.S., Japan, and Australia.
• Client Base: Serves over 10 million active clients, emphasizing both retail and institutional investors.
• Revenue Growth: Continues to see increased trading volumes and revenue, driven by market expansion and product diversification. Gross revenue in 2024: $2 billion. Net revenue in 2024: $1 billion. Gross revenue in 2023: $607 million est.
• Regulatory Compliance: Actively works with regulators to ensure compliance, enhancing trust and opening doors to new markets.

Other Notable Developments

Strategic Investments:

• Investment in Usual Labs: Kraken Ventures led a $7 million funding round for Usual Labs, supporting the development of the USD0 stablecoin and DeFi protocol.
• Acquisition of TradeStation Crypto: Acquired TradeStation's crypto division to expand licensing and operational capabilities in the U.S.

Global Initiatives:

• Founding Member of Crypto ISAC: Joined forces with industry leaders to promote security and share information on threats and vulnerabilities.
• Participation in "Tech Against Scams": Collaborated with other crypto companies to combat online fraud and protect users.

Marketing and Partnerships:

• Sponsorship of Atlético de Madrid: Became the official crypto and Web3 partner of the iconic Spanish football club, increasing brand visibility.
• Kraken strengthens its presence in Germany: Kraken, an ‘exclusive partner’ of RB Leipzig since the start of the season, is now also available in Germany. The US company is represented on the sleeves of the Red Bulls’ shirts in Bundesliga games, as well as on the sleeves of the men’s first team’s training and warm-up tops.

Conclusion

Kraken's recent leadership changes, coupled with strategic product innovations and market expansions, position the company for significant growth in the evolving cryptocurrency landscape. The potential undervaluation compared to competitors like Coinbase could present a compelling opportunity for investors. With favorable political developments, particularly in the U.S., and a clear path toward an IPO, Kraken is poised to solidify its status as a leading global crypto platform.

Have you enjoyed reading? Continue at the Sky Cliff Portal: https://skycliff.pro/invite/d6212c9f-7cd5-427b-81ad-52d5fd66e9bf Use this link to received a limited free access to market data, company financials, IPO plans and much more.

The Sky Cliff Platform serves as a comprehensive portfolio monitoring solution for the Late-Stage Private Equity Market (pre-IPO), offering independent informational services. Please note that Sky Cliff Professionals does not provide investment or tax advice. Potential investors are advised to seek specialized independent tax and financial advice before investing in any alternative investment. Past performance does not guarantee future returns, and investments involve risks to your capital.