Kraken IPO: will it happen and what are the risks?

Will a Kraken IPO still take place? If so, what are the challenges the company faces?

Kraken logo on smartphone screen                                 
Will there be a Kraken IPO? – Photo: Shutterstock
                                

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Now that Coinbase’s direct listing is done and dusted, attention is turning to other cryptocurrency exchanges that might feel emboldened to make a stockmarket debut.

Binance appears to have firmly ruled itself out. In an announcement that could be interpreted as a rather pointed swipe at its archrival, the company tweeted:

Meanwhile, in late July 2021, Robinhood had its long-awaited IPO, trading on the Nasdaq and achieving a valuation of $31.8bn.

Initially scheduled for the third quarter of 2021, eToro’s plan to go public through a merger with US SPAC Fintech Acquisition Corporation has been delayed to the end of this year, due to a decline in demand for the SPAC’s shares.

Kraken’s turn in the spotlight

What remains to be seen is whether a Kraken IPO is in the works and how much Kraken stock would be worth when compared with the likes of Coinbase.

The trading platform’s CEO, Jesse Powell, has become something of a regular on financial news channels, where he takes the time to give exceedingly bullish predictions about how much major cryptocurrencies will be worth in the future.

However, he has recently been more cautious. He told Fortune in June 2021 that, while he hoped to make the platform public in 2022, he was minded to try an initial public offering (IPO) to raise cash, rather than a direct listing.

He said the market reaction to Coinbase’s April direct listing made him consider an IPO, adding:

“Not having lock-ups, having billions of dollars of insiders be able to dump their shares, you know, on day one ... I think it has a dampening effect on the market.”

By opting for a direct listing – which entails the sale of existing rather than newly issued shares – instead of an IPO, Coinbase eschewed the usual investment banking underwriters, but got some criticism for doing so.

On its first day of trading, Coinbase’s president, CEO and CFO sold 63%, 71% and 100% of their shares respectively. Early venture capital backer Union Square Ventures also sold its entire position.

Coinbase listed only days after Bitcoin reached its current all-time high and after it reported a nine-fold year-on-year increase in first-quarter revenue. The company closed its first day’s trading almost $80 above its reference price, at $329.28.

In a previous interview with Bloomberg, Powell had expressed doubts about whether he would have an IPO for Kraken.

During that interview, when he was asked about the prospects of a Kraken IPO, he said: 

“To the crypto community, I think those kinds of assets are easier to measure Bitcoin against because you never know where the dollar is going to be. There could be 10 times as many US dollars out there a year from now, so it’s really hard to measure Bitcoin against the dollar.”

Powell’s concerns about how many dollars will be in circulation relate to the unprecedented quantitative easing that we’ve seen in response to the coronavirus pandemic – and concerns that the Federal Reserve will need to continue injecting economic stimulus for years to come.

With recent announcements from the Federal Reserve signalling that interest rate rises could begin as early as 2022, Powell’s concerns around the continued devaluing of the greenback could be unfounded.

Kraken Bitcoin Exchange
Kraken Bitcoin Exchange – Credit: Kraken


Kraken is going public – yes or no?

So, what will this mean for the feverish demand for Kraken IPO news and any prospect of a Kraken IPO date?

Despite announcements in June that an IPO would take place by the end of the year, the trading platform is yet to complete an S-1 filing with the US Securities and Exchange Commission, the crucial first step in ensuring that a Kraken initial public offering gets the green light. This document is also vital for prospective investors, because it offers a valuable insight into the company’s current financial situation and the risk factors it faces going forwards.

If and when Kraken share emerge, we still don’t know whether they will be via a traditional IPO or a Coinbase-style direct listing. The CEO’s comments suggest that it may well end up being the former, contrary to what people have tended to believe previously. Back in June, Powell appeared to rule out any prospect of an eToro-style SPAC deal, declaring that the current value of Kraken stock means that it is “too big” to explore such an approach.

Kraken is yet to announce a date for its IPO
Kraken is yet to announce a date for its IPO – Credit: Kraken


Kraken IPO: what valuation are we looking at?

Assuming that Kraken stock is coming to an exchange near you some time soon, the inevitable next question concerns the valuation that this trading platform might end up securing. While Kraken is currently valued at around $10bn, reports indicate that the company has high hopes of achieving a $20bn valuation. This is substantially less than the $100bn valuation Coinbase was seeking. 

Powell believes that Kraken’s unique selling point when and if the IPO does take place will be the fact the exchange’s banking licence has been granted by the US state of Wyoming, a notoriously lax state in regard to crypto regulation. “Users will also be able to link their bank account to their crypto account. So you have everything in view,” Powell said.

The crypto exchange also recently announced that it now supports Apple Pay and Google Pay in the Kraken app, making it easier for customers to buy crypto.

Additionally, last month, Kraken reported that it would follow in the footsteps of Coinbase by expanding into Europe by the end of the year. Powell told German publication Handelsblatt: “We are working on a licence in an EU country.” A successful expansion would no doubt impact the valuation of the company favourably.

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Overall, the threats associated with a Kraken IPO very much mirror the ones that Coinbase faces. For example, we already know that there was some alarm surrounding the statistic that 96% of Coinbase’s revenue comes from transaction fees – with analysts arguing this wouldn’t be sustainable in the long run.

There are predictions that we could end up seeing rival crypto exchanges starting to slash their fees in an attempt to entice a broader cross-section of customers, and this would be nothing short of calamitous from a profitability standpoint. Kraken is a relative minnow when compared with the likes of Coinbase and Binance, and may find it harder to withstand such market pressures – especially if it doesn’t have a suite of products that can help offset the decline in revenues that arises from fee compression.

As we’ve seen already with Coinbase and MicroStrategy, Kraken shares may also be overexposed to volatile movements in the erratic crypto markets. This may make it difficult to evaluate the stock fundamentally.

Kraken IPO news

Then again, there is an argument that a Kraken IPO could learn from some of the lessons that were seen after Coinbase’s direct listing – avoiding some of the potential pitfalls that may emerge. COIN’s first-mover advantage means that it made history by launching on the Nasdaq, but it also had to overcome some of the challenges that successors may face.

And it doesn’t help that Powell – who is direct and plain-speaking during his broadcast interviews – openly acknowledges that the crypto sector could end up facing a series of seismic changes in the coming years.

Speaking to CNBC, he warned that regulatory uncertainty surrounding digital assets would continue to linger for some time yet, warning: “Something like that could really hurt crypto and kind of kill the original use case, which was to just make financial services accessible to everyone.”

That wouldn’t just kill off the original use case for cryptocurrencies – it could end up striking at the very heart of Kraken’s business model.

Further reading

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