What’s Behind Kraken’s Apparent Over-Valuation?

US-based cryptocurrency exchange Kraken has announced the possibility of a private offering investment opportunity available only to existing clients. The offer was sent out via email to Kraken’s top investors and has generated interesting discussion and speculation on Twitter.

1/ Kraken valuing itself at $4B. According to bitcoinity, they did $1B in btc trading volume last month. Let's call it $1.5B in total crypto trading. Assuming fees of 0.3%, they had $4.5M in revenue x 12 = $54M revenue/year. https://t.co/5U3JEkGA3k

— Andrew Rennhack (@andr3w321) December 11, 2018

The offer targets existing crypto investors who are accustomed to working with very large transactions. Those who respond to the invite will undergo additional eligibility evaluation prior to joining the offering. All investors need to respond by Dec 16, 2018, in order to be considered for participation. The original email announcement directs existing Kraken clients to complete a questionnaire online prior to receiving a complete packet of information regarding the private offering. The email also highlights the fact the Kraken is not looking for financing or is in need of cash. It instead cites the bear market that has plagued cryptocurrency throughout all of 2018 in conjunction with Kraken’s “significant reserves,” stating that this is a prime opportunity for acquisition.

Over-reaching?

According to the email, Kraken is listing shares for sale at a valuation of $4 billion USD. Investors will be required to commit to a minimum investment of $100,000. The services of a third party transaction facilitator will be enlisted for the entirety of the process. This third party facilitator will provide services such as investor checks, transaction documentation execution, and, ultimately, all funding of investments. The valuation is based on internal assessments of the company and its holdings. However, as the tweet above makes clear, not everyone thinks this is accurate. Based on Kraken’s current sales, and assuming a stable market (which is a substantial assumption these days), Kraken’s revenue is approximately $54M per year. This calculation yields a staggering 125 P/E ration — five times higher than the average for publicly traded companies in the US. Some have argued that the company has strong future potential for growth, but even in such a case, the flagging crypto market may make this an even greater stretch.

Goodbye, Caution!

This is an interesting direction for historically frugal Kraken to take. However, Kraken experienced a multitude of technical issues, causing slower service and response times across the platform — so Kraken leadership may be exploring different ways to boost confidence and attract investors. The impending potential for a regulatory crackdown and possible fines has become more and more realistic, leading some to speculate that the offering is simply a way to pad account balances prior to fines being levied. Kraken’s listed coins remain extensive, even as Bitcoin once again rises to prominence. Yet, all the altcoins Kraken has listed are definitely shrinking. Therefore, listing a lot of coins is becoming less of an advantage when comparing Kraken to Coinbase, Coinmama, Gemini, or other competitors. What do you think of Kraken’s valuation? Let us know your thoughts in the comments below! While you’re at it, check out our unbiased Kraken review!