In March 2013, there were less than a million people around the world who had a cryptocurrency wallet. By the end of 2023, this had grown to 580 million people globally, up from 432 million at the beginning of 2023, with an estimated 46 million people in the US alone owning crypto. Despite the cyclical volatility in crypto markets, crypto adoption has consistently grown.

Centralized exchanges are the “pick and shovel” providers of the cryptocurrency ecosystem. They function as onramps for crypto users to exchange their fiat currencies for cryptocurrencies. They capture value by charging a transaction fee, and their revenues are therefore not directly tied to the value of any individual cryptocurrency.

Kraken is a global cryptocurrency exchange for retail and professional investors looking to buy, sell, and use blockchain assets. The company focuses on offering cryptocurrency traders secure advanced trading options with low costs for high-volume trades. It also attracts users by providing centralized exchange services taking advantage of new developments in the blockchain industry. For example, Kraken began offering margin trading, staking, and parachain auctions soon after it became available to the broader cryptocurrency industry.

Jesse Powell (Chairman of the Board, former CEO) and Thanh Luu co-founded Kraken in 2011. Before founding Kraken, Powell built digital currency marketplaces and services for gamers. In 2010, Powell’s interest in Bitcoin and blockchain grew as he got to know Mark Karpelès, the founder of Mt. Gox, and Brian Armstrong (founder of Coinbase).

When Mt. Gox collapsed as a result of security breaches and poor operations in 2010, Mark Karpelès brought Powell in to help sort out the mess. Studying the aftermath of Mt. Gox, Powell decided to launch a more secure and well-run exchange.

He launched Kraken in 2011 with the goal of creating an exchange, in his own words, on the “bleeding edge” of offerings supported by blockchain. Before announcing he would step down from his role as CEO in September 2022, he drew on 11+ years of experience and his network which helped him to anticipate developments in the crypto world and plan Kraken’s product journey. When Kraken announced that Powell would be stepping down, the company also announced that Dave Ripley, Kraken’s COO since 2016, would be taking over as CEO in April 2023.

As blockchain technology interacts more with mainstream financial systems it will likely continue to become more regulated. Although the SEC had been relatively hands-off from 2018 to 2022, it began revisiting cryptocurrency regulation in early 2022, adding operational complexity for exchanges like Kraken. This crackdown involves Kraken’s settlement with the SEC in February 2023 regarding the company’s US staking product. The company’s Chief Legal Officer, Marc Santori, is a cryptocurrency regulation specialist who has been involved in the crypto industry since 2012. From 2013-2019, Santori led the Bitcoin Foundation’s regulatory affairs committee and designed legal frameworks for capital raising with cryptocurrencies.

Kraken’s core services are cryptocurrency trading and subscription trading services. It also offers additional services for customers to create additional value using their assets, such as staking, infrastructure projects, and banking.

Cryptocurrency Trading

Source: Kraken

Kraken’s primary service is a cryptocurrency exchange facilitating trades between buyers and sellers. The company’s “Advanced Trading” monthly subscription option gives investors access to additional analytics, support, and lower trading fees. That subscription caters to its more intermediate audiences and experienced crypto traders.

In the early days of crypto, exchanges differentiated themselves by the types of coins they offered and the fees they charged per trade. As of May 2024, Kraken’s platform supports 268 tokens and supports the use of seven fiat currencies on its exchange.

Kraken focuses on serving repeat traders and serious investors. For instance, Kraken’s stringent security measures require app-based 2FA, email confirmations for withdrawals, customizable API permissions, encrypted email communications, suspicious activity monitoring, and encrypted data. Kraken was early to market with advanced trading products such as margin trading and futures. Coinbase, the largest US competitor of Kraken, created a margin product that was shut down by the SEC in 2020.

Staking & Auctions

Ethereum and other blockchain protocols have the way transactions are validated from “Proof of Work” to “Proof of Stake”. “Staking” allows users to use their cryptocurrencies to validate on-chain transactions and earn rewards. Another emerging technology is “parachain auctions", a protocol linking different blockchains and issuing rewards for users staking their cryptocurrency in the protocol.

Kraken shuttered its US staking service in February 2023 following an SEC enforcement action claiming Kraken did not properly register its “staking-as-a-service” platform as a security. The staking platform counted more than 135K US users as of June 2022 and US users held over $2.7 billion in assets on the platform as of April 2022. Kraken paid $30 million in fines as part of the settlement.

Banking

Kraken was the first cryptocurrency exchange to obtain a Special Purpose Depository Institution (SPDI) charter. The SPDI charter allowed Kraken to act as an on-ramp to the banking ecosystem, making it less reliant on other banks for payment processing. Innovating new banking products could enable a potential strategy for Kraken to become more of a financial platform for investors with cash and cryptocurrency assets while also providing revenue diversification during periods of high volatility. However, Kraken is not an FDIC-insured bank.

NFT Trading

Source: Kraken

Beginning in June 2023, Kraken began offering NFT trading. It offers the ability to search for NFT collections like Bored Apes or Cryptopunks on an NFT auction marketplace and offers zero gas fee trading. Users can also sell NFTs on the marketplace.

Kraken Wallet

Source: Kraken

In April 2024, Kraken announced the release of its self-custodial wallet product, the Kraken Wallet. This product is available to cryptocurrency holders whether or not they bought their crypto on Kraken. It provides self-custody of digital assets across tokens and NFTs, with multichain support spanning chains including Bitcoin, Ethereum, Solana, Optimism, Base, Abitrum, Polygon, and Dogecoin.

Kraken Pro

Source: Kraken

In December 2022, Kraken Pro launched its Kraken Pro platform, which it described as a “powerful web platform” that “encompasses a full suite of advanced trading tools and unified access to spot trading, margin trading, staking and portfolio management” within a single interface.

The platform is “specifically designed” for advanced traders to trade in volume at reduced latency. Kraken Pro offers access to more than 210 digital assets as of May 2024. It also allows for the trading of over 90 perpetual futures. As of May 2024, Kraken Pro claimed to have more than 9 million unique verified clients, more than $207 billion in trading volume in the previous year, and an average support resolution time of less than five minutes.

Customer

In its early days, Kraken targeted sophisticated crypto traders and investors in particular who were looking for low fees, security, and robust tooling. As of May 2024, Kraken was available to customers internationally and in all US states except New York, Washington, and Maine, where it provides none of its services. Various other restrictions apply to different states within the US. For instance, futures trading and staking are not available for US residents as of May 2024. Texas and New Hampshire residents cannot deposit or hold EUR, while residents of Massachusetts cannot deposit or withdraw funds via international banks.

Market Size

Transaction volume value (number of trades multiplied by asset price) determines the market size of centralized cryptocurrency exchanges. As an example, if Bitcoin (BTC) is worth $100, then 60 million trades of BTC would create $6 billion of BTC transaction volume value. If a Bitcoin exchange took a 1% fee of the volume on average for facilitating trades, then in theory that exchange would generate $60 million of revenue.

Kraken’s main US competitor Coinbase, a public company, saw $830 billion in trading volume in 2022, which declined to $467 billion in 2023. In 2022, the company had $2.3 billion in transaction revenue, which was $1.5 billion in 2023. This would indicate that Coinbase’s average transaction fee ranged between ~0.28% in 2022 to about 0.32% in 2023. The global trade volume for the five largest centralized cryptocurrency exchanges in 2022 was $10 trillion, representing ~$28 billion of potential revenue based on 2022 volumes.

In 2022, Kraken’s market share of total trading volume on centralized exchanges fluctuated between 2.3% and 3.1%. By April 2024, Kraken appeared to have fallen out of the top 10 centralized crypto exchanges globally by market share. However, some unregulated exchanges are known to artificially inflate their numbers with fake transactions, so Kraken may have had a higher percentage of the worldwide market.

Crypto Market Volatility

Source: CoinMarketCap

From 2020 to 2021, centralized cryptocurrency exchange trading volume grew from $1.8 trillion to $14 trillion (a 689% increase in volume). However, sliding cryptocurrency prices dropped trade volume on centralized exchanges by 46% from 2021 to 2022. Coinbase’s volume, for example, dropped from $1.7 trillion to $830 billion, a decrease of about 51%, between 2021 and 2022, while its total revenue decreased from $7.3 billion to $3.1 billion, down ~57% YoY. Coinbase saw even further drops in 2023 to $467 billion in trading volume and $1.5 billion in revenue.

Centralized exchanges can attempt to deal with market volatility by selling subscription services and focusing on well-performing cryptocurrencies. However, diversification will only dampen volatility driven by prices to a limited extent because 10 of the most popular cryptocurrencies command ~80-85% of the market. Movements in the top 10 cryptocurrencies significantly impact the value of trades in the market (see chart below). Additionally, Bitcoin is generally a signal of confidence in the market, and other cryptocurrencies tend to mimic its price movements.

Centralized Exchanges

Binance: Binance, the largest global exchange as of May 2024, processed more than 50% of global spot trading volume between Q1 and Q2 2023, although this declined to just 30.1% by 2023. It was founded in 2017 and offers 415 tokens on its exchange as of May 2024 as opposed to Kraken’s 268. It also supports 11 fiat currencies, against Kraken’s seven. Binance faces regulatory challenges due to its roots in China and aggressive market expansion before receiving official approvals. Its American partner, Binance.US, is operating with questionable legality in several of the states it is available. Binance.US offers staking in some US states, whereas Kraken does not offer staking in the US as of February 2023.

Coinbase: Coinbase is a US-based centralized exchange that was founded in 2012. It went public in April 2021 and achieved a market cap of over $100 billion on its first day of trading, but its stock value has fallen since then and it has a market cap of $55.5 billion as of May 2024. Compared to Kraken’s 268 tokens, Coinbase offers 249 tokens on its exchange as of May 2024; it also only supports three fiat currencies (euros, British pounds, and US dollars) versus the seven supported by Kraken. Coinbase offers staking options in some US states, while Kraken does not offer staking in the US.

Other Competitors

Robinhood: Robinhood was founded in 2013 and went public in July 2021. It had a market cap of $18.4 billion as of May 2024. As cryptocurrency garners more mainstream adoption, mainstream financial trading service companies like Robinhood have entered the market. Robinhood supports the buying and selling of 61 crypto tokens as of September 2023 in all US states except Hawaii and Nevada. Although it did not previously allow users to move purchased crypto off-platform, in March 2023 it rolled out a crypto wallet and began supporting crypto transfers.

Most of Kraken’s revenue comes from transaction fees which vary based on volume incentives over a 30-day period. Its fee schedules vary across spot trading vs. margin or futures trading and by volume.

Source: Kraken

As of May 2024, Kraken’s spot trading fees ranged from 0% on the low end to 0.4% on the high end.

Kraken reported ~4 million users in February 2019, ~6 million in June 2021, and ~9 million in May 2022. One unverified source claimed the platform had over 10 million users as of May 2024. It is unclear whether Kraken's reported users are active or simply registered users. Kraken claimed that saw $56 billion in trading volume in January 2021, which was more than it saw in the full year of 2019. In May 2024, Kraken’s 24-hour spot trading volume had grown to around $600 billion.

Kraken raised a Series D of an undisclosed size in 2021. In addition to its equity funding, Kraken raised $100 million in 2019 from a group of its largest customers to acquire the London-based company Crypto Facilities. In total, the company has raised more than $130 million as of September 2023 (including the money raised for its 2019 acquisition).

Product Innovation

One of Kraken’s key opportunities for growth is to innovate trading products utilizing the latest cryptocurrency developments. In 2021, an ecosystem of Layer 1 protocols built on top of the Ethereum blockchain, such as Polkadot (the key protocol behind parachain auctions), rose in popularity. If it can continue to innovate its offerings to match the latest developments in cryptocurrencies (like it did with Polkadot’s parachain auctions), it will continue to grow with the market.

Asset Tokenization

Non-fungible tokens (NFTs) also represent a considerable growth opportunity for exchanges. Although some consider them to be nothing more than blockchain tokens depicting low-grade pixelated art with speculative value, they represent the underlying movement of “tokenization" which is a potentially seismic shift in asset ownership.

Tokenization can allow commercial real estate ownership to create tokens representing partial ownership using smart contracts. If asset tokenization grows in popularity, it could be a large new market for asset trades on Kraken. In June 2023, Kraken began supporting NFT trading, and the Kraken wallet likewise supports NFTs. One potential obstacle, however, is that during the crypto bear market of 2022-2023, NFTs saw their value collapse even relative to the downturn in the crypto market more broadly.

Steady Crypto Adoption

Despite short-term price and trade volatility, there is potential for sizable steady user growth long-term. For instance, Ethereum added ~25 million unique addresses every six months from 2017 through February 2022. In May 2024, Ethereum had 271 million cumulative addresses, which was up from 232.9 million in May 2023 and 66 million in May 2019. This indicates that there is a growing pool of crypto users that has consistently grown even through periods of cyclical volatility in the crypto market. Almost 70% of US millennials believed cryptocurrencies would be part of their lives and continue to accrue value as of March 2022.

Regulatory Risks

In May 2022, the SEC doubled cryptocurrency regulation staff to increase cryptocurrency exchange oversight. The SEC plans to restrict insider trading products (e.g., taking trades in markets they make) and ensure compliance with financial institutions’ anti-laundering and “know your customer” requirements. Between November 2022 and February 2023, Kraken was the target of two regulatory enforcements from the SEC and the Treasury Department for failing to register its staking service as a security and for facilitating crypto trading in Iran that allowed citizens to skirt US sanctions.

Margin Compression

The other critical risk to Kraken is the theoretical threat of margin compression as transaction fees go to zero, especially in a competitive market with numerous centralized and decentralized exchanges with users to choose from. Similar to how Robinhood decreased stockbroker commissions, new entrants in the crypto exchange market may increasingly commoditize trades leading to margin compression.

Kraken may not be able to compete economically against larger centralized exchanges that have the opportunity to cut fees going forward. For example, Binance cut its trading fees on Bitcoin trades to zero in the summer of 2022, leading to a rapid increase in the company’s market share. However, Binance ended this practice in March 2023.

Market Volatility

Source: CoinGecko

The volatility of the crypto market, which has experienced large swings in the first 15 years of its existence, poses threats to centralized exchanges like Kraken because transaction volume is tied to trading volumes, which is ultimately tied to the value of crypto assets as a whole. From a peak of almost $3 trillion in November 2021, the global crypto market cap fell to as low as $826 billion in December 2022 before surging back to $2.9 trillion in March 2024.

In 2011, Jesse Powell and Thanh Luu co-founded Kraken, a cryptocurrency exchange aimed at offering secure and advanced trading options for retail and professional investors. Over the years, Kraken has expanded its services to include margin trading, staking, parachain auctions, banking, NFT trading, and a self-custodial wallet. Despite market volatility and regulatory challenges, Kraken has maintained its focus on providing secure and cost-effective trading solutions, differentiating itself through its stringent security measures and a wide range of supported tokens and fiat currencies. As of 2024, Kraken continues to compete with major exchanges like Binance and Coinbase, navigating a complex regulatory landscape while striving to diversify its revenue streams through subscription services and advanced trading products.