In 2018, Intercontinental Exchange (NYSE: ICE), owner of the New York stock Exchange, launched Bakkt. The vision for Bakkt was to serve as a regulated custodian of digital assets, with the tech infrastructure to enable the trading and conversion (to fiat) of the same. In fact, functionally, Bakkt ’s platform may have seemed similar to a still young, but up-and-coming fintech start-up named Coinbase (founded 2012).
As the brainchild of ICE, Bakkt was naturally launched with an eye towards capturing institutional investor interest in digital assets, most notably Bitcoin. The marquee offering for institutional investors was a 1-day, physically delivered Bitcoin futures contract, with physical warehousing. But Bakkt was launched with its other eye towards the consumer. In what has been described by current CEO, Gavin Michael, as a “B2B2C” strategy, Bakkt’s infrastructure was designed to allow consumers to pool, exchange and use for payment, all kinds of digital assets – cryptocurrencies, mileage rewards, gift card credits, etc. – by creating a digital wallet with interconnectivity between consumers, issuers, and merchants.
Bakkt went public on October 18th through SPAC vehicle VPC Impact Acquisition Holdings. For anyone who has invested in the newly public, 2021 iteration of Bakkt, it’s been a white-knuckle ride, with violent swings in share price pursuant to news related catalysts: the most recent of which were Mastercard’s announcement of Bakkt as a new Crypto-as-a-Service partner, and Fiserv’s announcement of Bakkt as a future integration partner for its omnichannel Carat ecosystem. Collectively, the pre- and post-IPO marketing has been heavily focused on the consumer-facing mobile wallet, and not he institutional Bitcoin derivatives products. But the Bitcoin derivative products are still touted on Bakkt’s website.
The net effect of Bakkt’s divergent product offerings has created an incongruity of purpose for the fledgling digital asset platform: there’s a lack of cohesion in its business model stemming from its two distinct end-users – institutions and consumers. This dissonance may ultimately lead to negative sentiment among investors, and lack of adoption among consumers. But further to the latter, the consumer-facing product itself seems deficient in purpose.
The central element of Bakkt’s consumer-facing application is a mobile wallet. What differentiates the Bakkt mobile wallet from others is its ability to not only manage digital assets like cryptocurrencies, but digital assets of all kinds. This includes gift, reward, and loyalty credits consumers earn from merchants and card issuers. Because the mobile wallet accesses Bakkt’s back-end custody, clearing, and payments infrastructure, the true value of the consumer product is its ability to exchange these heretofore non-interchangeable digital assets – whether that be through conversion, trading, or payment. As this capability isn’t currently offered through existing mainstream consumer, digital asset and mobile wallet applications – CashApp, Paypal, or Coinbase – there does exist an argument, at least conceptually, that Bakkt’s platform does address a consumer pain-point.
But does Bakkt’s platform rise to the level of a tech solution that addresses a consumer’s need?
I say no. And here are a few reasons why.
Problem 1 – consumers don’t need another mobile wallet for cryptocurrency exchange and custody, because they already have that with Square, Paypal, or Coinbase. Additionally, as of this writing, Bakkt only supports Bitcoin, and no other cryptocurrencies.
Problem 2 – consumers don’t need another mobile wallet to ‘pay’ for purchases with cryptocurrency. Bakkt is facilitating a crypto-to-fiat conversion – which is not new. Consumers can already perform this through existing mobile wallet providers with far greater market penetration.
Problem 3 – to the extent that one type of digital asset can be exchanged for another, of equal value – reward credits from an airline exchanged for value at a restaurant for example – it’s not clear how that actually works (mechanically). What is the transaction flow by which one company’s rewards points are converted into credits at another company? And if there’s a conversion to USD first, what’s the conversion ratio?
Problem 4 (and this is just a hunch) – there is no consumer need. Personally, I’ve never lost sleep because I was concerned that all my rewards, loyalty, and gift points, digital or otherwise, weren’t warehoused and managed in the same mobile wallet, and suspect most other consumers haven’t either. To the extent that I would like them to be accessible in a mobile wallet, and to exchange them or use them for payment, I’d just as assume wait until Venmo or CashApp, which already custody, trade, and convert cryptocurrencies (crypto-to-crypto and crypto-to-cash), add similar functionality.
Fintech Investment Bank Take…
Bakkt’s technology can do a lot of things…too many things.
Bakkt was born into this world with a blue-blood pedigree as the offspring of Intercontinental Exchange. By virtue of this alone, Bakkt’s objective to pursue institutional money with crypto derivative products makes a lot of sense. But there hasn’t been much mention of the institutional side of the business lately. In fact, in repeated interviews from multiple press organizations, where Bakkt CEO, Gavin Michael has been directly questioned about basic KPIs for Bakkt’s Bitcoin derivatives segment, he has refused to disclose any. This lack of visibility, and unwillingness to even talk about the institutional offering, doesn’t portend well for Bakkt.
Note: We should be getting those KPIs shortly as Bakkt is scheduled to report third quarter results on November 12th.
And although Bakkt has been grabbing media headlines with its consumer-facing offering, and its ‘digital wallet for all types of digital assets’ is interesting (it scratches a consumer itch), it still lacks a compelling story – in my opinion, because Bakkt’s digital wallet doesn’t solve for a compelling need.
This leaves me with the thought of Bakkt as some chimerical tech-monster, with a technology platform amalgamated from high value, individual solutions, but deficient in a single, high value comprehensive one. Like the mythical chimera, cobbled together from different animal parts, Bakkt’s platform looks cool, and is theoretically functional, but at the end of the day, you’re still left with the nagging question of “what is it?”
I believe Bakkt is fortunate for having gone public when it did. The capital markets, both public and private, are crypto-crazy right now, and flashy headlines announcing big name fintech partnerships can easily send a company’s valuation vertical – as Bakkt’s has done. Bakkt was right to take advantage of these lofty valuations.
But, longer term, I suspect Bakkt’s story might end up being a cautionary tale: one of a fintech that rushed to go public via SPAC, before it was truly prepared to. Bakkt has an internal misalignment of strategy as a function of different products and different end-users.
Perhaps Bakkt may have been better served by ironing out its go-to-market strategy before it went to market.