'We do particularly well with the OGs:' An inside look at Kraken's 3 main business lines

Founded in 2011, Kraken has become one of the largest spot cryptocurrency exchanges in the world, in terms of real bitcoin trading volume.

In 2013, after two years of development and testing, the California-based exchange launched a public beta of its trading platform. Since then, Kraken has raised $13.5 million from over 2,000 individual investors through crowdfunding platforms like Bnk to the Future at a valuation of $4 billion.

Under CEO and co-founder Jesse Powell, Kraken has made various acquisitions to improve its infrastructure and key additions to its leadership team to build out its line of services, including Steve Hunt, VP of engineering, who joined from Jump Trading, and Nelson Minier, the firm's head of OTC, who joined from Credit Suisse. 

The exchange-operator is known to spar with regulators, specifically those in New York. In fact, Powell has compared New York regulators to an "abusive, controlling ex." The firm doesn't hold the state's BitLicense to offer services to residents in the jurisdiction and exited from the state several years ago, although it still has employees working in New York. To be sure, in recent months Kraken has worked with Wyoming regulators to create what the firm views as a more reasonable alternative to New York's model, as previously reported by CoinDesk.

As for its business makeup, Kraken has three core business lines: its cryptocurrency exchange, its OTC desk, and its futures platform. Here’s a breakdown of these services.

Exchange

Kraken’s flagship product is its cryptocurrency exchange. Since the beginning of 2019, the volume on its most popular trading pair (BTC/USD), has grown nearly fourfold — fueled by the rise in the price of bitcoin.

Source: Digital Assets Data

In total, the exchange saw $212 million worth of crypto exchange hands over the past 24 hours, according to CoinGecko. Over the last month, $3.7 billion worth of crypto traded on Kraken.

Source: The Block, CryptoCompare

Still, it commanded a mere 7.9% marketshare in August, according to data compiled by The Block. 

Source: The Block, CoinGecko

The firm offers trading in 96 different cryptocurrency pairs (38 crypto-to-crypto & 58 fiat-to-crypto) including Augur, Basic Attention Token, and Bitcoin. In an interview with The Block, Kraken's Powell hinted that the exchange would pick up the pace of coin listings. 

"We want to be fairly scrutinizing of the coins we list, but we have a backlog of coins we want to list - client demand is a big piece of it. We have a few coins not widely known but [which] are technically interesting," he said. 

Futures

In February, Kraken acquired UK-based Crypto Facilities in an $100 million deal to expand into the booming market of cryptocurrency currency derivatives.

Rebranded as Kraken Futures, the firm offers cash-settled derivatives in bitcoin, bitcoin cash, XRP, litecoin, and ether. The business is run by Timo Schlaefer, who founded Crypto Facilities.

The products can trade on a monthly or quarterly basis. As per CoinDesk, the firm traded nearly $1 billion in its first month following its acquisition. The exchange tells The Block that, to date, Kraken Futures has “seen more than 10x growth since the acquisition.” Kraken cites its 30% revenue sharing program and the “seamless transfers” between its spot and futures platforms as the reason for this growth.

OTC

Kraken’s over-the-counter trading desk was launched in 2016 as a way for the firm to help broker large trades for certain clients. Pooling from its own exchange liquidity, the trades are conducted off the main order book of Kraken as a way to avoid large market moves from a big trade. The operation is global with team members based in San Francisco, New York, Tokyo, Singapore, and Hong Kong.

The unit is led by Nelson Minier, a 20-year veteran of Wall Street.

In an episode of The Scoop, Minier describes the firm’s OTC clients as institutions and high-net-worth individuals. “We do particularly well with the OGs,” he said. “They want white glove service. They know they’re doing pretty big size and they want to make sure that they’re talking to somebody and feel more comfortable talking to somebody that’s going to be moving that much money…”

Minier also explains that Kraken is a principal desk, which means the firm facilitates trades using its own funds. “We’re only allowed to take principal positions, we trade the firm’s money. So if you come to us and want to sell 1,000 bitcoins we take it down as our risk. It’s not like we have the other side of the trade. It’s our risk if it falls and drops a thousand points then we shed a lot of tears,” Minier said on The Scoop.

According to Kraken, since 2018, the “absolute number of OTC clients” at the firm has grown 20x.

For a inside look at Galaxy Digital, the cryptocurrency merchant bank, read here.