Bakkt's SPAC shows how frothy the crypto markets have become

It was the SPAC announcement heard around the crypto world.

Bakkt, the digital asset marketplace owned by Intercontinental Exchange, said on Monday that it plans to go public through a so-called special-purpose acquisition company (SPAC) deal that would value the two-year-old venture at more than $2 billion. 

Market insiders immediately questioned whether the deal was reasonable. After all, while Bakkt has long had ambitions to launch a consumer app for spending and storing digital assets, it is unclear how many users they have or how much money they're making.

It is also still waiting on key partners — specifically airlines — to work with the firm on letting would-be users exchange unused airline miles. That plan has probably been set back by the hit the airline industry has taken during the Covid-19 pandemic. 

Bakkt isn't letting any of that get in the way of its ambitious goals to top nine million customers next year and generate $500 million in total revenue.

The audacious plan reflects the frothiness of the crypto and SPAC markets, which have both exploded in value over the last year, according to market observers.

Bitcoin has soared in recent months, recently eclipsing $40,000 a coin for a time (it's currently changing hands at around $38,500). At the same time, SPACs — a way to go public through a merger with an existing shell company — have driven the "voracity" of the new issuance market, according to investment bank Cowan.

But how realistic is Bakkt's SPAC? Its "monster" target valuation speaks to the "euphoria" in both markets, said Galaxy Digital founder Mike Novogratz. "We are an investor so I am going to cheer it on," but the valuation "does feel rich," he said.

Sam Bankman-Fried, FTX's chief executive officer, chimed in via Twitter: "Man I would like to be the guy who typed '0' into the deck and then was like 'yeah, totally, 30m, that's what 0 projects to.'" 

On the other hand, it's not surprising that Bakkt is trying to capitalize on the bull market-driven action.

Crypto-related stocks have soared over the last year, with firms like Galaxy Digital and Silvergate achieving triple-digit percent gains. Software firm MicroStrategy — which in the past few months has added nearly $500 million worth of bitcoin to its balance sheet — surged by more than 250% in 2020. On FTX, pre-IPO futures contracts tied to Coinbase are trading at a valuation of more than $75 billion.

Meanwhile, SPAC issuers have engaged with fellow digital asset firms Paxos and BlockFi about possible deals, according to several sources. 

Two peas in a pod

Indeed, the crypto market and SPAC market seem to be overcoming their past negative reputations at the same time. While billionaires like Stanley Druckenmiller and Larry Fink have recently changed their tune about bitcoin, big names in finance such as Pershing Square's Bill Ackman and Social Capital's Chamath Palihapitiya have helped popularize SPACs. 

"Let's look back ten years or so, SPACs were a four-letter word, they didn't have the best reputation, the sponsors didn't necessarily have the best interest in mind of investors in the marketplace," John Tuttle, vice chairman of the New York Stock Exchange, told The Block in a recent interview. "And they largely fell out of favor."

Today, higher-quality companies are tapping into the public markets via SPACs. Recent high-profile successes include Virgin Galactic and Draft Kings. Most of those firms doing SPAC deals are in industries poised to play a bigger role in the future, said BlockTower Capital's Michael Buccella. 

"There’s a great long-term story that can be used to bridge these companies from SPAC merger/listing to realizing revenues and earnings to backfill the valuation," he told The Block. "It’s why other industries like electric vehicles, space tech, cannabis, psychedelics, lithium-ion battery, and other futurist industries with promising long-term prospects are all appealing targets."

Whatever one thinks about Bakkt's ambitious SPAC, it's definitely a signal that more deals, including SPACs and IPOs, are likely coming to the crypto market, according to JMP Securities' Devin Ryan. 

"When these deals hit the public news wire that sparks more activity and if the early deals progress well, momentum will likely accelerate," the investment banking executive commented. "I think SPACs will be one viable path to the public markets for firms connected to the DeFi space. We believe some of the leading firms are already being approached, and we know of some SPACs in the market where these businesses could fit."