Bakkt: Clearer Optics, Plenty To Prove

Summary Bakkt has divested legacy business units to streamline focus on crypto infrastructure and ￰0￱ loyalty business underperformed from the outset, producing modest revenue relative to the acquisition value, and was impacted by COVID-19, so divesting was a good ￰1￱ current business model positions Bakkt as an embedded service layer, offering trading, custody, and compliance infrastructure via APIs to fintechs, neobanks, and ￰2￱ stock price movement resembles a relief rally; long-term upside of BKKT stock depends on execution and adoption of the new business lines. I'm initiating coverage on Bakkt (BKKT), as the stock stages a fresh rally following the divestiture of legacy businesses, a public offering, a stablecoin services launch, and a leadership transition the company has undergone, with fintech veteran Mike Alfred's appointment to the board being the latest spotlight move, which all refocuses the company as a pure crypto infrastructure and services ￰3￱ is not a new name to most crypto ￰4￱ company helped open an institutional on-ramp for Bitcoin ( BTC-USD ) in 2019 when Bakkt launched the first regulated, physically delivered Bitcoin futures contract in the U.

S., which was traded on the Intercontinental Exchange ( ICE ), a product that delivered Bitcoin on settlement and gave institutions a regulated path to hold BTC long before the spot Bitcoin ETFs became available in the ￰5￱ piece will focus on what the divestiture and the renewed focus as an institutional-grade crypto infrastructure and services provider mean for Bakkt and how the sequence of recent corporate actions could fundamentally reshape Bakkt's investment narrative for investors. Bakkt—The Streamlining and the Road Ahead Bakkt's recent sequence of transitional moves has been a long time coming for both the company and most investors. It's been a long stretch of volatile revenues and razor-thin ￰6￱ some quarters, the cost of revenue even exceeded the revenue itself, resulting in negative margin and gross ￰7￱ losses have been persistent throughout the history of Bakkt as a publicly traded company, save for Q1 this year when a non-cash accounting gain recognized from the fair value of warrant liability temporarily lifted results into positive ￰8￱ short, the company struggled to balance its consumer-facing business (the Loyalty business) with its institutional infrastructure business (Bakkt Trust).

Every quarter of financials has reflected this ￰9￱ statement (Seeking Alpha) Now, to understand where Bakkt is headed, we need to understand where it's coming ￰10￱ has always basically been a crypto company but ran two different businesses that were largely unrelated, and their business model made it difficult for most investors (including me) to properly understand and value the ￰11￱ two business models were a B2B loyalty and rewards platform inherited through the Bridge2 Solutions acquisition and a digital asset custody and trading infrastructure business operated under Bakkt Trust Company (a New York State-chartered limited-purpose trust).

On the one hand, the Loyalty business operated as a B2B services provider, managing corporate rewards programs where consumers could redeem points for travel and merchandise. I think it's a good decision for Bakkt to streamline its focus by divesting the legacy loyalty ￰12￱ way the Loyalty business worked before the divestiture was by acting as a large ￰13￱ a customer redeemed loyalty points from or through a partner brand or financial institution, Bakkt had to procure that specific flight, hotel booking, or product from a vast network of third-party vendors, handling all the logistics and ￰14￱ created lots of operational strain, lower margins, and a drain on capital and management focus that should have been dedicated to ￰15￱ I think a lot of things went wrong with this business line from the outset.

A business was acquired for a large amount following a $300 million Series B funding in 2020 but ended up producing only modest revenue relative to that ￰16￱ contributed Bridge2 to Bakkt at an implied enterprise value of about $250 million as part of the Series B transaction ( this filing shows ), yet Bridge2's pro forma revenue for 2020 was about $36.4 ￰17￱ acquisition of Bridge2 Solutions happened just before the COVID-19 lockdown period, and that immediately hit the travel and retail industries from which the Loyalty business directly earned its ￰18￱ recent quarters (before the divestiture), net loyalty revenues had fallen to single-digit millions (net loyalty revenue was $9.8 million in Q2).

Pro-forma sales 2020, 2021 (Company filing) When the Loyalty business was integrated from the Bridge2 acquisition, Bridge2 was already seeing declining revenues, and though the bottom line remained positive, net income was also declining. Bridge2 acquisition (Bakkt) Then the custody business via Bakkt Trust was focused on institutional-grade crypto storage and settlement, including Bitcoin and Ethereum ( ETH-USD ) custody and supporting products like Bakkt's physically settled Bitcoin futures launched through ICE (mentioned earlier). The Trust required capital and compliance overhead but seemed to never reach sufficient institutional scale to offset those costs, which further diluted profitability and management ￰19￱ example of this is a direct comparison of Bakkt Trust's assets under custody AuC as of the Q4 2024 end before it was transferred to ICE in Q1 this year, which was reported to be around $2.3 ￰20￱ is an enormous gap from peers like Anchorage Digital, boasting tens of billions of dollars in AUC, and Coinbase ( COIN ) Custody, which manages custody balances well into the hundreds of billions across institutions and ￰21￱ I think one reason for this could be Bakkt's initial focus on its physically settled Bitcoin futures contract (its flagship product mentioned in the opening paragraph) rather than a custody-as-a-service model, compared to rivals like Coinbase and Anchorage, who have seized institutional inflows from funds, ETFs, and corporate treasuries and have thus gained much higher ￰22￱ the physically settled futures structure required Bakkt to build a robust, secure custody arm (the Bakkt Warehouse) to hold the physical Bitcoin for settlement, Bakkt's primary go-to-market product was the futures contract itself, not custody ￰23￱ basically missed out.

A further drag for the custody business was the SEC's issuance of SAB 122 , which rescinded interpretative guidance included in SAB ￰24￱ SAB 121, entities were required to record customer crypto assets as liabilities, which likely discouraged most regulated institutions from becoming crypto asset ￰25￱ now that it has been rescinded, banks and regulated institutions face fewer accounting roadblocks to offer custody, which cleared the way for more regulated institutions to enter the crypto custody market and made the competition tougher for companies like ￰26￱ that the Loyalty business has been divested and Bakkt Trust has been sold to ICE, the main question is what clear, scalable growth narrative Bakkt now offers for investors to be excited ￰27￱ a crypto bull market (which I believe we're currently in and have only been slowed down by last Friday's liquidations), it is easier for companies' pivots to garner attention and price rallies, especially when they simplify the story and align with themes like crypto treasury (which has been a trending narrative for most of this year).

Is Bakkt Too Late to the Crypto Services Market? Pure-play crypto companies that have survived multiple downcycles are those that have built a business model based on recurring sales and an asset-light SaaS model that scales with transaction volume rather than market ￰28￱ the looks of it, Bakkt is now structurally more asset-light and has a clearer path to build recurring ￰29￱ and client wins will, however, determine whether recurring sales actually ￰30￱ new business model essentially positions Bakkt's infrastructure as an embedded service layer where Bakkt provides crypto trading and custody infrastructure via APIs to fintechs, neobanks, and ￰31￱ these fintech and neobank clients plug Bakkt's APIs into their apps to offer crypto services, while Bakkt handles trade execution, routing, compliance, and custody in the ￰32￱ Bakkt's custody business is no longer in its direct control, Bakkt will still offer custody services through a signed nonbinding letter of intent with ICE Digital Trust to provide custody services for digital assets and potentially resell the custody services to third ￰33￱ of Bakkt's other selling points is a shorter time to market for clients and partners as crypto adoption grows as the company markets its products as "turnkey".

And I believe the catalyst to further propel Bakkt's place in the crypto services market is how fast crypto integrates into the global financial stack and how each of Bakkt's product offerings is optimized for specific crypto use ￰34￱ forgetting how much of that integration is turnkey (like the company markets its products) since the target customer base is primarily fintechs and neobanks. Stablecoins, for example, have already gained some regulatory backing with the GENIUS Act in the ￰35￱ is already laying infrastructure for stablecoin payments, and in Q1 announced a cooperation agreement with DTR for stablecoin payment ￰36￱ in the Q2 results press release , Bakkt announced the launch of its AI-based stablecoin solution called Bakkt Agent, which offers on-chain settlement and compliance automation for global stablecoin payment ￰37￱ products hold the prospects for steady, recurring revenue with better ￰38￱ I think this doesn't in any way mean some huge moat for Bakkt (yet).

Competition is intense across the crypto infrastructure sector, with incumbent players like Coinbase (via Coinbase Prime) and other well-funded private players like Fireblocks or Anchorage, who offer the same API integrations, custody, and stablecoin rails, fighting for the same clients as ￰39￱ in practice, Bakkt's relationship with ICE could potentially be an advantage for clients' trust and regulatory ￰40￱ Line Bakkt's restructuring seems like the best strategic reset the company has executed in ￰41￱ funds raised, including the $75 million capital infusion , also ease liquidity pressure and extend some runway for the company. Still, execution is ￰42￱ needs to sign anchor clients, scale take rates, maintain disciplined cost control moving forward, and find ways to integrate new products like the stablecoin rails without losing margin.

I, personally, would not rate BKKT at the moment as a Buy for a crypto portfolio, but I think it is worth being on the watchlist for crypto ￰43￱ traders will likely profit from the current price ￰44￱ metrics to watch will be whether Bakkt finalizes deals, how rapidly recurring revenue grows, how the take rate evolves versus the cost base, and whether it begins buying and holding Bitcoin under its new treasury ￰45￱ now holds a majority stake in the Japanese company Marusho Hotta and has bought the bitcoindotjp domain name for the corporate treasury ￰46￱ now, BKKT's current price action really looks like the pattern of a relief rally in my view.

Bakkt's streamlined business model is still a bet on ￰47￱ it succeeds, Bakkt will likely punch higher above its current valuation.