When Bakkt Holdings (BKKT -13.48%) went public on Oct. 18 by merging with a special purpose acquisition company (SPAC), the market shrugged. The digital asset platform provider's stock fell short of its expected IPO price of $10 on the first day, and its stock stayed below that level for a few days.

But on Oct. 25-26, Bakkt's share price abruptly skyrocketed to a record high of $37.49 -- and briefly became one of the most-talked-about stocks on Reddit's WallStreetBets (WSB) subreddit -- before pulling back to about $20 a share. Let's see why Bakkt's stock suddenly attracted so much attention.

Physical Bitcoins on top of a smartphone.

Image source: Getty Images.

What does Bakkt do?

The Intercontinental Exchange (ICE -0.27%), which owns the New York Stock Exchange (NYSE) and other options and futures exchanges, established Bakkt as a new company for digital assets three years ago.

Kelly Loeffler, the wife of ICE CEO Jeffrey Sprecher, served as Bakkt's CEO before being appointed to the U.S. Senate in December 2019, representing Georgia. Gavin Michael, who took the helm in early 2021, previously led JPMorgan Chase and Citigroup's digital banking efforts.

Bakkt's digital wallet enables consumers to buy, sell, and spend their cryptocurrencies along with their hotel, airline, and credit card points. It also facilitates cryptocurrency payments for merchants.

Bakkt generates most of its revenue in two ways: It takes a 2% cut of each payment as a transaction fee, and earns a 2% spread on each cryptocurrency purchase or its conversion back to a fiat currency.

Bakkt only expects to serve 9 million active users by the end of 2021, but it expects that figure to more than triple to 31 million by 2025.

Management expects Bakkt to generate $889 million in revenue this year, with 94% of that total coming from cryptocurrency trades. It also expects Bakkt to remain unprofitable on an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis with a loss of $169 million. But by 2025, Bakkt is projected to generate $6.6 billion in revenue -- most of which will still come from cryptocurrency trades -- with a positive adjusted EBITDA of $285 million.

Bakkt management believes it can achieve those ambitious growth targets by securing more payment partners, expanding overseas, and benefiting from the secular growth of the cryptocurrency market.

Why did Bakkt's stock price nearly quadruple?

Investors weren't impressed by Bakkt's SPAC-backed debut because it seemed like a latecomer to a market that has already been fragmented among companies like Square, PayPal, Robinhood, and Coinbase.

Bakkt's user base is still tiny, and its expectations seemed too bullish. However, a double whammy of developments on Oct. 25 woke up the bulls.

First, Mastercard (MA -0.10%) partnered with Bakkt to enable its customers to buy, sell, and hold cryptocurrencies; access "crypto-centric" loyalty programs; as well as issue crypto-linked debit and credit cards. There are currently more than 1.1 billion Mastercard cards in circulation worldwide.

Second, Fiserv (FI -1.86%), which provides money transfer services to more than 100 million digital banking users, partnered with Bakkt to expand its omnichannel Carat network with cryptocurrency transfer options.

These two partnerships indicate Bakkt's 2025 estimates could actually be realistic, especially if more financial companies hop on the bandwagon.

But are Bakkt's gains sustainable?

At the peak of its recent rally, Bakkt's enterprise value soared to nearly $8 billion, or nine times this year's sales. As of this writing, Bakkt trades at about six times this year's sales, which is still a low valuation for a company that aims to grow its revenues at a compound annual growth rate (CAGR) of 75% between 2021 and 2025 (after excluding transaction-based expenses).

However, Bakkt still has a lot to prove before it can be mentioned in the same breath as Square, PayPal, Robinhood, or Coinbase. This company could still have a lot more room to grow, but I wouldn't touch its stock until I review its first few quarterly reports as a publicly traded company.