Krakens originally appear in legend as a giant sea beasts residing off the coasts of Norway or Iceland. They appear in countless tales and legends from many sea-going cultures.
The Kraken's actual form is never made completely clear. It has been depicted as everything from a giant fish to a giant humanoid type creature. However, the image of 'Kraken' is widely recognized as an octopus-like creature, as it seems safe to say that most accounts of the creature depict it as such.
Where the idea came from could be a number of things. Sightings of bubbles rising from the depths could be explained by volcanic activity rather than an underwater monster. Islands that were only sometimes visible are now explained by the tides rather than a giant submerging creature. Earlier descriptions of the Kraken say it's more crab-like than octopus-like, and a lot of the sightings show characteristics of wales.
Stories of giant krakens destroying ships are many in number, but no documented tangible proof yet exists.
However, are all these accounts only stories? The discovery of giant squid and giant octopus carcases stunned the scientific community when they were found. If creatures like that really do exist, who's to say that they, or maybe even larger counterparts don't sink ships? It seems almost impossible for so many accounts to exist throughout history without being founded on some REAL events.