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Global is jumping into non-fungible tokens, or NFTs, aiming to expand its revenue base beyond cryptocurrency trading. But investors shouldn’t expect the new product to move the stock, at least in the near term.

Coinbase (ticker: COIN) said on Tuesday that it plans to launch a market for minting, auctioning, and trading NFTs, including a user-friendly interface and social media features.

NFTs are digital collectibles—anything from a tweet to a piece of art or music. Owners of NFTs have property rights to the digital asset, enabling it to be authenticated and traded through the use of a “smart contract.” NFTs are generally based on the Ethereum blockchain, and some have sold for millions of dollars.

NFT trading volume hit $10 billion in the third quarter, according to BTIG analyst Mark Palmer. The largest trading platform is Opensea, which processed $3.4 billion of volume in August and $2.8 billion over the last 30 days, according to Dappradar.com. Opensea charges a 2.5% seller fee to auction an NFT; after that, a seller may lower the fee or maintain 2.5% for subsequent sales.

Some analysts don’t see NFTs generating substantial revenue for Coinbase. The company reported transaction revenue of $1.9 billion in the second quarter, almost entirely from retail trading and related areas. Another $103 million in revenue came from sources such as custodial fees, subscriptions, and other services.

“NFTs won’t move the needle for them,” says Mizuho Securities analyst Dan Dolev. Trading commissions are falling and becoming commoditized, he argues. Coinbase will face ongoing price pressure in core retail trading, even as it builds out an institutional platform and other services.

“I don’t think this will help them change the narrative, which is the specter of declining transaction revenue as crypto becomes more commoditized,” he says.

Dolev is one of the few analysts with a Hold rating on the stock. His price target is $220, well below recent prices around $249.

BTIG’s Mark Palmer, however, is far more bullish, viewing NFTs as another arrow in Coinbase’s revenue quiver.

The company was recently blocked by regulators from launching crypto lending products, but it’s developing other revenue streams, such as prime brokerage and custody services. NFTs are one more way for the company to bring in retail users, says Palmer.

“It’s important step to the diversification of their revenue streams, especially given their continued reliance on transaction fees,” Palmer said in an interview. He adds that Coinbase has a “massive footprint” with11% of the world’s crypto assets on its platform, primarily in Bitcoin and Ethereum.

“An exchange with 11% of all the crypto assets in the world has already demonstrated its reach,” he says. “Now it will have the opportunity to introduce NFTs to investors who may have not had any experience with them.”

One more reason to launch NFTs is fending off competition from apps like PayPal (PYPL), Square (SQ), and


Robinhood Markets

(HOOD). Those companies are expanding with cryptocurrency services, aiming to boost engagement with their apps and keep users in the fold.

“A bundled offering is going to be much stickier,” says Palmer. “Ultimately, certain parts of the platform will be loss leaders but they’ll promote engagement that will result in higher revenue overall,” he says of Coinbase.

Palmer has a $500 target on the stock, one of the highest on Wall Street.

D.A. Davidson analyst Christopher Brendler also views the launch of an NFT platform positively, noting that fees on NFT trading should be higher margin than institutional trading for Coinbase.

“They’re a little late to NFTs, but it’s also very early on in this area,” he told Barron’s. Brendler has a Buy on the stock too, with a $400 target.

Even if NFTs don’t take off on Coinbase, the company may still capitalize off their growth. Coinbase Ventures, an affiliated venture capital fund, participated in OpenSea’s second round of seed funding in 2018, according to dealroom.co.

Write to Daren Fonda at daren.fonda@barrons.com

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