Coinbase Global (COIN -0.30%) is up more than 100% for the year, but much of that stellar performance came in the first half of 2023. Since mid-July, Coinbase is declined about 30%, largely on concerns about persistent weakness in the crypto market. Even high-profile backers, such as ARK Invest's Cathie Wood, have recently been reducing their Coinbase positions, adding to overall weakness.

So could this be a perfect buy-the-dip opportunity for Coinbase? The recent surge for Bitcoin (BTC -1.54%), in which it briefly passed $35,000, led to a mini-rally in Coinbase shares, and overall market sentiment appears to be shifting in its favor. Let's take a closer look.

The return of the crypto investor?

The biggest complaint about Coinbase is that it is having trouble attracting users during a prolonged crypto winter that started back in 2022. Earlier this month, a bearish research report focused on the inability of Coinbase to acquire new customers. The numbers didn't look good, with estimates suggesting that trading volume on the platform might be down as much as 52% from the year-earlier period.

The concern now is that Coinbase will actually report a net loss in early November, and that could spook investors who are currently on the fence about the stock. 

Higher Bitcoin prices

That's the glass-half-empty view of things. The glass-half-full view says that the crypto market is going to come roaring back, thanks to higher Bitcoin prices.

There are two key factors that appear to be catalyzing the crypto's recent rally. Combined, these factors could lead to bullish market sentiment, as well as the return of retail investors to Coinbase.

The primary bullish factor is the imminent launch of the first-ever spot Bitcoin exchange-traded fund (ETF) for the U.S. market. There are mixed thoughts about how much a new ETF will affect Coinbase directly, but the indirect impact could be huge. If the new spot ETF pushes Bitcoin significantly higher, all of the buzz and speculation surrounding the digital currency could finally lure back retail investors. 

A secondary factor is the Bitcoin halving, scheduled for April 2024, when the reward Bitcoin miners receive is cut in half. This halving event, which slows supply growth, occurs only once every four years and is likely to be one of the most-hyped crypto events of the year.

Following three previous Bitcoin halving events (2012, 2016, and 2020), Bitcoin rallied hard, and the expectation is that the halving in 2024 will be just as bullish. In fact, one pricing model from hedge fund Pantera Capital suggests that it could skyrocket to $149,000 after the halving. 

Right now, Bitcoin accounts for 35% of all trading on the Coinbase platform. This explains why the exchange started to rally when Bitcoin did. With the digital token surging from $30,000 to $35,000 in the span of less than a week, investors have been searching out stocks with significant exposure to it.

The regulatory risk

The problem with the thesis of higher Bitcoin prices leading to higher Coinbase prices is that it does not take into account regulatory risk. While Coinbase has taken every step possible to settle its regulatory issues with the Securities and Exchange Commission (SEC), they don't appear to be going away anytime soon. Most notably, the SEC continues to question whether certain cryptos traded on the Coinbase platform are actually unregistered securities and trade in violation of regulations. 

The good news here is that momentum appears to be shifting in Coinbase's favor. Some Washington lawmakers are pushing back against the SEC, arguing that it is taking too aggressive a stance in its crypto crackdown. Moreover, recent legal victories by embattled crypto XRP, which is engaged in a multiyear lawsuit with the SEC, appear to be positive for Coinbase.

Should you buy Coinbase?

Coinbase reports earnings two days after Halloween, and it's not clear if it's going to be trick or treat for investors. Overall activity (as measured by monthly active users and trading volume) was most likely down, both on a quarter-over-quarter and year-over-year basis.

However, signs of a big Bitcoin rally could change all that by attracting investors back to the platform. If you are confident that the Bitcoin rally is sustainable, then now could be a unique opportunity to buy the dip on Coinbase. But just keep a watchful eye on what's happening in Washington, because government regulators have the power to spoil any potential rally in Coinbase stock.