The crypto market is up for the year, so it's perhaps no surprise that stocks directly tied to the performance of crypto are also up. And not just up but up big. Coinbase Global (COIN 7.66%), the world's second-largest cryptocurrency exchange, is up a whopping 298% for the year. That's more than twice the performance of Bitcoin (BTC -0.09%), which is up 135% for the year.

But there are now signs that Coinbase might be overheating. The stock recently hit an 18-month high, and some high-profile investors are now selling to lock in profits. Ark Invest, for example, just sold off $15 million in Coinbase stock at the end of November. So, that raises an interesting question for investors: Is it too late to buy Coinbase stock?

The Bitcoin effect

To answer that question, it's important to take into account Bitcoin's performance. Historically, there has been a strong relationship between the price of Bitcoin and investor sentiment. If Bitcoin is going gangbusters and people are making money (at least, on paper), they will be more willing to invest in crypto. It's very similar to the "wealth effect" for the stock market: If stocks are rising, people feel wealthier and are more willing to buy.

Improving sentiment around Bitcoin obviously helps Coinbase since the company's entire business model is based around boosting crypto trading volume and bringing in new crypto investors. Bitcoin currently accounts for 33% of all trading volume on Coinbase, so if there's one cryptocurrency at the core of Coinbase's operations, it's Bitcoin.

The new spot Bitcoin ETF

Right now, the primary factor driving positive sentiment is the imminent approval of the first-ever spot Bitcoin ETF for the U.S. market. Institutional investors are chomping at the bit to invest in Bitcoin, and a new spot Bitcoin ETF gives them the perfect vehicle to do so. By some estimates, as much as $50 billion in new liquidity could flow into Bitcoin. All that new demand is almost certain to push up the price of Bitcoin.

The big question, though, is how much these new Bitcoin ETFs will help Coinbase. After all, if people are buying a Bitcoin ETF instead of Bitcoin itself, that does not benefit Coinbase directly. Coinbase would only benefit indirectly if all the attention surrounding Bitcoin actually leads to new people signing up for Coinbase accounts.

But it does look like Coinbase is looking for ways to insert itself directly into the Bitcoin ETF discussion. For example, if you read through the application from BlackRock (BLK -0.10%), which was first to market in filing for a spot Bitcoin ETF, it very clearly says Coinbase will be the custodian for all the Bitcoin the ETF will hold. So, Coinbase will likely earn some custodial fees along the way, and that's going to show up in the company's bottom line.

The Binance factor

Secondly, it's important to consider the controversy surrounding Binance, the creator of the Binance Coin (BNB -0.29%) token and the world's largest cryptocurrency exchange. Binance is a direct Coinbase competitor, and after a long, ongoing investigation, Binance recently settled with the U.S. Department of Justice and U.S. Treasury Department for $4.3 billion. In addition, the crypto exchange's founder and CEO was forced to step down and admit wrongdoing. While it looks like the U.S.-based unit of Binance will continue to operate, it will likely do so at reduced strength.

It might sound cynical, but all of that should be fantastic news for Coinbase investors. After all, Coinbase will likely be an immediate beneficiary of Binance's problems. Long story short, customers uncomfortable with holding their funds on the Binance cryptocurrency platform will likely move their funds to other, more trusted crypto exchanges. According to blockchain analytics firm CryptoQuant, we are already starting to see evidence of this happening.

Just keep in mind that the Binance situation is not a clear slam dunk for Coinbase for one single reason: Coinbase is facing legal and regulatory issues of its own. In June, the U.S. Securities and Exchange Commission (SEC) filed a lawsuit against Coinbase, alleging it was improperly trading "unregistered securities" on its platform. Moreover, Coinbase has been engaged in a very public war of words with the SEC over the future of crypto, so a fair amount of regulatory risk also exists for Coinbase.

What is a realistic price target for Coinbase?

Right now, Coinbase is trading at its highest level since April 2022. But it is still nowhere near its all-time high of nearly $350 from 2021. So, there's clearly still room to run. Just keep in mind that Coinbase will likely experience the same volatility as Bitcoin and the wider crypto market.

Thus, the ultimate decision of whether to invest in Coinbase right now comes down to your view of the crypto market. For me, I'm expecting Bitcoin to rally next year, and I'm expecting Coinbase to go along for the ride. So, no, it's not too late to buy Coinbase stock as long as you keep your expectations in check and understand the risks involved.