If you read the news, Coinbase (NASDAQ:COIN) stock has been on fire this year. The hype has been nonstop since a federal judge ruled in favor of Ripple Labs Inc. in a lawsuit which had been brought against them by the U.S. Securities and Exchange Commission.

Since the decision COIN stock has fallen by over 30%. However, the company still has a market cap of over $16 billion and expected revenue for 2023 of $2.7 billion. And yet, even with Bitcoin (BTC-USD) recently trading at over $34,000, up from $25,000 at the time of the ruling, the company is forecast to post an EPS of negative 54 cents.

What’s Going On?

Since digital assets aren’t real, crypto offers a pure market. The only scarcity is an artificial one, imposed by the technology that limits supply through the mining process.

This lets greed and fear reign without worrying about grain harvests or miner strikes. Markets rise on skepticism about central bank currencies like the dollar. They fall on legal uncertainty and the attractiveness of other assets.

Since 2021, cryptocurrency has been locked in another battle, over who should regulate them. This is especially true for Coinbase, which the SEC sued in June, calling it an unregistered exchange and its actions illegal.

The case is now approaching its first turning point. Coinbase will be able to make oral arguments against the SEC’s action on January 17. The exchange will argue the court should dismiss the suit because the SEC lacks authority to regulate digital assets.

Coinbase says the scheduling of a hearing is good news. But regardless of how the court rules, the result is likely to be appealed. The real legal breakpoint on the Coinbase case comes in November of 2024 when the presidential election could usher more crypto-friendly people to positions of power. Meanwhile, Coinbase is focusing on international markets.

New Competition

There’s also good news that could prove to be bad news.

It’s likely an Exchange Traded Fund (ETF) covering Bitcoin will soon be approved. A judge has ruled that Grayscale, a crypto asset manager, can convert its Grayscale Bitcoin Trust (OTCMKTS:GBTC) into a real ETF. Crypto advocates call this Bitcoin’s big break. It will let investors trade Bitcoin while avoiding the risks that took down FTX or exchanges that have been hacked.

Legitimizing the Bitcoin market is a double-edged sword for Coinbase, however. What’s good for Coinbase is also good for Fidelity, Blackrock (NYSE:BLK), Goldman Sachs (NYSE:GS) and for any other trading desk with scaled computer systems.

Legitimacy is coming when Coinbase is vulnerable. Its current operating margins are negative. It’s due to report earnings November 2 and a loss is expected. That’s not a surprise though, the company’s last profit came in 2021.

The Bottom Line

Cathie Wood’s ARK funds have been selling COIN stock into strength. The news sent the stock down hard, from $82 a share to its present level.

Bitcoin traders are optimistic, but trading systems are different from the assets being traded. A market maker should make a profit, no matter how the market is moving. Coinbase seems to be losing money at the same time it faces new competitive threats from Wall Street.

Win or lose in court, Coinbase faces a management challenge. The stock, which has been volatile based on cryptocurrency values, should trade on its ability to operate the business. Coinbase’s unique advantages are going away. Can it grow to be a profitable exchange in a legitimate market? That’s what you’re betting if you buy Coinbase stock.

As of this writing, Dana Blankenhorn did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.