What happened

Shares of many stocks with close ties to bitcoin and other cryptocurrencies are flying high today. China-based bitcoin mining specialist Bit Digital (NASDAQ: BTBT) rose as much as 23.3%. The bitcoin-focused investment fund Grayscale Bitcoin Trust (OTC:GBTC) posted a maximum gain of 24.9%. Business analytics company MicroStrategy (NASDAQ:MSTR), which recently converted most of its cash reserves into bitcoin, gained as much as 26.2%. Cryptocurrency asset manager Riot Blockchain (NASDAQ:RIOT) topped out at 29.6% and Chinese-American cryptocurrency miner Marathon Patent Group (NASDAQ:MARA) led the pack with a maximum gain of 42.5%.

These stocks rose in unison as the price of bitcoin tokens reached a new all-time high of $19,850 per token, according to Coindesk data. That was a 9.7% gain in 24 hours, capping a quick return from a 15% decline at the end of last week. Many alternative cryptocurrencies also rose dramatically today, including a 9% surge in Ethereum prices and a 7% increase for Ripple tokens.

A green charting arrow rising upward, backed by a list of popular cryptocurrency names and prices.

Image source: Getty Images.

So what

Bitcoin's big gains in 2020 look like a reminder of the skyrocketing chart in 2017, where the leading cryptocurrency's prices had increased by 1,030% by the end of November. The year-to-date gains are less impressive this time, stopping at 156% at the time of writing, but this year's chart started from $8,000 instead of $1,000. The market cap for the total bitcoin market was approximately $15.4 billion in early 2017 and $131 billion at the start of 2020. It's easier to move the needle on a smaller and less valuable asset.

The surge in 2020 started with a so-called halving in May. That's a technical event where the generation of new bitcoin tokens suddenly required twice as much computing power as before. This was the third such event in bitcoin's history and the next one is scheduled for May 2024. Halvings are done in order to limit the supply of new tokens, which should result in higher prices under the assumption that demand for bitcoin tokens will rise over time. The halvings of 2012 and 2016 did indeed kick off two impressive price increases over the next year or two, followed by fairly dramatic corrections at the end of each surge.

On the demand side of the equation, institutional investors have started to take a serious interest in bitcoin and other cryptocurrencies. For example, asset management giant AllianceBernstein (NYSE:AB) is now telling investors that bitcoin has become a viable investment these days thanks to lower volatility and an emerging regulatory framework for cryptocurrencies in general.

Now what

Bernstein suggests that bitcoin could be seen as an attractive alternative to gold, based on similar valuation ideas of limited supply and global demand.

All of the stocks mentioned above are crushing the broader stock market this year, often leaving the actual bitcoin token's gains far behind. But past performance is no guarantee of future returns. You could even call this a bubble, since some of the bitcoin-based winners have absolutely crushed the returns on pure bitcoin in 2020. That being said, many investors are more comfortable trading stocks than cryptocurrencies.

If you want some exposure to the exploding cryptocurrency market, you could do a lot worse than grabbing a few shares of a managed bitcoin fund like Grayscale Bitcoin Trust or Riot Blockchain. Just follow Bernstein's advice and limit your initial cryptocurrency buys to a small piece of your portfolio, stopping somewhere between 1% and 10% of your total holdings.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.