Stocks Rise, But This Is the Market Everyone's Watching Right Now

Wall Street was in a good mood on Tuesday, and stocks generally moved higher to get a little closer to their all-time record highs. Gains for the Dow Jones Industrial Average (^DJI 0.06%), S&P 500 (^GSPC -0.22%), and Nasdaq Composite (^IXIC -0.52%) were all reasonably healthy and reflected investor optimism about earnings results and the economic recovery.

Data source: Yahoo! Finance.

Yet when you look more closely at the financial markets, you'll notice that the cryptocurrency arena  got a lot of attention on Tuesday. Big gains for Bitcoin (BTC 1.29%) stemmed from a couple of moves that should improve liquidity and increase investor interest in crypto assets more broadly. It'll be interesting to see whether the latest news will produce sustained upward momentum for Bitcoin and its peers in the weeks and months ahead.

Bitcoin rising

Bitcoin prices approached record levels on Tuesday, with the price of the groundbreaking digital currency rising above the $64,000 mark for the first time since April. Indeed, the crypto asset finished just below its record levels slightly under $65,000 and is within striking distance of uncharted territory.

A couple of factors helped stoke interest in Bitcoin on Tuesday. First, a new exchange-traded fund (ETF) that allows investors to participate in the crypto market through the ETF's holdings in Bitcoin futures hit the market  for the first time and received a hearty welcome. Shares of the ProShares Bitcoin Strategy ETF (NYSEMKT: BITO) were up nearly 5% in their debut, with nearly $1 billion worth of shares changing hands at some point during Tuesday's trading session.

You don't have to mine Bitcoin to get investment exposure to cryptocurrency. Image source: Getty Images.

The ProShares ETF became the first U.S. exchange-traded fund approved by the U.S. Securities and Exchange Commission (SEC) to offer exposure to Bitcoin, albeit indirectly through futures contracts. Yet it's also an imperfect way to invest in Bitcoin because the futures contracts in which it invests won't necessarily track the spot price of the cryptocurrency. With Bitcoin futures markets in contango, it's likely that long-term returns for the ProShares ETF will lag what an investor would get simply by buying and holding Bitcoin itself. That's a lesson that many investors in other markets where contango appears, particularly energy, have learned the hard way.

Is an alternative coming?

With the SEC finally breaking the logjam on Bitcoin ETFs, investors are optimistic about the prospects for more choices in the crypto asset class. Digital asset specialist Grayscale capitalized on that positive mood, teaming up with the New York Stock Exchange to list its Grayscale Bitcoin Trust (GBTC 4.18%) as a converted ETF.

Grayscale's cryptocurrency investments have traded on over-the-counter markets for quite a while, but they're not ETFs. Instead, they're structured as investment trusts, with fixed numbers of shares and no direct way for institutional investors to redeem shares to receive cryptocurrency assets. That has led Grayscale Bitcoin Trust and several of the company's other trusts to trade at substantial discounts to the value of their assets.

A conversion to an ETF would open up the floodgates for redemptions, and investors are betting that the discounts will close as a result. That's a big part of what sent Grayscale Bitcoin Trust shares up 7% today, outpacing the gains in Bitcoin itself.

Yet it's far from a done deal that the SEC will approve an ETF that holds Bitcoin directly rather than through futures. Concerns about the liquidity and stability of the Bitcoin asset market remain a potential stumbling block.

Cryptocurrency bulls are hopeful that Bitcoin can jump past old highs and into record territory to finish the year. If it does, then just about every investment tied to the cryptocurrency markets could see massive gains.