Shares of Coinbase Global (COIN 25.01%) surged 23.8% higher at 2:30 p.m. ET on Tuesday, May 13. The operator of the leading cryptocurrency exchange in America will join the S&P 500 market index on its next update, scheduled for May 19.

Why Coinbase is crashing the S&P 500 party

Coinbase will replace the more traditional finance-sector company Discover Financial Services, ending Discover's 12-year tenure in the popular index.

Discover is moving out because fellow S&P component Capital One Financial is acquiring the company. The transaction will close on May 18, leaving an open seat around the S&P 500 table. The index's management team saw fit to introduce a cryptocurrency expert instead.

With a $64.6 billion market capitalization, Coinbase looks like a natural fit for the S&P 500 index. By comparison, Discover is worth $51.5 billion today.

The surprising part is that Coinbase is a leading name in the cryptocurrency industry -- and it will be the first serious representative of that market niche.

Image source: Getty Images.

The secret handshake for S&P 500 entry

For those who might have expected an even bolder crypto move, I should point out that a large market cap isn't the only requirement for earning membership in this elite club. At the time of inclusion, the new member must show positive unadjusted earnings over the last four quarters, which is a threshold Coinbase easily passes but the deeply committed Bitcoin owner Strategy fails.

That being said, Coinbase's inclusion in the S&P 500 index is a notable step forward for the newfangled market slice known as digital assets. It's a sign of newfound respect from one of the stodgiest corners of Wall Street. Even Strategy might qualify someday, if the company starts to generate solid earnings.

Meanwhile, Coinbase's recent earnings report fell far short of analyst expectations, but earnings still doubled year over year. The business is good enough for the S&P 500, and it has found a long-term home in my own portfolio. Let's see where Coinbase, Bitcoin, and the whole crypto sector can go from here.