How bitcoin's plunge may have been a precursor to market turmoil

A volatile area of the market may have been a harbinger of the stock market's worst week in two years.

Fundstrat Global Advisors' Tom Lee acknowledges bitcoin's crash two months ago could be seen as a signal stocks would plunge next.

As the cryptocurrency weakened and investors bolted from risk-sensitive assets, "it could easily look like a chart that looks like the S&P, because both had a parabolic move and then subsequently gave back some of these gains," Lee told CNBC's "Trading Nation" last week.
But that's where the relationship may stagnate. Lee added that "the connection between the two is really, really limited."

Lee, the firm's head of research, sees the recent parallel more as a psychological event suggesting how exuberant investors became, rather than as a kinship between the two assets.

"In the past 12 months, not only did we have a strong rally in equities, we had a strong rally in cryptocurrencies," he said. "I wouldn't be surprised if those investors who saw risk-on assets everywhere outperforming globally were also buying cryptocurrencies."

Lee predicted bitcoin prices could triple to $25,000 by year-end. But he said it'll still be less than a fraction of the S&P 500's value — not enough to move the needle on the stock market's direction.

"Cryptocurrencies have their own economy based on activity on that blockchain. Equities have their own economy based on earnings per share multiples. The institutional overlap is essentially zero," Lee said.