If the cryptocurrency boom goes bust, stocks could easily be dragged into the chaos, Wells Fargo Securities says.
Christopher Harvey, the firm's head of equity strategy, is paying close attention to the unprecedented activity in what could be one of the most epic bubbles of all time.
"There is a significant amount of froth in the cryptomarkets. We do think that if that froth comes out, it will start to spillover," he warned on CNBC's "Trading Nation."
Bitcoin and its peers have been seeing wild price swings seen over the past week. Last week, bitcoin lost one-third of its value in a single day before rebounding. That capped days of volatility which saw the digital currency surge to a new record near $20,000. On Tuesday, it was above $15,000, according to CoinDesk.
"What we're worried about is froth coming out of that market, and that's starting to affect equities," said Harvey. "You're seeing it a little bit, but just not to a large degree. And, it's something to watch out for in 2018."
Harvey has a 2,863 index year-end price target for 2018 — about a 6 percent gain from Friday's close. It comes far below the 20 percent gains Wall Street has seen this year.
"You have to lower your expectations for next year. A lot of good news is already priced in, and we just don't see that much going forward. It'll be a decent market, it just won't be a banner year," he said.
Harvey sees the first half of the year stronger than the second. By then, he predicts, stocks will come up against new challenges — whether the cryptomarket implodes or not.
"What the market will have to contend with is EPS [earnings per share] peaking, ISM potentially peaking, you're going to have the yield-curve in all likelihood flattening — and in addition to that, you'll likely have multiples start to compress, " Harvey said. "You're going to have to scratch and claw to stay afloat for it to break even."
