A protracted cryptocurrency crash would 'spill over' into stocks, Wells Fargo warns

A sustained sell-off in the cryptocurrency market will hit the stock market where it hurts, one major Wall Street firm warns.

It's a scenario investors are underestimating, according to Wells Fargo Securities' Christopher Harvey.

"We see a lot of froth in that market. If and when it comes out, it will spill over to equities," the firm's head of equity strategy said Tuesday on CNBC's "Futures Now." "I don't think people are really ready for that."

Harvey's comments came as bitcoin, the cryptocurrency market's largest player, tanked. It plummeted 20 percent over two days, recouped much of those losses and then plunged below $10,000 Tuesday afternoon on Coinbase. (On Wednesday, it was at $10,380.)

A two day selling frenzy isn't what's going to affect the stock market, according to Harvey. It's what could transpire when a shock is deeper and longer.

"What we haven't seen is the depth and the breadth of what could happen," Harvey said. "What we're really looking for is not a one-day event, but multiple days and multiple weeks — something more extended."

Harvey, who has a S&P 500 year-end price target of 2,863, was one of the first Wall Street strategists to suggest that a cryptomarket bust could hurt the stock market rally. On CNBC in late December, he contended stocks could easily be dragged into the chaos — citing the high levels of speculation and euphoria surrounding the emerging asset class.

In a worst-case scenario, he sees it affecting technology stocks first and then financials. Harvey believes investors don't recognize how much exposure they may have to the cryptomarket through stocks.

"If speculation comes out of the cryptocurrency market, you would expect some of that optimism to start to fade," Harvey said. "Almost every day that market is getting bigger. It's starting to touch more and more parts of the marketplace and different regions of the world."

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