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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.

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Sara Eisen

Sara Eisen joined CNBC in December 2013 as a correspondent, focusing on the global consumer. She is co-anchor of the 10AM ET hour of CNBC's "Squawk on the Street" (M-F, 9AM-11AM ET), broadcast from Post 9 at the New York Stock Exchange.

In March 2018, Eisen was named co-anchor of CNBC's "Power Lunch" (M-F, 1PM-3PM ET), which broadcasts from CNBC Global Headquarters in Englewood Cliffs, N.J.

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