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.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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