The correlation between the price of emerging market equities and bitcoin could signal a major rally for the world's largest cryptocurrency by market capitalization, according to Tom Lee, head of research at Fundstrat Global Advisors.
In an interview with CNBC's "Trading Nation" on Friday, Lee claimed that bitcoin "could end the year explosively higher," targeting a year-end price as high as $25,000. (See also: Bitcoin May Fall By a Third in 2018: Study.)
Lee explained that emerging markets are typically viewed as a sector that is "rented by hedge funds" and "does well when we are in a risk-on environment." Both emerging markets and bitcoin peaked earlier this year and are now both in a downtrend, stated the investor.
Bitcoin Bull Sees Cryptocurrency Staging a Comeback
At a price of $6,720 per coin on Monday morning, bitcoin reflects a 55.3% gain since the start of 2018 compared to the S&P 500's 8.2% return over the same period. The volatile digital currency has fallen a whopping 66% since reaching an all-time high in December 2017 at the peak of the cryptocurrency frenzy. The iShares MSCI Emerging Markets Index ETF is down 8.1% year-to-date (YTD).
"Until emerging markets begin to turn, I think in some ways that correlation is going to hold and tell us that sort of the risk on mentality is those buyers aren't buying bitcoin," said the bitcoin bull. He noted that since "the vast majority of trading is in countries like Japan, Korea and China," a strong dollar has actually been a headwind for the cryptocurrency space, since investors who want to own risk-off assets have been buying dollars.
Last week, analysts at JPMorgan issued a note in which they indicated that emerging markets and value assets will stage a comeback and that the dollar's recent strength will subside following the unprecedented outperformance of U.S. equities over international stocks.
Lee told CNBC that tides should change in favor of both bitcoin and emerging markets, especially if the dollar weakens and the Federal Reserve eases its policy. He also noted that there's deep pockets and firepower on the sidelines in the cryptocurrency market. (See also: Intl. Stocks Will Outperform Domestic Market: JPM.)