On Thursday, Wall Street witnessed a dramatic sentiment reversal. Initially, Nvidia's (NVDA.US) better-than-expected earnings and September's strong nonfarm payroll report drove the Nasdaq Composite up over 2%. However, by midday, all gains evaporated, with the tech-heavy index closing down more than 2%.

Multiple factors contributed to this reversal: Nvidia's historically volatile intraday price swings and the more nuanced final nonfarm data that dampened rate-cut expectations. But Fundstrat's Tom Lee and Interactive Brokers' Steve Sosnick identified cryptocurrency market movements as a potential catalyst.

"This struck me as odd. I was discussing the market's strength on a call when Bitcoin approached $90,000, noting that a breakout might trigger S&P volatility. Then something unusual happened—the moment Bitcoin surpassed $90,000, both Nasdaq and S&P 500 started falling," Sosnick said.

"I wouldn’t call Bitcoin the root cause of the reversal, but it was the immediate trigger. Algorithmic traders now treat Bitcoin as a 'leading indicator,' essentially a proxy for speculative fervor. If humans notice this, algorithms certainly do. Capital is being allocated around this signal—rational or not," he added.

Bitcoin, the largest cryptocurrency, recently dropped 6.59% to $86,450.50. The broader crypto market has slumped, with Bitcoin down over 30% from its peak, affecting retail and institutional investors alike. The October 10 liquidation event—where $19+ billion in leveraged crypto positions were unwound—reportedly sparked the decline.

"Building on Steve’s point, crypto has been struggling since the October 10 shock. Today’s equity action feels like an extension of that," Fundstrat’s Tom Lee noted. On October 10, the S&P 500 plunged 2.7%, while Bitcoin tumbled 7.2%.

"That liquidation was staggering…it impaired market makers’ capacity. In crypto, market makers are like central banks—the core liquidity providers. When their balance sheets take hits, they instinctively shrink exposure. If prices fall, they’re forced to sell more," Lee explained.

"Thus, crypto’s prolonged weakness reflects impaired market-making. In 2022, such risk digestion took 8 weeks; we’re only in week 6 now. So yes—given crypto’s deleveraging and liquidity strain, Bitcoin and Ethereum have become de facto leading indicators for equities," he concluded.