Bitcoin Is Facing an Existential Crisis. Just Look at Its Inflation Reaction.

A boost to the Bitcoin price is clearly a good thing for crypto bulls, who will be hoping recent lows will mark the bottom. They may be right, but the rise also poses tricky questions for the crypto and wider markets. That is because stocks and other risk assets also rallied along with Bitcoin—something that has become more frequent recently. The 7% year-over-year increase in consumer prices, despite being a 40-year high, was in line with expectations and served to improve risk appetite.

It isn’t just a one-off—the International Monetary Fund said as much Tuesday, warning over the risk of contagion. The IMF said there was little correlation between cryptos such as Bitcoin and Ether and the major U.S. indexes prepandemic, but that things changed in 2020 amid “easy global financial conditions and greater investor risk appetite.”

The increasing correlation is slowly wiping out the perception that Bitcoin can help diversify risk and act as a hedge against wild swings in other asset classes. It has also been moving inversely to the 10-year Treasury yield, dispelling its characterization as an inflation hedge.

If Bitcoin doesn’t act as a hedge after all, then what is it? At the moment it’s behaving like just another tech stock. It is facing an existential crisis.

—Callum Keown

*** Join MarketWatch editor Jeremy Olshan and economist Stephanie Kelton as they talk to leaders in business, tech, finance, and government about the next phase of money’s evolution, and meet real people whose lives are being changed as these new ideas are put to the test. Listen to the Best New Ideas in Money podcast.

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Inflation Spikes Most Since 1982 on Demand for Cars, Furniture

The consumer-price index rose 7% for the year ending in December, up from 6.8% for the year through November, as pandemic-related shortages and rising consumer demand from economic stimulus payments drove up prices to their fastest increase since 1982.

• The core price index, excluding volatile food and energy prices, rose 5.5% for the year ending in December, the Labor Department said. That is up from 4.9% in November, and the biggest jump since 1991.
• Demand for autos and furniture soared. As a global semiconductor chip shortage hurt auto manufacturing, used car and truck prices rose 37.3% in December compared with a year earlier. New vehicle prices rose 11.8% in December, the biggest jump since 1975.
• Living room, kitchen, and dining room furniture prices rose 17.3%. Home builder KB Home reported better-than-expected fourth-quarter profit and said it expects housing revenue of up to $7.6 billion in 2022, and housing gross profit margins of up to 26.2%.
• Food prices rose 0.5% in December from November. Consumers paid more for restaurant meals because of higher food prices and rising wages, but groceries are also more expensive. Food makers General Mills , Campbell Soup , and Conagra have all said they are raising prices this year.

What’s Next: Lael Brainard, who will testify to the Senate today as part of her confirmation hearing to become Federal Reserve vice chair, plans to tell lawmakers “inflation is too high” and that the central bank’s goal is to get “inflation back down to 2 percent,” according to her prepared remarks.

—Janet H. Cho

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White House Sends More Tests to K-12 Schools

The Biden-Harris administration is expanding Covid-19 testing in K-12 schools by another 10 million tests a month—including five million free rapid tests and five million lab-based PCR tests—as part of its efforts to keep schools open and learning in-person.

• The tests are on top of the $10 billion in funds the administration sent states last year specifically for tests at K-12 schools. They are also in addition to the 500 million free at-home tests the government will mail out starting later in January.
• Randi Weingarten, president of the 1.7 million-member American Federation of Teachers, called the additional tests “a major step forward” in helping schools. Testing, vaccines, masking, and ventilation keep school environments safe, she said.
• The Omicron coronavirus variant is 98.3% of U.S. cases, according to estimates by the Centers for Disease Control and Prevention. The daily average of new cases jumped 47%, to 751,000. Hospitalizations are up 33%, and daily deaths are up 40%.
• A Kaiser study from Southern California found that 90% of patients with the Omicron variant were discharged within three days, with an average hospital stay of one-and-a-half days versus five days with the Delta variant, CDC Director Dr. Rochelle Walensky said.

What’s Next: Federal health and emergency management agencies are working with states to set up surge testing sites, which will offer free testing for the hardest-hit and highest-risk communities.

—Janet H. Cho

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IMF Warns Risk of ‘Contagion’ as Cryptos Follow Stocks

Cryptocurrencies are starting to act like other risk assets such as stocks, moving up with them while moving the opposite direction of the 10-year Treasury yield, and that has some market watchdogs warning about the risk of a “contagion” across financial markets.

• The International Monetary Fund said the increased correlation of cryptocurrencies with stocks limits their diversification benefits. It means they aren’t seen as a hedge on market risk.
• From 2017 to 2019, Bitcoin’s correlation to the S&P 500 was 0.01. After the Federal Reserve flooded the economy with money in 2020, the correlation rose to 0.36, the IMF said.
• Crypto is affecting stock markets, the IMF added. Bitcoin’s volatility may explain one-sixth of the S&P 500’s volatility, and the risk of contagion is one reason why the IMF wants a global regulatory framework for crypto.
• Coinbase , the cryptocurrency exchange, said it would buy the regulated futures exchange FairX as it makes its biggest move to expand into crypto derivatives and fills a void in its product lineup. Last year, it bought data analytics firm Skew.

What’s Next: Coinbase applied to the National Futures Association to register as a futures commission merchant in September 2021. FairX is already overseen by the Commodity Futures Trading Commission and works with brokers such as E*Trade Financial.

—Liz Moyer

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Walgreens Weighing Possible Sale of U.K. Boots Business

U.S. drugstore chain Walgreens Boots Alliance said it has begun a strategic review of its Boots business, which could open the door to the sale of its more than 2,200 U.K. pharmacies, health, and beauty stores. Potential buyers include Bain and CVC Capital Partners.

• Walgreens, the second-largest pharmacy chain after CVS , aims to remake itself as a healthcare provider. CEO Rosalind Brewer said at an industry conference that the process is at an exploratory stage, but “we do expect to move quickly.”
• Walgreens in September invested $970 million in Shields Health Solutions, which provides specialty pharmacy services to hospitals and health systems. In October, it bought a majority stake in VillageMD for $5.2 billion, and, in a separate deal, bought a 55% stake in CareCentrix, which manages post-acute and at-home care.
• Walgreens reported first-quarter adjusted earnings that beat analysts’ expectations, and raised its fiscal-year earnings guidance to low single digits. Comparable U.S. store sales rose 10.6%, the highest in more than 20 years.
• CVS Health also raised its full-year earnings guidance, boosted by vaccines and testing, both in-store and over-the-counter.

What’s Next: As part of efforts to develop its consumer healthcare business, Walgreens has introduced 47 Walgreens Health Corners, including 10 in California, and plans to operate more than 100 locations by the end of 2022.

—Lina Saigol and Janet H. Cho

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Booming Demand Helps TSMC Post Record Quarterly Profit

Taiwan Semiconductor Manufacturing Thursday reported a 16.4% jump in net profit for the last quarter of 2021, on sales jumping 21.2% compared with the same quarter of 2020.

• Revenue at the world’s largest contract chip maker, and a major supplier of Apple , was boosted by strong demand for the company’s chips, on the back of increased use of smartphones, home computers, and other technological gadgets during the pandemic.
• The company’s products are also in high demand for products transformed by technological innovation, such as 5G networks, electric vehicles, and artificial intelligence.
• Fourth-quarter revenue in dollar terms jumped by 24.1% to $75.74 billion, the company said. It made a 37.9% operating margin in the fourth quarter.

What’s Next: In a context of tight capacity for the chip industry worldwide, TSMC said it is planning to invest between $40 and $42 billion this year. The company, which announced a $100 billion investment plan last year, is forecasting several years of strong growth for the industry.

—Pierre Briançon

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2021 was a big year for cryptocurrency investors. How can people with crypto gains prepare for the coming tax season?

Cryptocurrencies, also known as virtual currencies, have gone mainstream. That’s for sure. For example, you can use Bitcoin to buy a Tesla and to buy or pay for lots of other things. However, using cryptocurrencies has federal income tax implications. Here’s what you need to know at 2021 tax return time if you made crypto transactions last year.

Understand this: the IRS wants to know about your crypto transactions.

The 2021 version of IRS Form 1040 asks if at any time during the year you received, sold, exchanged, or otherwise disposed of any financial interest in any virtual currency. If you did, you are supposed to check the “Yes” box. The fact that this question appears on page 1 of Form 1040, right below the lines for supplying basic information like your name and address, indicates that the IRS is serious about enforcing compliance with the applicable tax rules. Fair warning.

Read more here.

—Bill Bischoff

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—Newsletter edited by Liz Moyer, Camilla Imperiali, Rupert Steiner