Risk assets recently rallied in hopes that inflation has peaked and the Fed would cut interest rates next year. The central bank’s monetary tightening has roiled cryptocurrencies.

It’s a risk-off day in financial markets. While bitcoin, ether, and futures tied to the S&P 500 are trading weak, the safe-haven U.S. dollar is gaining against other global currencies.

Investors trimming bullish exposure to assets perceived as risky, amid expectations that the Federal Reserve might use the minutes of its July meeting to push back against hopes of slower rate hikes and eventual liquidity easing.

Early this year, the Fed embarked on its most aggressive liquidity tightening cycle in over two decades, roiling bitcoin (BTC) and other cryptocurrencies. The Fed will release the minutes of its July policy meeting on Wednesday at 2 p.m. ET (18:00 UTC).

“The question is whether the Fed wants to use these minutes as a communication tool to push back against the view of a 2023 easing cycle,” ING analysts noted in a market update published Tuesday. “Post-meeting rhetoric from the Fed suggests that this is more likely to be the case – especially since the Fed funds futures price the policy rate being cut from 3.60% to 3.20% in the second half of next year.”

While the minutes are a raw record of what transpired at the last meeting, some observers argue they could be tailored to anchor market expectations.

“Fed looks at market reaction post meeting and uses minutes to correct misunderstandings. There is a lot to correct today,” Joseph Wang, former Fed trader, tweeted.

The Fed raised rates by 75 basis points to the 2.25%-2.5% range and ditched forward guidance, saying the next moves will be data-dependent. Since then, markets have been pricing slower rate hikes and eventual liquidity easing in 2023, tracking the decline in commodity prices. The dovish expectations strengthened last week after the U.S. reported softer-than-expected consumer price inflation for July.

However, markets appear to have run ahead of themselves, as the central bank’s inflation fight is far from over, several Fed officials said following last week’s CPI release. Policymakers added that interest rate hikes could continue into 2023.

Risk assets may see renewed volatility if the minutes further push back against the dovish expectations. “A further rejection of this market pricing should help the dollar,” ING analysts said. “Favor DXY pushing up the 107.00 area.” The DXY, short for the U.S. Dollar Index, is currently around 106.70.

Bitcoin tends to move in the opposite direction of the dollar index. At press time, bitcoin traded at $23,640, representing a 1% drop on the day.

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Put/call ratio for Bitcoin options reached yearly highs on Thursday, data shows.

Activity on bitcoin (BTC) options suggests rising bearish sentiment among investors as the asset ranges between the $29,000 and $30,000 price levels.

Bitcoin dropped to nearly $24,000 in the past week amid systemic risks within the crypto ecosystem and inflation fears in the broader market. The asset has slid for seven straight weeks as of Friday.

The asset’s price movements have been highly correlated to the U.S. markets in the past few months, with poor earnings reports and hawkish comments from the Federal Reserve (Fed) showing an impact on bitcoin prices.

Put/call ratios for bitcoin open interest hit a 12-month high of 0.72 yesterday, research firm Delphi said in a note Friday, adding that the data indicated “bearish sentiment among investors.” Similar ratio levels were reached last May.

“The put/call ratio measures the amount of put buying relative to calls,” Delphi analysts explained in the note. “A high put/call ratio indicates that investors are speculating whether bitcoin will continue to sell off, or it could mean investors are hedging their portfolios against a downward move.”

“Last April, the put/call ratio traded as high as 0.96 before Bitcoin’s price dropped over 50% in May 2021,” the firm added.

Put options are a contract that gives the option buyer the right, but not the obligation, to sell a specified amount of an underlying asset at a given price. Call options, on the hand, allow call buyers to purchase the asset at a predetermined price in the future.

At the time of writing, there over 63,000 bitcoin worth of open interest on options are set to expire on May 27.

Thursday’s surge in the put/call ratios surpassed previous 2022 highs of 0.69 in February, and are up 38% from one-year lows of 0.44 in December, data from analytics tool skew shows.

Crypto exchange Deribit leads options volumes with over $7 billion in open interest as of May 17. Those levels are a recovery from late last month, which saw a $2 billion plunge in open interest over two days from April 28 to April 30.

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Surging prices for food, energy and housing have sent inflation in the U.S. to a four-decade high.

Inflation appears to have become a top concern for both Wall Street and the main street days before the U.S. Federal Reserve (Fed) decides its response to the rising general price level in the economy.

“What are your thoughts about probable inflation rate over next few years,” U.S.-based electric car maker Tesla’s CEO Elon Musk tweeted late Sunday. Musk added that he would continue to hold bitcoin, ether and dogecoin even though buying physical assets is often the best way to ride an inflationary wave.

Surging prices for food, energy and housing have sent inflation in the U.S. to a four-decade high and the ongoing Russia-Ukraine war is expected to worsen the situation.

“We’re likely to see another year in which 12-month inflation numbers remain very uncomfortably high,” U.S. Treasury Secretary Janet Yellen said during a CNBC interview last week. The situation in Ukraine has exacerbated inflation and upcoming inflation reports will show “further evidence of an impact on U.S. inflation of Putin’s war on Ukraine”, Yellen added.

The general populace worldwide seems equally worried about a continued rise in the standard of living. According to Google Trends, a widely used tool to gauge general or retail interest in trending topics, returned a value of 100 for the worldwide search query over the past 18 years.

A score of 100 represents peak popularity – the maximum number of searches observed for a term during a given time frame. In other words, more and more people are worried about rising prices and are scanning the web for information on how bad the situation could get and ways to hedge against the same.

Google Trends provides access to a mostly unfiltered sample of actual search requests made to the search engine and measures their searches on a range of 0 to 100, according to the company. The search value represents the search interest relative to the highest point on the chart for the selected region and time.

The crypto community and the likes of Musk and MicroStrategy’s CEO Michael Saylor consider bitcoin as a hedge against inflation, a digital equivalent of gold.

“USD consumer inflation will continue near all-time highs, and asset inflation will run at double the rate of consumer inflation. Weaker currencies will collapse, and the flight of capital from cash, debt, & value stocks to scarce property like bitcoin will intensify,” Saylor tweeted in response to Musk’s inflation query late Sunday.

And though bitcoin has recently underperformed gold mostly on fears of faster monetary tightening by the Fed, observers remain confident of its long-term use case as a store of value asset.

“Inflation is likely to be persistently high (but lower than now) for some years. This adds fuel to the bitcoin-as-a-hedge thesis and could encourage even more portfolio allocations to a liquid asset with an independent monetary policy and a hard cap on supply,” Genesis Global Trading’s daily newsletter dated Feb. 25 said.

Bitcoin was trading near $39,000 at press time, representing a 3% gain on the day. The cryptocurrency found buyers during early Asian hours after Musk tweeted his intention to hold the digital asset.

The Fed is likely to raise borrowing costs by 25 basis points later this week and signal a continued fight against inflation through the rest of the year. The first rate hike since 2018 seems to have been priced in by markets. Bitcoin has dropped nearly 40% in the past four months, predominantly on the Fed rate hike fears.

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Officials said they are ready to hike interest rates and also briefly mentioned the threat of crypto and stablecoins to the financial system.

The Federal Reserve is ready to raise interest rates and reduce its balance sheet, according to minutes released Wednesday.

Fed officials agreed that “if inflation does not move down as they expect, it would be appropriate for the committee to remove policy accommodation at a faster pace than they currently anticipate,” said the minutes of the Federal Open Markets Committee’s (FOMC) January meeting.

They also noted that “a significant reduction in the size of the balance sheet would likely be appropriate.” The Fed has increased its total assets to about $9 trillion now from about $4 trillion in early 2020.

The cryptocurrency market, including stablecoins, was also a topic of discussion during the Fed’s January meeting, for the first time since July 2021.

Fed officials raised concerns about the significant growth of the crypto industry, and “some participants saw emerging risks to financial stability associated with the rapid growth in crypto-assets and decentralized finance platforms,” the meeting summary stated.

Regarding stablecoins, the Fed mentioned a potential run risk, which characterizes them as “another vulnerability in funding markets.”

While the minutes are widely watched nationwide, CoinDesk reported earlier that traders seem to have already moved on and are focusing on the Federal Reserve’s next meeting in March, when the central bank is expected to start hiking rates.

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It’s no guarantee of Fed approval, but Avanti Bank now has a routing number through the American Bankers Association.

Wyoming-based crypto bank Avanti is one step closer to potentially acquiring a master account with the Federal Reserve, the U.S. central bank.

Avanti Bank now has a routing number issued by the American Bankers Association (ABA), a key milestone in the process to receive a Fed account. Routing numbers are used to identify banks for checks and other transactional purposes, and are only issued to federal or state-chartered financial institutions that are also eligible to have a Fed account, according to the ABA’s website.

A number of Wyoming special purpose depository institutions (SPDIs), including Avanti and Kraken, have long sought master accounts with the Fed. Any bank that has such an account is eligible to deposit funds at the Fed, as well as tap the global payments system.

University of Alabama School of Law professor Julie Hill noted on Twitter that Avanti had received a routing number. A routing number in and of itself is not confirmation that a bank has a master account, however, she told.

Any bank trying to secure a master account needs to have a routing number. Often the ABA will ask for an opinion letter from the Fed confirming the entity in question is eligible, Hill said. Usually this happens if the ABA “believes it is unclear” if the applicant is eligible, she said. Once the number is issued, the Fed will begin processing the application.

The Fed can still reject an application after a routing number is issued, Hill cautioned.

“I don’t think that just because Avanti has a routing number necessarily means they’ll get a master account, but it’s typically a first step. You have to have a routing number before you can get a master account,” she said.

In November, members of a Fed advisory council made up of executives from banks, thrifts and credit unions voiced concern about the prospects of institutions with novel charters accessing the Fed payments system.

“If the access is granted, these institutions may introduce increased risks to the financial system,” according to the minutes of the meeting. SPDIs, the document noted, “hold uninsured dollar deposits. The deposits will be backed by 100% reserves, and the funds on deposit cannot be loaned by the bank. This structure allows those SPDIs to avoid Federal Deposit Insurance Corporation (FDIC) and Bank Holding Company Act (BHCA) supervision.”

Caitlin Long, the founder and CEO of Avanti, said she was “optimistic that the Fed will grant its applications for a master account and membership” in a statement emailed to CoinDesk by a spokesperson.

“Avanti meets or exceeds the legal and prudential regulation requirements, and has been purpose-built to create a safe and sound bridge between the US dollar financial system and digital assets,” said Long, a Wall Street veteran who has lobbied to make her home state of Wyoming a blockchain industry hub.

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CBDC’s are an inevitable evolution of today’s electronic currencies, the bank’s analysts said.

A U.S. central bank digital currency (CBDC) would differ from the digital money currently available to the public because it would be a liability of the U.S. Federal Reserve, not a commercial bank, and so would have no credit or liquidity risk, Bank of America said in a report.

Preserving the dollar’s status as the world’s reserve currency, improving cross-border payments and increasing financial inclusion are all seen as benefits of a U.S. digital currency, analysts led by Alkesh Shah, wrote in the note Monday. The Fed published a discussion paper last week on the benefits and risks of a U.S. CBDC.

Potential risks – which could be diminished by CBDC design choices – include “changing the financial sector’s market structure by shifting deposits, increasing the liquidity risk of the financial system if deposits at commercial banks were converted to a CBDC and decreasing the efficacy of monetary policy implementation,” the note said.

Bank of America said key considerations before issuing a CBDC are the need for it to be privacy-protected, intermediated, transferable and identity-verified.

Stablecoins are likely to see an increase in usage in the absence of CBDCs, the bank noted, adding that the two largest by market value, Tether and USD Coin, had a combined market value of around $121 billion as of Jan. 21. Their use as a means of payment is increasing, particularly for cross-border remittances, the report said, as they are faster and cheaper than using fiat currency.

In a report published earlier in the month, BofA challenged the Bank of England’s assertion that a U.K. CBDC would act just as a form of digital cash. It said CBDCs are likely to replace checking accounts as the way in which consumers hold the majority of their funds.

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