The cryptocurrencies Bitcoin and Ethereum are under pressure following a painful trading session in the United States, which shocked many participants in the digital currency market. The two leading digital currencies fell to their lowest levels this week during Asian trading before recovering slightly. Bitcoin dropped by 8.7%, but later rose to $40,000 by 2:20 PM local time in Hong Kong. Ethereum fell by 15% but later reduced its decline.
#### Pressure on Cryptocurrencies
Cryptocurrencies are fluctuating after Elon Musk, founder of the globally leading electric car manufacturer Tesla, complained about the fossil fuels required for Bitcoin mining, while also reversing his commitment to allow the use of the most famous digital currency in the settlement of electric car sales. The People's Bank of China (the central bank) added to the negative sentiment by confirming that digital currencies cannot be used for payment settlements. However, these factors do not completely explain what happened to digital currencies on Wednesday, which saw a drop of 31% followed by a nearly equivalent rise. Investors relying on borrowing and the sudden spike in volatility may have played a role in the disturbances in the cryptocurrency market.
#### Risks of Borrowed Money
Many cryptocurrency traders use borrowed money to increase their returns, making them vulnerable to automatic liquidation of their positions in the event of a price drop. In the past 24 hours, accounts of over 700,000 traders were liquidated, amounting to $8.1 billion in cryptocurrencies, according to data from Bybt.com, a trading and information platform for cryptocurrency futures. Todd Morakis, co-founder of J.S.T. Capital, a financial services firm specializing in the digital asset market, stated that "bad news and pessimistic market forecasts, coupled with some traders being forced to sell, is a recipe for disaster." He added, "We’ll see a lot of movements over the next week, but we hope they remain within a range, even if broader than usual. This market currently offers opportunities for investors, but I think you'll see investors waiting and letting things stabilize."
#### Temporary Recovery of Bitcoin
Negative sentiment is increasing among observers of the cryptocurrency market. Jeffrey Halley, senior market analyst at OANDA Asia Pacific, said, "A period of relative calm will drive away more buyers on the dips, but Bitcoin is about to register a temporary recovery, especially when investors see the weak performance of other currencies during the rise at the end of the trading session." He cautioned that if Bitcoin closes below $40,000 this evening, there could be another decline and a potential retest of $30,000 again. Despite the recent downturn, cryptocurrencies still provide substantial gains for investors who have held them for more than a few months. Bitcoin's price has increased by 37% since the beginning of 2021, while Ethereum's price has more than tripled.
#### A Promising Future?
Goldman Sachs Group, Bank of New York Mellon, and DBS Group Holdings Limited have started to warm up to Bitcoin or expand their interest in it in recent months, indicating an increasing acquisition of digital currencies. Julian Emanuel, a strategist at BTIG, stated that "China's caution and the potential regulation from the United States lead to a climate of uncertainty, which places limitations on digital assets in the short term and may lead to modest retests or undermining of the drops in Bitcoin or Ethereum prices." He added, "The boom and bust cycle of digital assets, with only 2% of people currently using cryptocurrencies (the same figure that used the Internet in 1996), is likely to have more prosperity in the coming years."
