The People's Bank of China has issued a warning that the currency is not legally protected and has no 'real meaning'.
The Chinese central bank has warned the country's financial institutions not to trade in bitcoin, saying that the digital currency doesn't have "real meaning" and lacks legal protections.
However, no explicit risk to China's financial system was identified by the bank, and it reiterated that individual citizens were free to use bitcoin provided they were aware that they were taking the risk on themselves.
The bank also identified money laundering and other illegal uses of the currency as areas of concern.
Bitcoin has recently achieved a measure of popularity in China, with FiatLeak and other
bitcoin trading information sites showing large inflows of the currency through Chinese exchanges.
China Telecom, the largest mobile phone provider in the country, launched a promotion allowing a Samsung phone to be bought with bitcoins, and Baidu, the Chinese Google, is accepting payments for its firewall service in the currency.
But there's also suspicion that a large measure of the bitcoin's Chinese popularity is the result of fringe-legal uses. The currency is perfect for getting around the country's tight capital controls, which prevent rich Chinese citizens from moving too much money overseas.
While bitcoin remains unregulated, it is easy for users to buy a large sum in Chinese yuan and sell it in US dollars, evading those regulations.
The potential of bitcoin in China is seen as a large part of the reason for the currency's seven-fold increase in price over November, and the news that the Chinese central bank is taking a less-than-welcoming stance to it has sent markets tumbling.
The value of one bitcoin fell by 28% over two hours on Thursday morning, before settling into its more normal pattern of rapid large price swings in both directions.
The warning follows a similar cautionary tone from the Dutch central bank, which noted that there is no central issuer which can held liable for bitcoin, and no deposit guarantee scheme in the event of bitcoin banks failing.
The former head of the Dutch bank even compared the bitcoin bubble to the Netherlands' tulip mania in the 17th century – but pointed out that at least when that bubble burst, investors were left with tulips at the end.