BTC Chinas Bobby Lee says his exchange remains in business despite new restrictions
Bitcoin has fallen to less than half the value it recently traded for, following reports of fresh action by Beijing to restrict trade in the virtual currency.
BTC China has said that local payment companies have been blocked from providing it with clearing services.
It means that the firm the worlds biggest Bitcoin exchange in terms of trading volumes can no longer accept yuan-based deposits.
Prices tumbled following the news.
One bitcoin was trading for as low as 2,560 yuan ($421, £258), according to the South China Morning Post.
That compares with an all-time high of 7,588 yuan ($1,250; £764) in late November.
Exchanges in other countries also reported drops, with Japan-based MtGox seeing the exchange rate for one bitcoin fall from $717 to as low as $480 in Wednesdays trade.
A lot of people put Bitcoins rise over recent months to China where interest in it has gone through the roof, said Emily Spaven, editor of digital currency news site CoinDesk told the BBC.
People are getting frightened that with the new regulations the country could now drop out of the ecosystem. Going forward, its certainly not the end of Bitcoin, but people have been panic selling.
Virtual currency exchanges in China are not licensed by the countrys central bank to accept or pay out yuan to their customers, making them reliant on independent clearing houses to act as middlemen.
We essentially got notice from our third-party provider today that they will discontinue accepting payments for us and new deposits, Bobby Lee, chief executive of BTC China, told SCMP.
Were still operating a Bitcoin exchange in China legally, and were still allowing people to deposit and withdraw Bitcoin, and withdraw renminbi [yuan].
According to Yicai a business news website with ties to the government the news followed a meeting between officials from the Peoples Bank of China and 10 clearing houses on Monday in Beijing, at which the firms were told they had until the end of January to sever links to the countrys Bitcoin exchanges.
This followed an earlier notice, issued by the regulators a fortnight ago, which banned local banks from handling transactions involving bitcoins.
Bitcoin walletThe Chinese ban will make it harder for locals to swap their yuan for bitcoins
The virtual currency is not backed by a central bank of its own, and is best thought of as being virtual tokens, rather than real-world coins, which derive their value from the ability to exchange them for cash or use them to buy goods.
One expert suggested the crackdown was the result of the Chinese governments fears that locals were using it as a way to bypass currency controls in order to move their savings out of the country.
China is trying to grow its domestic economy and rebalance it from an export and investment-based model to a consumer driven one over the next decade, and to do that the authorities want to keep as much yuan within the country as possible, said Jinny Yan, an economist with Standard Chartered bank.
They dont want to curtail any innovation in the financial sector. However, at the moment any unexpected growth and development in channels that allow by-passing of capital controls will cause anxiety.
Ms Spaven added that she believed Bitcoin would eventually bounce back.
Underneath all the speculative trading is a robust technology that has intrinsic value as a payment network, offering cheaper and faster money transfer than any other options that exist currently, she said.