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 world's 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.
Bitcoin is often referred to as a new kind of currency.
But it may be best to think of its units being virtual tokens rather than physical coins or notes.
However, like all currencies its value is determined by how much people are willing to exchange it for.
To process Bitcoin transactions, a procedure called "mining" must take place, which involves a computer solving a difficult mathematical problem with a 64-digit solution.
For each problem solved, one block of bitcoins is processed. In addition the miner is rewarded with new bitcoins.
This provides an incentive for people to provide computer processing power to solve the problems.
To compensate for the growing power of computer chips, the difficulty of the puzzles is adjusted to ensure a steady stream of about 3,600 new bitcoins a day.
There are currently about 11 million bitcoins in existence.
To receive a bitcoin a user must have a Bitcoin address - a string of 27-34 letters and numbers - which acts as a kind of virtual postbox to and from which the bitcoins are sent.
Since there is no registry of these addresses, people can use them to protect their anonymity when making a transaction.
These addresses are in turn stored in Bitcoin wallets which are used to manage savings.
They operate like privately run bank accounts - with the proviso that if the data is lost, so are the bitcoins owned.
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 Wednesday's trade.
"A lot of people put Bitcoin's 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, it's certainly not the end of Bitcoin, but people have been panic selling."
Currency controlsVirtual currency exchanges in China are not licensed by the country's 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.
"We're still operating a Bitcoin exchange in China legally, and we're 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 People's 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 country's Bitcoin exchanges.
This followed an earlier notice, issued by the regulators a fortnight ago, which banned local banks from handling transactions involving 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 government's 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 don't 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.
"If you look at our Bitcoin Price Index, you can see that prices dipped to below the current level this time last month and soon bounced back. I believe the same will happen this time around. It may take some time, but the price will rise again."
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