Bitcoin, the virtual currency, has created something of a frenzy in China, with its value surging more than 80 percent in a year. Until last week, that is, when it plunged more than 30 percent after the central bank banned financial institutions from involvement in bitcoin trading.

The majority of Chinese investors, who seem to love speculation, know little about the mechanisms surrounding the currency. They can’t hold one in their hands nor use bitcoin in their normal daily lives.

Therefore, it seems like the right time to damp down the heated bitcoin trade in China, which had accounted for more than half of the currency’s global trading volume.

“It’s a game of speculation (in China), and few people know or care what’s behind it,” said James Li, head of BTC360.com, a bitcoin trading platform which he founded this year.

Bitcoin was introduced in 2008 by a programmer, or group of programmers, under the name of Satoshi Nakamoto. It was designed to become an alternative to government-backed currencies. There are 12.1 million bitcoins in virtual circulation, and their supply is strictly governed by rules embedded in complicated software.

Most of the early bitcoin investors or collectors were geeks or financial experts. Even as an IT journalist, I can’t explain the mechanism of the virtual currency in a few sentences.

Not regulated by any country

The value of one bitcoin was up to 6,970 yuan (US$1,143) last month, compared with less than 100 yuan a year ago. Despite the central bank’s announcement, it rebounded to about 5,036 yuan yesterday, after dropping to 4,500 yuan last week, according to BTC360 and BTC China, the country’s biggest online bitcoin trading exchanges.

“Bitcoin is not regulated by any country or banking authority, and that makes it attractive and valuable to investors when the global economy is uncertain,” Beijing-based Dongxing Securities said in a recent note before the central bank’s announcement.

The surging price and extensive media exposure have made bitcoin a hot investment channel. Merchants started to accept bitcoin, including China’s biggest online search engine Baidu and a smartwatch subsidiary of Shanghai-based Shanda Interactive.

The seller of a house in the Zhangjiang region of Shanghai’s Pudong New Area even offered to accept bitcoin in payment.

The value of one bitcoin will hit US$1,300 if it continues to develop without regulation and other obstacles, according to Merrill Lynch, a US-based investment bank.

But China and US industry officials both strengthened regulations on bitcoin in December.

The People’s Bank of China barred financial institutions from being involved directly or indirectly in transactions related to bitcoin in a bid to strengthen controls over the digital e-money, it said last week. It was also the first time that China publicly said the virtual currency was not “a currency with real meaning” and didn’t have the “same legal status as a currency.”

The public is free to trade bitcoin as a normal online product and service, but they undertake the risks by themselves, according to the central bank.

Earlier last week, former US Federal Reserve Chairman Alan Greenspan called the bitcoin phenomenon a “bubble.”

“It has to have intrinsic value,” Greenspan said.

“You have to really stretch your imagination to infer what the intrinsic value of bitcoin is,” he added.

Huge losses for investors

The Chinese central bank’s announcement stemmed in part from the case of Chinese bitcoin trading website GBL, which closed unexpectedly in October and delivered huge losses to investors.

GBL began operating in May and had 4,493 registered users just before it closed.

Investors may have lost as much as 25 million yuan.

One investor who reported the case to the police claimed a loss of 90,000 yuan, according to media reports.

Though it triggered a short-term drop in the virtual currency, the announcement by the People’s Bank of China will make the whole system healthier and more sustainable, according to platforms BTC360 and BTC China.

If nothing else, it may be a turning point in attitudes towards bitcoin investment in China.

Baidu, which has accepted bitcoin since October, stopped accepting the virtual currency after the central bank announcement.

The recent large fluctuations in the bitcoin’s value rendered Baidu unable to safeguard users’ interests, the company said in a statement.

The Shanghai-based house seller and Shanda also stopped accepting bitcoin.

Individual investors in bitcoin are warned about the risks of the virtual currency, said a statement issued by five regulators, including the central bank, the China Banking Regulatory Commission and the Ministry of Industry and Information Technology.

The peak daily trading volume of bitcoins reached 90,000 on BTC China, while the peak transaction value has surpassed 200 million yuan.

In an online chat group, many BTC users complained about price drops and the difficulty in obtaining bitcoin.

“The bitcoin is not a real currency,” said Mark Matthews, head of research at Swiss private bank Julius Baer for Asia. “In fact, I don’t think virtual assets have a lot of wealth.”

Still, bitcoins continue to be used in many applications.

The mini boom in bitcoin software for smartphones is making it easier for consumers to use the virtual currency in place of cash for quick transactions, such as paying for food or splitting a bill. Firms such as Skype and Tesla Motors Inc still accept bitcoin.

The facts about bitcoin

What is bitcoin?

Bitcoin is an open source peer-to-peer payment network and digital currency introduced in 2009 by a programmer, or group of programmers, called Satoshi Nakamoto.

Transactions are verified by a decentralized network of computers all over the world. Specialized computers use a proof-of-work system to prevent people from copying and spending the same bitcoin multiple times, a problem for digital currencies known as “double-spending.”

How can you get bitcoins?

People use operating computers, known as “miners,” to collect bitcoins through special client ends. The system produces 25 bitcoins every 10 minutes globally. The popularity of bitcoins and surging prices have made it more difficult for people with standard computers to obtain the currency.

Who uses bitcoins?

Bitcoins are increasingly used as payment for legitimate products and services, and merchants have an incentive to accept the currency because transaction fees are lower than the 2 to 3 percent typically imposed by credit-card processors. Notable vendors include OkCupid, Reddit and WordPress for online services.

Speculators have been attracted to bitcoin, fueling volatility and price swings. The top bitcoin trading platforms include BTC China and MtGox.