The price of fell by around 10 percent after Chinese authorities announced plans to inspect bitcoin enterprises.
The People's Bank of China published an announcement this morning that it will carry out site inspections on January 17 to check whether enterprises dealing in bitcoin have the correct licenses, have implemented anti-money laundering systems and whether there is market manipulation.
Following the announcement, the digital currency fell from around $915 to as low as $784.56. Bitcoin is currently hovering around the $806 mark.
Chinese investors dominate the global bitcoin volume trade. For some time, Chinese regulators have been concerned about bitcoin and whether it is having a negative effect on the renminbi.
Last week, the People's Bank of China met with three of the country's largest bitcoin exchanges to talk about market regulations.
Charles Hayter, chief executive and founder of digital currency comparison website CryptoCompare, said today's announcement was a "ratcheting of the rhetoric" from the Chinese authorities.
"Instead of 'we're watching' you it's now 'we're investigating' you," he told CNBC.
"The intentions of the Chinese state are clearer and it looks like they're trying to bring the Chinese bitcoin exchanges to heel - whether they are looking to make an example is yet to be seen."
Hayter added that the move may have positive impacts in the long term, as it may bring more respectability to the industry as it matures.
"But in the short term this could affect volumes which have been one of the key drivers of the recent rally."
Bitcoin had been steadily rallying through 2016 and appreciated to more than $1,100 on January 5th, near to its record high, but the digital currency subsequently crashed, dropping back to the $900 level.