At the Garage Café, a dimly lit magnet for young programmers and entrepreneurs in Beijing’s hi-tech Zhongguancun district, one topic dominates the low hum of conversation: Bitcoin.

The crypto-currency’s value has soared more than fivefold over the past month, driven in large part by hectic speculative trading on Chinese exchanges.

“Most of our customers talk Bitcoin, and some of them trade as much as ten million RMB’s worth ($1.6 million) at a time,” says Xu Tianhai, who manages the Garage.

Now they are holding their breath, in the wake of a Chinese Central Bank notice Thursday that banned financial institutions from trading in Bitcoin and forbade its use as a currency. The value of Bitcoin on Chinese exchanges fell after the announcement, and one expert said he thought it could drop by half in the next few weeks.

The Chinese have seized the limelight in recent months as the world’s leading Bitcoin traders and “miners.”

BTC China, the biggest Chinese Bitcoin exchange, has grown to become the largest in the world, handling an estimated 30 percent of global Bitcoin transactions over the past month. In November, China accounted for one third of worldwide downloads of Bitcoin electronic wallets, needed to trade or spend the virtual currency.

Specialized mining companies, which create the e-currency through a complex computing process, have assembled huge banks of computers in China dedicated to solving the algorithms that bring Bitcoins into existence.

But hardly anywhere in China beyond the Garage Café accepts Bitcoins as payment for anything and the Central Bank’s statement is likely to dampen any interest among vendors that might have been budding, analysts say.

Trading undeterred

The government’s intervention did not slow trading, which was unusually heavy on Friday, according to fiatleak.com, a website that tracks worldwide exchanges.

Bitcoin has exploded in China among investors and speculators, not least because they have very few alternative places to put their savings.

Chinese banks offer minimal interest rates; the Shanghai stock market is in the doldrums – at half its 2007 peak level – and real estate, a traditional savings vehicle, is now so expensive in China as to be beyond the reach of most people.

“Bitcoin is accessible, and its returns are higher than anything else,” says Zennon Kapron, founder of the Kapronasia financial consulting firm.

Volatility tolerance

The mouthwatering profits are undoubtedly attractive – Bitcoin has risen eightfold against the US dollar since the beginning of the year – and though its value has spiked and plummeted several times, that vertiginous volatility is not as off putting in China as it might be elsewhere.

Desperate investors here have experience with a bizarre range of commodities whose value has risen and fallen fast, including mung beans, pu’er tea, and garlic.

“Chinese people are very fond of gambling, and Bitcoin attracts them because it is like a gamble,” says Liu Xiao, an analyst who has studied virtual currencies for Anbound, a Beijing-based consultancy.

“A lot of people are crowding into the market and then getting out when they have made a profit,” adds Chandler Guo, the young heir to a meatpacking fortune who says he invested more than one million RMB ($165,000) in Bitcoin earlier this year. “One day in Bitcoin is like one month in the real world.”

Although no reliable figures exist, it is thought that a lot of Chinese speculators are short-term traders, buying Bitcoins and quickly selling them for traditional currencies on Bitcoin exchanges. Others, however, with faith in the longer-term prospects of Bitcoin are holding on to their investments in hopes of even larger gains in the future.

“Buyers are not mature or reasonable,” says Li Lin, founder and CEO of Huobi, a leading Chinese Bitcoin exchange. “They may lack confidence and panic, or be too optimistic about Bitcoin’s future.”

Government regulation

The Central Bank did not stop people from trading Bitcoins in its announcement Thursday. “Ordinary people are free to participate if they are prepared to shoulder the risk,” it said. But its first steps to regulate the market illustrate its concerns.

Prominent among them is a fear that Bitcoin users could use the seamless and frictionless international transfer system among online trading platforms, and the anonymity of all trades, to evade China’s strict exchange controls and move money abroad secretly.

The new regulations oblige exchanges to apply for a government license, and require them to identify all users by their real names and ID card numbers. They must also “immediately report…any suspicious transaction of virtual goods and cooperate with the Central Bank’s investigation into money laundering,” the notice says. This will infuriate libertarian Bitcoin ideologues for whom anonymity is a key aspect of the e-currency, but could be a step toward broader acceptability for governments.

“As the largest economy in the world with capital controls, this is obviously something they would want to look at,” says Mr. Kapron. “It will be interesting to see how they regulate and manage that.”

But the government announcement did not appear to significantly dampen Chinese enthusiasm; trading on Thursday, the day the statement appeared on the Central Bank website, was nearly twice as heavy as normal on the BTC China exchange, and by Friday afternoon Bitcoin’s RMB value had almost bounced back to its earlier levels, around 6,100 ($1,000.)

And enthusiasts believe that China has a special role to play in the Bitcoin world, not only because of its trading and mining weight, but also because of its technology.

'Most innovative' Bitcoin technology in China?

“The most innovative technology in Bitcoin mining is happening in China,” says Li Xiaolai, one of China’s biggest Bitcoin investors, who has also sunk his money into exchanges, mining companies, web applications, and other corners of the Bitcoin ecosystem.

“We have always been copycats, but this is the first time China can lead the world,” Mr. Li says, pointing to advanced Chinese designs for the ASIC chips that power mining machines. “That is much more interesting than the price going up.”

If Bitcoin prospers, “it is quite possible that China will be the dominant world player,” predicts Mr. Liu. For the time being, though, amidst the confusion over its future, expert opinions vary as widely as the e-currency’s wild price swings.

“I know it will grow into a very big market in China,” says Mr. Li, the exchange owner, confidently. “But I cannot say exactly how big; it’s beyond my imagination.”

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Liu is more doubtful. “This is a bubble and it will burst,” he forecasts. “The question is when.”