The announcement by the Indian government was an attempt to crackdown on corruption and "black money", but following the movement, internet searches for the term "buy bitcoin" increased in popularity, according to Google Trends data.

Following last week's announcement that the notes were no longer legal tender , sales volumes for bitcoin increased on several exchanges for the digital currency, according to The Hindustan Times.

Indian Prime Minister Narendra Modi's decision to withdraw 500 and 1000 rupee notes from circulation has sparked interest in bitcoin among India's consumers.

Other signs of increased interest include downloads of the smartphone app for bitcoin exchange Zebpay, which passed a threshold of 100,000 downloads.

"Queries for bitcoins have gone up by 20 percent to 30 percent in the past couple of days," Zebpay's CEO, Saurabh Agrawal, told the Hindustan Times.

As a result of the increased demand, the premium paid for rupee-denominated bitcoin has widened.

One bitcoin on the Indian exchange Unocoin is worth 55,405 rupees, or $817.97, at the time of writing. Dollar-denominated bitcoin currently costs around $709.

According to Charles Hayter, CEO and founder of Crypto Compare, the premium at the start of September was just $20, or around 3 percent.

"Bitcoin is a sanctuary in emerging markets where knee jerk policy reactions are commonplace - India's move on high value bank notes is just the latest in a string of poorly communicated & executed judgments," he told CNBC via email.

"Bitcoin was trading at a $20 dollar premium in India at the beginning of September and now is trading at a $70-100 premium to the USD rate."

One reason for the increased demand may be due to Indians who are frustrated by the government's decision and are now looking for a way to store their wealth that is (theoretically) out of Dehli's reach.

"The Indian rupee, like all other government currencies, is a fiat currency. It exists through the fiat - order - of the government," explained Jacob J, a writer for The CoinTelegraph.

"As seen in the recent instance, its existence can also be terminated through an order from the government. With the passage of time, Bitcoin's superiority as a currency is becoming more and more apparent."

India has been slow to start using digital currencies. The amount of bitcoin traded per day in India is a fraction of other countries, according to Linus Lindgren, strategic investor and advisor at BTCXIndia.

"I would estimate the average traded volume in India to be around 500btc/day, which is less than 1 percent, maybe even 0.1 percent, of global volumes," he told CNBC via email.

"We have certainly seen a larger interest than ever before in the last weeks, but in contrast to centralised systems, where money can be made worthless over night, a decentralised currency like bitcoin is opt-in, meaning that this revolution will come gradually as more and more people start seeing the benefits and switch."

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