One of Bitcoin enthusiast Mike Caldwell's coins in this photo illustration at his office in Sandy, Utah, September 17, 2013. Bitcoins, touted by some experts as the future of money, gained in prominence during Europe's financial crisis as more people questioned the safety of holding their cash in the bank. Cameron and Tyler Winklevoss, currently making headlines with plans to launch a Bitcoin fund, said on Tuesday that they could see the digital currency becoming a country's official money. REUTERS/Jim Urquhart SHANGHAI (Reuters) - The price gap between bitcoins trading in Chinese yuan and those sold for other currencies has evaporated in recent days, highlighting the porous nature of China's capital controls.

Chinese bitcoin chat rooms buzzed last month as investors noticed that the digital currency as sold on China's biggest exchange was more expensive, in dollar terms, than bitcoins traded abroad using dollars, creating a tempting arbitrage play.

Traders could earn profits by buying bitcoins using dollars on a foreign exchange such as Mt. Gox, reselling them for yuan at the higher price on BTC China, the main local exchange, and finally converting the yuan back to dollars.

"Insane bitcoin. If you've got dollars, hurry and do arbitrage," a user called 'foxtree' wrote on Weibo, a Twitter-like micro-blogging platform, on November 19, the day the gap peaked at more than 30 percent.

A key driver of the price gap was China's capital controls, which make it difficult for speculators to swap yuan proceeds from the sale of high-priced Chinese bitcoins into dollars.

"Certainly a portion of the premium on BTC China was a result of the fact that any coins sold would be in RMB, which isn't the most portable currency," said Zennon Kapron, head of Kapronasia, a Hong Kong-based finance and technology consultancy, using an alternate term for the Chinese currency.

"So if you did trade that market, getting your money back into another currency is more difficult," he said.

RAPID EVOLUTION

In recent days, however, the spread between bitcoins as priced in yuan and those priced in dollars has disappeared. An announcement by China's central bank last week forbidding commercial banks from dealing in bitcoin also contributed to the price decline on BTC China.

But analysts say the price convergence also reflects the rapid evolution of the bitcoin market, which began with technology enthusiasts but quickly expanded to include those with the financial know-how to evade China's strict capital controls.

A 27-year-old e-commerce professional from the east coast city of Xiamen, who goes by the screen name 'King,' is typical of early-wave amateur punters.

He told Reuters that he used RChange, an online currency exchange and payment service based in the Seychelles, to exchange yuan for commercially-operated electronic currencies such as OKPay and EgoPay, which are accepted by several international bitcoin exchanges. But because such currencies carry hefty charges, this method is only profitable when the bitcoin spread is very wide.

SOPHISTICATED ARBITRAGEURS

Recently, as bitcoin has grown in popularity, more sophisticated arbitrageurs have stepped in. Early this month, Chinese media began reporting that investors from Wenzhou, the east coastal city known for its entrepreneurial and speculative zeal, were piling into bitcoin.

Wenzhou's famously tight-knit, business-savvy global diaspora has given rise to the adage "Wherever there's a market, there are Wenzhou people" and offers Wenzhou investors ready access to foreign currency.

Some bitcoin speculators are also likely resorting to other tried-and-true methods for skirting China's capital controls. The most common is falsified trade invoices, which disguise movements of speculative cash as payments for goods and services.

Indeed, unexpectedly strong export growth in November reignited suspicions that official data had been inflated by fake invoicing.

Those suspicions centered on the conversion of dollars to yuan in order to profit from appreciation of the Chinese currency. But the same technique has been used to move funds in the other direction.

Mis-invoicing in China resulted in illicit outflows worth $3.79 trillion between 2000 and 2011, according to a report last year by Global Financial Integrity, a think tank and advocacy group in Washington.

A Shanghai-based fixed income fund manager dismissed capital controls as a barrier to shifting money around. "All of my clients have plenty of money offshore already," he said.

(Additional reporting by Shanghai newsroom; Editing by Richard Borsuk)