UPDATE (7th December, 09:04 GMT):

The bitcoin price has continued to drop overnight on major bitcoin exchanges. The price on exchanges included in the Bitcoin Price Index all currently sit below $700, with the BPI overall having dropped almost 20% to $670 since close of play last night, and BTC China's price seeing a low of ¥4,003 ($658) this morning.

The price slump follows the statement from the People's Bank of China and the news that divisions of Baidu and China Telecom, two of the best known names in Chinese internet and telecommunications, removed references to bitcoin payments from their sites.

Analysis of the People’s Bank statement has been divided between optimism and pessimism, but its effect was felt on bitcoin values, which dropped from a high of $1,147 on 4th December to $834 the next day on the Bitcoin Price Index. After hovering around that mark for 24 hours or so, they dropped to a low of $670 at the time of writing.

The two big Chinese companies attracted a lot of attention in the past month when they announced they would accept bitcoin for certain products and services. In both cases, it was smaller divisions of the two companies trialling bitcoin rather than large-scale adoption, and likely done as a promotion.

But then came this week’s statements by the People’s Bank, which many say amount to the government’s official disapproval of bitcoin use. Without explicitly banning bitcoin trade, the statement which “clarifies the status of bitcoin” said all financial institutions “must not use bitcoin to set the price for products or services, not buy and sell bitcoins... and not directly or indirectly provide other bitcoin-related services including registering, trading, clearing or settlement.”

The statement applies to financial institutions. Bitcoin was a ‘virtual commodity’ that should not be referred to as a currency or virtual currency, the statement said, but added that the general public was allowed to continue trading on the internet. Bitcoin websites and other businesses were allowed to use it in daily life as long as they complied with the usual regulations.

It is not known whether the software division of Baidu (Jiasule) or China Telecom subsidiary Jiangsu Telecom, who accepted bitcoin, subsequently removed the option as a result of any official directive, or were simply playing it safe.

This week Suning Yigou, a Chinese home appliances retailer, had said it planned to introduce bitcoin services such as “storage insurance, insurance for bitcoin transactions and other insurance products,” as well as accepting bitcoin payments mining equipment and other hardware products. Whether or not these plans will be affected by events over the past couple of days remains to be seen.

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The price of bitcoin has seen a larger than normal drop in trading prices over the past day on a number of bitcoin exchanges.

In a major sell-off that started last night, Mt. Gox, the largest US dollar bitcoin exchange, saw a low price today of $800 from a recent high of $1,230, a 35% decrease before bouncing back up a bit. Almost 52,000 bitcoins have been traded on Gox over the past 24 hours.

CoinDesk’s Bitcoin Price Index

, which is an aggregate calculation of top exchange prices, has seen a 24-hour drop of $185 since the day's open, or 18%, at the time of writing.

The number of negative news articles being produced about bitcoin and virtual currencies in general has probably contributed to a decline in pricing over the short term.

Earlier this week, China’s central bank along with four government ministries released a statement effectively outlawing banks to use bitcoin, which could cause problems for any business that might exchange BTC for the Chinese Yuan.

And Baidu, which is considered the Google of China, had decided to halt accepting bitcoin after its Jiasule service started accepting it in October.

After the statement was released, a price drop was seen on China’s (and the world’s) largest bitcoin exchange, BTC China, where over 73,000 bitcoins have been traded in the past 24 hours.

The news cycle is clearly changing sentiment about the distributed virtual currency, raising into question why short selling is not more prevalent to provide better liquidity and less volatility.

While shorting bitcoin is technically possible, most of the largest exchanges on the market don’t allow it, leaving specialized trading arbitrators as the only providers.

This article was co-authored by Daniel Cawrey and Jon Southurst.

Market image via Shutterstock