Bitcoin dropped after China's Vice Premier Liu He said his government will crack down on the virtual currency's mining and trading activities.
The world's largest and most popular cryptocurrency last traded down more than 6% at $38,293 after holding the $40,000 level for most of the Asian and London sessions.
China's Financial Stability and Development Committee, which is chaired by Liu, said it will resolutely prevent and control financial risks, and singled out bitcoin as the asset it needs to regulate more.
His remarks came days after China banned financial institutions and payment companies from providing services related to cryptocurrency transactions, and warned investors against speculative crypto trading, according to three industry bodies.
Rival cryptocurrency ether also came under pressure, falling 8.4% to $2,533.
The US Treasury Department yesterday called for new rules that would require large cryptocurrency transfers to be reported to the Internal Revenue Service and the Federal Reserve flagged the risks cryptocurrencies posed to financial stability.
Those warnings came after Chinese financial industry bodies banned the use of cryptocurrencies in payment and settlement earlier in the week.
"Nerves remained heightened, and I cannot see liquidity being deeper on Saturdays and Sundays than Monday to Friday, especially after the last week," said Jeffrey Halley, senior market analyst at OANDA.
"Weekend headline risk could prompt another bout of extended wealth destruction for the weekend warriors," he added.
Bitcoin markets operate 24/7, setting the stage for price swings at unpredictable hours, with retail and day traders driving those moves.
The offloading in crypto world has coincided with a surge in gold, which has hit four and a half month highs and is on track for three weeks of gains in a row, rising 1.8% so far this week.
A narrative of bitcoin becoming "digital gold" had gained traction earlier this year, with JPMorgan saying in January that bitcoin emerged as a rival to gold.
But Societe Generale questioned the comparison.
"Bitcoin has clearly 'outshone' gold both to the upside and now also to the downside. But with such a gap in volatility and amplitude, does it make sense to compare the two assets at all?," it queried.
The selloff also spilled over into equity markets on Wednesday, more so in companies with high exposure to cryptocurrencies, such as Coinbase, which is down 10% this week.
