The largest cryptocurrency was last down 4.6% at $42,874, with smaller coins that typically trade in tandem with bitcoin also tumbling. Ether fell over 8% while XRP slipped 7%.
The People's Bank of China also said it will bar financial institutions, payment companies and internet firms from facilitating cryptocurrency trading, and will strengthen monitoring of risks from such activities.
"Crypto markets are in an extremely frail state overall, and these sorts of downswings speak to that; there's a degree of panic in the air," said Joseph Edwards, head of research at cryptocurrency broker Enigma Securities.
"Crypto continues to exist in a grey area of legality across the board in China."
Shares in cryptocurrency and blockchain-related firms also came under pressure with U.S. listed miners Riot Blockchain, Marathon Digital and Bit Digital slipping between 4.1% and 5.1% in premarket trading.China-focused SOS slipped 1.2% while crypto exchange Coinbase Global fell 2.7%.
Earlier this year, Chinese authorities said they would crack down on cryptocurrency mining, sparking a massive sell-off of bitcoin and other coins.
(Reporting by Tom Wilson, additional reporting by Sagarika Jaisinghani, editing by Karin Strohecker)
By Tom Wilson