Is Bitcoin really a bubble?Creative Commons

The Union finance ministry on Friday cautioned the citizens who are investing in virtual currencies such as Bitcoin and compared the virtual currencies (VCs) with the ponzi schemes.

"There has been a phenomenal increase in recent times in the price of Virtual 'Currencies' (VCs) including Bitcoin, in India and globally. The VCs don't have any intrinsic value and are not backed by any kind of assets. The price of Bitcoin and other VCs, therefore, is entirely a matter of mere speculation resulting in spurt and volatility in their prices. Consumers need to be alert and extremely cautious as to avoid getting trapped in such Ponzi schemes," read the statement released by the ministry.

The announcement came in the wake of the South Korean government cracking down on Bitcoin trading. Bitcoin and other virtual currencies tanked substantially on Thursday after the South Korean government said it is exploring options to ban exchanges that allow trading of cryptocurrencies.

Bitcoin's value dropped as much as 8 percent on Thursday. Currently, the value of Bitcoin is around $14,000.

The ministry further said in a statement that there is a real and heightened risk of investment bubble of the type seen in the ponzi schemes which can result in sudden and prolonged crash exposing investors, especially retail consumers losing their hard-earned money.

The finance ministry explained that cryptocurrencies are stored in electronic format, making them vulnerable to hacking, loss of password, and virus attack, which may also result in permanent loss of money.

"As transactions of VCs are encrypted they are also likely being used to carry out illegal/subversive activities, such as terror funding, smuggling, drug trafficking and other money-laundering Acts," the statement noted.

Earlier this month, the Reserve Bank of India (RBI) warned public that it has not given any licence to anyone to operate such virtual currencies.

In a notification, the central bank said, "users, holders and traders of Virtual Currencies (VCs) including Bitcoins regarding the potential economic, financial, operational, legal, customer protection and security related risks associated in dealing with such VCs."

The finance ministry further said, "VCs are not backed by government fiat. These are also not legal tender. Hence, VCs are not currencies."