The Centre on Friday warned people against investing in virtual currencies, including Bitcoin, saying there are like Ponzi schemes.
The government, however, did not issue any measure to curb bitcoin's trade.
Anecdotal evidence suggests close to a billion dollar equivalent of rupee currency has gone into bitcoins months before the cryptocurrency witnessed an extreme rally.
"There has been a phenomenal increase in the recent times in the price of virtual currencies (VCs), including Bitcoin, in India and globally. The VCs do not have any intrinsic value and are not backed by any assets. The price of VCs is therefore entirely a matter of mere speculation resulting in a spurt and volatility in their prices," the finance ministry said.
The ministry said there was a "real and heightened risk" of investment bubble of the type seen in Ponzi schemes which can result in a sudden and prolonged crash leading to investors, especially retail consumers, losing their hard-earned money.
"Consumers need to be alert and extremely cautious as to avoid getting in such Ponzi schemes," the ministry said.
The government said VCs are stored in a digital/electronic format, making them vulnerable to hacking, loss of password, malware attack etc., 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 ministry said.
"VCs are not backed by government fiat. They are also not legal tender. Hence VCs are not currencies. The government and RBI have not authorised any VCs as a medium of exchange," the ministry said.
"Persons dealing in them must consider the facts and beware of the risk involved in dealing in VCs," the ministry said.
China recently put a virtual ban on VCs by asking Bitcoin exchanges to close down.
On Thursday, South Korea promised a crackdown on Bitcoin as it feared the cryptocurrency speculation had been "irrationally" overheated in the country.