Cheng feels so strongly about the potential for the digital currency that in December he wrote to Financial Secretary John Tsang Chun-wah on behalf of the Hong Kong bitcoin community, asking the government to clarify bitcoin's status in the city to encourage more bitcoin investment. Tsang's office acknowledged Cheng's letter, but has not responded formally.

"I think Hong Kong can set an example for keeping bitcoin clean and encouraging bitcoin businesses," Cheng says. "I urged Tsang to set regulations to deter money laundering with bitcoins and to clarify the government's stance on digital currencies so that bitcoin entrepreneurs won't need to operate in a grey area and can bring investments to the city."

Bitcoin has boomed as an alternative banking and payment system, attracting the attention of the financial community and governments globally as users lobby for the currency to gain legitimacy. The total value of all bitcoins in the world is currently more than US$7.7 billion.

Advocates say the payment system eliminates the need to funnel money through third parties such as banks or card payment processors, leading some proponents to argue that it's a replacement for credit cards.

Bitcoin is not controlled by any government or central bank and provides some, although not total, anonymity for users. As a result it has a dark side, attracting criminals who have used it as a payment method for drug and weapons deals.

Hong Kong's reputation as a potential global bitcoin hub was damaged in October when a locally registered business, operating as a bitcoin trading platform on the mainland, shut down, affecting 4,000 investors who lost US$5 million in funds. The case aroused the suspicion of police, who later arrested three mainland citizens.

Tsang, the finance chief, wrote in a blog post last month that the bitcoin bull run couldn't last forever because there was "no support from the real economy". He linked the rise in value to speculation and argued that "the more popular bitcoin is, the risks of a market bubble burst are higher".

Many are sceptical of the currency's soundness. Nobel-prize winning economist Paul Krugman has trashed it and former US Federal Reserve chairman Alan Greenspan described bitcoin as a "bubble". The European Central Bank has compared bitcoin to a Ponzi scheme.

British economist John Greenwood, who designed Hong Kong's pegged currency regime, says that bitcoin is not credible as a global currency because it fails three fundamental requirements: as an alternative payment for goods and services; as a stable store of value; and as a universal measurement of money.

But a growing number of entrepreneurs in Hong Kong remain undaunted. They are eager to start businesses to make the city a gateway for bitcoin trade and investment with the mainland and the rest of Asia.

Watch: What's Bitcoin and how does it work?

"I think Hong Kong can become the centre of the bitcoin universe," says David Shin, co-founder of Digimex, a company that plans to launch a Hong Kong-based bitcoin crowdfunding platform called CryptoMex this month. The start-up would connect Asia-based bitcoin investors, particularly those from China, with global bitcoin ventures seeking funding.

"Hong Kong is the right place to benefit from the bitcoin boom in China as well as help to improve the overall ecosystem by providing avenues for Chinese bitcoin users to reinvest in global bitcoin ventures," Shin said.

Bitcoin reached its peak price in November, propelled in part by an earlier banking crisis in Europe. After the Cypriot government scrambled to bail out its banks with an unprecedented one-off tax on all bank deposits above €100,000 (HK$1 million), investors were attracted to the digital currency, doubling its value.

The damage to traditional banking was done: bitcoin was seen as safer than a country on the brink of bankruptcy.

Two months later, in May, bitcoin caught the eye of the Chinese media and soon speculators rushed to make quick money, causing the price to spike 600 per cent in just two months.

The bull run abruptly came to an end on December 5 when the People's Bank of China announced it was banning financial institutions from dealing in bitcoin. The price of the digital currency plummeted from US$1,242 to US$576 a coin. On December 17, the mainland's banking regulator moved to end new deposits in bitcoin exchanges - the bulk of the funding supply - undermining confidence in the virtual currency.

With no new renminbi deposits accepted by the two biggest digital currency exchanges on the mainland, BTC China and OKCoin, investors dumped bitcoin and prices further weakened on reduced demand.

Despite the setbacks, bitcoin investors and entrepreneurs say they're still bullish on the currency. Hong Kong tycoon Li Ka-shing's venture capital company, Horizon Ventures, invested in BitPay, the digital currency equivalent of PayPal, which provides services to bitcoin users.

And some finance professionals have walked away from secure, well paid jobs to start bitcoin businesses in Hong Kong.

Aurelien Menant, co-founder and CEO of Hong Kong-based Gatecoin, the first licensed digital currencies exchange in Asia, quit his job at Societe Generale CIB in May to work full time on his business.

"I loved my job in investment banking, but I have always been attracted by entrepreneurship and I see bitcoins as today's main new disruptive technology, like Skype or Hotmail was 15 years ago," Menant says. He says that setting up a licensed exchange in Hong Kong was inexpensive and straightforward.

"Hong Kong is an amazing place to start a business, especially for a global business," he says. "The bitcoin momentum is in Asia at the moment, where it clearly has the biggest potential."

Menant says that Hong Kong, as one of the main international trading hubs, would greatly benefit from digital currencies.

"The financial regulation here is also one of the best in the world. It enforces very strict guidelines to prevent money laundering and other criminal activities and at the same time allows small businesses to enter," he says.

The interest in the nascent virtual currency is all the more remarkable given it emerged out of nowhere four years ago.

Users can buy bitcoins through various online currency exchanges operating worldwide and investors have seized the chance to buy them on the dips and sell on the highs.

Bitcoin was created with only 21 million coins available, but the coins can be divided into eight decimal places, resulting in tens of billions of smaller bitcoins.

Today coins are "mined" when high-performance computers use complex mathematical algorithms to verify genuine bitcoin transactions, resulting in the creation of new bitcoins.

Recent scrutiny of bitcoin's wild price swings has sparked widespread debate on the future of the digital currency.

A US Senate hearing in November proved decisive for virtual currencies as regulators in Washington signalled they could embrace bitcoin, paving the way for legitimacy in the world's largest economy.

Some governments have supported the concept. Germany became the first country to recognise bitcoin in August, allowing Berlin to tax users of the digital currency in the future. But the watchdog body the European Banking Authority and central banks in France and India sounded warnings against potential losses from bitcoin, declaring that there was no consumer safety net, although they stopped short of an outright ban.

Cheng says that Hong Kong should work towards a framework to allow bitcoin to operate in a more secure environment.

"I think of bitcoin as a social experiment with money," he says. "Whether it succeeds or not doesn't matter too much to me. I think the key for Hong Kong is to regulate digital currencies in a way that would maximise the rewards and minimise the risks."