From a high of $260 (£169) for each Bitcoin, the value dropped to about $130 (£84) in just six hours.
The selling frenzy began as Bitcoin's main exchange, MTGox, struggled to keep up with the volume of trade in the virtual currency.
MTGox said it was working hard to improve the exchange to avoid future trading problems.
The high of $260 marked the end of a steep rise in value for Bitcoins, which were worth only $90 each two weeks ago. On Thursday, values recovered slightly to reach about $160 (£104).
In a statement explaining what happened, MTGox said the delays in trading had not been caused by a hack attack. In the past few weeks the exchange, and the bitcoin community, has been targeted by hackers looking to cash in.
Instead, said MTGox, the "rather astonishing" number of new accounts that had been opened in the past few days caused a bump in trading volumes that it was unprepared for. In one day, the number of trades in Bitcoins had tripled, it said.
This caused "lag" or delay, which meant that Bitcoins were not swapped between people as fast as needed.
"As expected in such situation people started to panic, started to sell Bitcoin in mass (panic sale) resulting in an increase of trade that ultimately froze the trade engine," it said. About 80% of all the trade in Bitcoins goes through MTGox.
Engineers were working to improve the MTGox trading engine to handle the huge number of transactions, it said. The exchange added that it was planning to shut down for a couple of hours to add servers to help cope with the load.
Tech news site Ars Technica linked the crash to the antics of an anonymous Bitcoin owner who gave away around $13,000 in Bitcoins via the Reddit social news site. The unnamed person, who used the alias Bitcoinbillionaire on Reddit, randomly picked 13 different people to receive the coins. One lucky Redditor got a gift of about $5,000 (£3,250).
The vast increase in interest in Bitcoins is also creating problems for some established members of the digital cash community.
Bitcoins are created, or mined, when computers complete a complicated mathematical problem. Many individuals have pooled their computer power to ensure this mathematical work is completed more quickly.
But the rising value has meant the MT Red mining pool, which is co-ordinated via Reddit, cannot keep up with its financial obligations to its pool members and is shutting down. The "soaring price" has made it impossible for MT Red to cover what it owes to members, an administrator said.
The Bitcoin virtual currency lost half its value on Wednesday because of a panic sell-off.