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Bitcoin has traded above $900 despite online black market Silk Road having some 30,000 bitcoins seized by the US prosecutors after the website was found to be facilitating money laundering using the virtual currency.
Bitcoin is currently trading at $917.05 on MT Gox, one of the popular bitcoin exchanges.
The forfeiture is not expected to generate any regulatory hurdles for bitcoin transactions.
"These bitcoins were forfeited not because they are bitcoins, but because they were, as the court found, the proceeds of crimes," Manhattan attorney Preet Bharara said in a statement.
The seized bitcoins are worth $28m (£18m, €21m) at current market rate and the forfeiture is the largest ever involving the cryptocurrency. The forfeiture order was signed by US District judge Paul Oetken.
A civil forfeiture action, seeking forfeiture of all assets of the website including all of its bitcoins, was filed against the Silk Road hidden website in Manhattan federal court on 30 September.
In addition, a criminal case was filed against the alleged owner and operator of the Silk Road, Ross William Ulbricht, known as "Dread Pirate Roberts". He was accused of narcotics conspiracy, computer hacking and money laundering.
"With today's forfeiture of $28 million worth of bitcoins from the Silk Road website, a global cyber business designed to broker criminal transactions, we continue our efforts to take the profit out of crime and signal to those who would turn to the dark web for illicit activity that they have chosen the wrong path," Bharara added.
The government had also seized an additional 144,336 bitcoins that are currently worth over $130m from computer hardware belonging to Ulbricht.
Subsequently, Ulbricht submitted legal files demanding the return of the seized bitcoins and contesting the forfeiture of them.
The Silk Road hidden website was facilitating buying and selling of illegal drugs and other unlawful goods and services anonymously and beyond the reach of law enforcement. The website had a turnover of more than a million dollars a month.
Bitcoin was a popular unit of transaction on Silk Road because it is lightly regulated and hard to trace.
Woes for Bitcoin
Bitcoin was launched in 2008 and is traded within a global network of computers. They can be transferred without going through banks or clearing houses, reducing fees involved in the services significantly.
It has steadily been gaining in popularity despite the volatility in its value. The virtual currency exists as software and is not backed by any country or banking authority.
The seizing of Silk Road was a major setback to bitcoin's reputation, as its anonymity has been a serious concern for regulators. Transactions in bitcoins are done anonymously over peer-to-peer networks.
Critics say bitcoins could be used for drug transactions, money-laundering and other illegal activities due to the near anonymity of those who deal in it.
The digital currency's value plummeted to as low as $640 after China's central bank barred the country's banks and third-party payment processors from dealing in bitcoin.
In addition, regulatory bodies in the US, Europe and India warned consumers about the risks of virtual currencies in light of the currency's growing popularity and usage.
Despite the setbacks, more number of popular businesses announced that they will accept the cryptocurrency for payments, helping boost its value.