People's Bank of China

Having long been advocates of Bitcoin (ever since Sept. 2015 when it traded at $230) for the simple reason that we were confident the digital currency would eventually become China's favorite means of circumventing capital controls - precisely as has transpired - two months ago we warned that the unprecedented surge which made bitcoin the best performing asset in the past year with a 5x return, may be ending as "China Prepares To Impose Curbs, "Capital Controls" On Bitcoin."

While China's unprecedented currency moves have quickly become the main talking point across global markets which otherwise have started off 2017 in an eerily calm fashion, it is the sudden surge in two-way volatility that has emerged a major threat to global market stability.

As we observed earlier, China’s currency gained 0.5% in offshore market to 6.8275 vs dollar, earlier surging as high as 6.78, extending its 2-day advance to 2%, the most on record, driven by a direct attack by the PBOC on shorts, whom it crushed overnight when it pushed the overnight offshore Yuan deposit rate to 80%, the highest in history.

The epic squeeze took place almost a year after an identical moves a year ago: back then the abrupt market reversal almost exactly a year ago marked the beginning of a nearly 5 percent rally that lasted two months.

While Yuan rallied following last night's trial balloon by the PBOC - when as reported overnight the PBOC was studying possible scenarios of yuan exchange rate and capital outflows in 2017 based on models, stress tests and field research, and is preparing contingency plans - Bitcoin in China soared to new record highs amid massive volumes.

It appears fears of crackdowns on "virtual" currency outflows - as described by China researchers - is not there yet as the momentum-chasing Chinese have found a new friend as Commodities crumble.

As noted yesterday, for the first time in three years, and only the second time in history, bitcoin rose above $1,000 in Yuan-denominated Chinese trading, however it was limited to the lower side of this "round number" psychological barrier in US trading, as BTC flirted with $999.99 for most of the day on the popular Coinbase exchange, without crossing it.