On January 5, 2017, Bitcoin suffered its worst single-day performance in over a year, plunging as much as 20% in a matter of hours after China’s central bank engineered a dramatic short squeeze on the yuan. The event laid bare the extraordinary — and deeply inverse — relationship between the world’s most traded cryptocurrency and the Chinese currency that would come to define Bitcoin’s early 2017 trajectory.
TL;DR
- Bitcoin crashed up to 20% on January 5, 2017, its worst day in over a year
- The trigger was China’s PBOC engineering a record yuan short squeeze, pushing the offshore yuan up 2.5%
- BTC had hit a three-year high of $1,139.89 just one day earlier on January 4
- Chinese exchanges accounted for over 90% of global Bitcoin trading volume
- BTC recovered to around $975 by end of day, still down 13%
The Record-Setting Yuan Rally
The catalyst for Bitcoin’s spectacular unwinding was not a crypto-specific event at all. It was a currency intervention. After nearly touching 7 to the dollar on Monday, the offshore yuan rallied more than 2.5% on Thursday, January 5, surging to 6.81 in the Hong Kong market. It was the yuan’s strongest two-day performance on record, driven by what analysts described as a brutal short squeeze orchestrated by the People’s Bank of China.
The PBOC’s message to yuan speculators was unambiguous: bet against the Chinese currency at your peril. The move came as Beijing prepared to introduce new capital controls designed to stem the hemorrhage of money leaving the country. Over the New Year holiday, the PBOC had announced that banks would be required to notify it of all cash transactions exceeding 50,000 yuan ($7,100), a sharp reduction from the previous ceiling of 200,000 yuan. The State Administration for Foreign Exchange simultaneously imposed onerous new reporting requirements on individuals using their $50,000 annual foreign currency quota.
Bitcoin’s Rise and Fall Mirror the Yuan
What made the January 5 crash so striking was how perfectly it mirrored the inverse relationship between Bitcoin and the yuan that had developed over the preceding months. Bitcoin had gained more than 40% in two weeks and hit a three-year high of $1,139.89 on January 4 — just $24 shy of its all-time record of $1,163 set on the Bitstamp exchange. The entire rally had been fueled in significant part by Chinese demand for an asset that could move money outside the country’s tightening capital controls.
Paul Gordon, co-founder of London-based Quantave, a digital currency investment infrastructure firm, connected the dots explicitly. “Given that the yuan’s weakness over recent months seemed to correlate with bitcoin’s strength more than any other currency, it’s no surprise that bitcoin traders have reacted the way they have to the yuan’s sudden strength today,” he said on January 5.
The numbers told the story. The yuan had shed almost 7% in 2016 — its worst annual performance since 1994. Over the same period, Bitcoin had surged 125%, outperforming every other currency for a second consecutive year. Chinese exchanges reported that they accounted for more than 90% of global Bitcoin trading, which explained why a shift in Chinese demand could move the price so violently.
The Speed of the Collapse
By midday Eastern Time on January 5, Bitcoin had dropped 20% against the dollar in approximately two hours of frantic trading, falling to an intraday low of $885.41. The collapse wiped out billions in market capitalization in minutes. By 16:25 GMT, BTC had recovered some ground to trade around $975, still down approximately 13% on the day.
The CoinMarketCap historical snapshot for January 5 captured the aftermath: Bitcoin trading at $1,013.38 (reflecting the partial recovery), with a market capitalization of $16.3 billion and 24-hour volume of over $510 million. The broader crypto market also suffered, with Ethereum down 9.17% to $10.25, Monero dropping 12.26% to $16.19, Litecoin falling 11.12% to $4.29, and Dash sliding 12.13% to $14.38.
China’s $530 Billion Capital Flight Problem
The backdrop to the Bitcoin-yuan correlation was China’s escalating capital flight crisis. Capital outflows from China had rocketed to an estimated $530 billion in the first 10 months of 2016 alone. The country’s foreign exchange reserves had fallen nearly 25% from a peak of just under $4 trillion in early 2014. The PBOC had spent over $34 billion in November 2016 alone propping up the yuan, and figures expected the following week from SAFE were anticipated to show reserves dropping below $3 trillion for the first time since 2011.
This was the environment in which Bitcoin had thrived. As the yuan weakened, Chinese investors increasingly turned to the cryptocurrency as a mechanism for moving money beyond Beijing’s reach. Bitcoin could be used for transferring value across the globe quickly and anonymously, operating outside the control of any central authority — precisely the attributes that made it attractive to those seeking to circumvent capital controls.
A Natural Correction, or Something More?
Some analysts argued that Bitcoin’s fall was overdue regardless of the yuan’s movement. The cryptocurrency had risen 45% against the dollar since December 21 and an extraordinary 521% since September 2015. Those gains had occurred while the dollar strengthened against virtually every other national currency in the world, making Bitcoin’s rise even more remarkable.
Marco Streng, CEO of Genesis Mining, described it as a natural correction. “If something goes up very rapidly, people make a lot of money, and at some point they’re going to want to sell, in order to realize their gains,” he told Fortune. Bitcoin was still up more than 50% from its level of approximately $600 three months earlier.
However, the yuan’s role as the trigger underscored a fundamental vulnerability: Bitcoin’s price was becoming increasingly dependent on the monetary policy decisions of a single government. The question many in the market were asking on January 5 was whether the PBOC’s yuan intervention was a temporary measure or the beginning of a sustained campaign to close off Bitcoin as an escape valve for Chinese capital.
Why This Matters
The January 5, 2017 crash revealed the depth of the Bitcoin-yuan correlation at a critical moment in crypto history. It demonstrated that Bitcoin, far from being a decentralized asset insulated from government action, was profoundly sensitive to Chinese monetary policy. This dynamic would intensify throughout 2017 as the PBOC conducted on-site inspections at major Bitcoin exchanges, eventually leading to the forced shutdown of Chinese crypto trading platforms later that year. The event also foreshadowed a recurring theme in crypto markets: the tension between cryptocurrency’s promise of financial freedom and governments’ willingness to use monetary tools to maintain capital controls. For Bitcoin, the $885 low on January 5 would prove to be a brief dip on the road to nearly $20,000 by December — but the lesson about sovereign currency dynamics would prove far more enduring.
Disclaimer: This article is for informational and historical purposes only and does not constitute financial advice. Past performance is not indicative of future results.