CRAZY M44 Problem

[WhoNew]

Hello there, I am having an issue with my 96 318/M44.

Okay, it runs and drives absolutely perfect...... until it hits 5000 RPMs. At 5000 RPMs, almost exactly, it feels as if it is hitting a rev limiter. The car just bounces and surges, but will NOT rev above 5000 rpms. I reset the computer, and as long as I drive the car and keep the RPM's below 5000, it is perfect, no check engine light.

If I keep on the gas till 5000 RPMs, and it surges, the Check engine light will come on. (it actually will go off and on as it bounces from 5000 down to about 4500 RPMs). then it's on. I had the codes pulled, and it said it was the Crankshaft position sensor. I reset the computer, drove it nice, and no CEL. so then, I get on a nice long stretch of road, and get it up to 5000 RPMs to see if I can MAKE it get past. Gas pedal to the floor, it just bounced from 5000 to 4500 RPMs for like 30 seconds. This not only threw the CPS light, but codes for the knock sensors too.

So am I too assume that the crank position sensor will cause this ?
I thought if the crank sensor was bad, the car wouldn't even start.

Any help would be greatly appreciated here. Thanks.