Kimchi premium is a distinctive phenomenon in the cryptocurrency market, exclusive to South Korea, offering alluring yet somewhat precarious opportunities for traders due to the country’s stringent regulations. Throughout this guide, we’ll unravel the precise nature of this South Korean phenomenon, exploring its history and origins, providing illustrative examples, and delving into both the legality and strategies for capitalizing on price disparities between domestic and foreign exchanges.
Additionally, we will explore the underlying reasons for the emergence of this disparity, including stringent capital controls in South Korea, high domestic demand for crypto assets, and, above all, regulatory limitations.
Kimchi Premium Explained
Kimchi premium is basically the difference between the trading prices of Bitcoin (BTC) and other cryptocurrencies when traded on South Korean and foreign exchanges.
The premium arose due to various factors, mainly favorable trade regulations in South Korea, people’s willingness to use Bitcoin, and the country’s strict financial controls. Since the introduction of cryptocurrency arbitrage trading, it has become quite popular, with traders taking advantage of the price difference by buying bitcoins on foreign exchanges and selling them on South Korean exchanges, pocketing the profit.
This price difference in BTC trading between foreign and South Korean exchanges is usually between 3% and 20%, allowing traders to make substantial profits through arbitrage.
To understand the reason behind price variations, it is crucial to consider the disparities in regulation and adoption of cryptocurrencies among different countries. The lack of uniformity in attitudes towards digital currencies significantly complicates their trade, introducing greater complexity and exposing the market to higher volatility levels.
History of Kimchi Premium
Kimchi premium first appeared in the cryptocurrency market in 2016, according to a report from the University of Calgary. Findings show that between early 2016 and 2018, kimchi premium averaged nearly 4.80% of trades, reaching almost 55% in January 2018.
The emergence of kimchi premium could be traced back to late 2017 when the price gap between Bitcoin in South Korea surged to around 30%.
This upward trend continued in early 2018, with the price difference exceeding 50%. Speculations suggest that this was caused by the lack of other high-yield investment options in South Korea due to the country’s strict regulations.
Kimchi premium has also been linked to the country’s interest in cryptocurrency technology and gaming, possibly leading to a more open mindset and early adoption of digital currencies.
In 2018, the kimchi premium nearly disappeared when the South Korean government announced plans to further restrict cryptocurrency trading, causing a market shock. At that time, South Korea was the world’s third-largest market for Bitcoin trades, behind Japan and the United States.
However, despite the South Korean government threatening a total ban, they are currently working to create regulations that are more accommodating to the cryptocurrency industry.
Kimchi Premium: Example
Below is a prime example to better understand the concept of kimchi premium.
Bruce, a cryptocurrency trader seeking quick profits, acquired Bitcoin on a US exchange when its value was $40,000. Immediately, Bruce sold that Bitcoin on a South Korean exchange, where the price was notably higher, reaching $46,000.
This transaction resulted in a profit of $4,000 for Bruce, effectively capitalizing on the price disparity between the two exchanges. This phenomenon, where Bruce achieved a percentage profit in arbitrage trading of approximately 15%, is known as kimchi premium.
This is a basic example illustrating the concept in theory. However, executing this type of arbitrage is not as easy in reality, mainly due to the rigorous regulations in South Korea related to capital flows, and bank accounts, among other aspects. Additionally, to seize these opportunities, traders require specialized software and automated solutions.
Is Kimchi Premium Legal?
Exploiting kimchi premium through arbitrage is not illegal per se. However, it is slightly more complex in Korea due to strict currency control laws and regulations, such as:
- Foreign investment policies. South Korea prohibits all non-national traders from doing business on South Korean exchanges. This restriction has led to a significant decline in cryptocurrency trading from China and Japan to South Korea.
- Anti-money laundering laws. There are various anti-money laundering laws to prevent the exchange and trade of cryptocurrencies obtained illegally.
- Capital controls. South Korea prohibits the movement of large amounts of money both into and out of the country; this affects large-scale purchases and the supply-demand equation, leaving room for a premium.
Moreover, traders have to report all their currency transactions exceeding $5,000 to their South Korean bank. Therefore, as long as they comply with all these regulations, South Korean users can use kimchi premium for arbitrage operations.
Taking Advantage of Kimchi Premium
Although initially associated only with Bitcoin trading, kimchi premium is now also used for other cryptocurrencies.
Furthermore, the premium pricing advantage is no longer limited to South Korea alone. Since many other countries have implemented strict capital controls, they exhibit a premium on Bitcoin prices compared to other global markets.
Here are some methods to take advantage of kimchi premium:
- Arbitrage. This is the most obvious strategy. As explained in the previous example of Bruce, traders can buy bitcoins or other cryptocurrencies on foreign exchanges where prices are lower and then sell them on South Korean exchanges at higher prices to make profits.
- Price prediction. Kimchi premium can be used to predict the price of Bitcoin and other cryptocurrencies. When the premium is high, it indicates a bullish run in the South Korean market. Similarly, when the price is low, it signifies a fall in that specific market.
- Automation. Given the complexity of profiting from kimchi premium manually, many traders turn to automated solutions. There are platforms with integrated kimchi premium trackers and trading bots capable of detecting arbitrage opportunities and executing buy/sell orders quickly to capitalize on them.
- Market sentiment analysis. Movements in kimchi premium can offer valuable information about the overall sentiment in the South Korean cryptocurrency market. By monitoring indicators, traders can identify trends and changes in demand.
Kimchi premium is a fascinating and unique phenomenon in the South Korean cryptocurrency market, originating from the country’s strict capital controls. Additionally, this premium on international prices of bitcoin and other cryptocurrencies has persisted for years, helping capitalize on price gaps.
However, beyond valuable arbitrage, kimchi premium provides considerable information about demand and sentiment in the South Korean crypto market. High premiums signal price increases, while discounts anticipate corrections. Therefore, tracking this metric can help avid traders anticipate local and global trends, securing substantial profits.