Kimchi Premium: How Traders Exploit Crypto Market For Profits. | Credit: Shutterstock
Key Takeaways
- Kimchi premium refers to the significant price difference between cryptocurrencies on South Korean exchanges and international platforms.
- The regulatory environment, high demand, restricted arbitrage opportunities, and cultural factors drive the rise of the Kimchi premium, creating arbitrage opportunities and challenges for crypto traders.
- The Kimchi premium emerged in 2017–2018, subsided temporarily due to regulatory concerns, and resurged in 2020–2021 amid global economic uncertainties.
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As of 23 Oct. 2024, the Kimchi Premium turned negative due to potential factors like increased regulation, improved market efficiency, or global market trends.
- The legality of exploiting Kimchi premiums through arbitrage depends on compliance with local regulations in South Korea and the trader’s home country.
The decline in the Kimchi Premium reflects a shift in South Korea’s cryptocurrency market dynamics. Despite local demand and increasing institutional interest, domestic prices have fallen below global averages. This reversal creates opportunities for arbitrage, but traders must navigate regulatory challenges and potential risks associated with fund transfers.
Historically, this price gap, particularly in Bitcoin (BTC) and Ethereum (ETH), allowed for arbitrage opportunities as traders buy assets from global exchanges at lower prices and sell them on South Korean platforms at a premium.
What Is Kimchi Premium?
The term “kimchi premium” is a phenomenon in the cryptocurrency industry when a coin, like Bitcoin, is priced substantially more on South Korean exchanges than it is on international exchanges denominated in US dollars or other major currencies.
The demand for cryptocurrencies in the South Korean market and other reasons unique to it give birth to this premium.
Several reasons can contribute to the rise of crypto or Bitcoin kimchi premium:
Regulatory Environment
Trade and investment in cryptocurrencies are subject to particular laws and regulations in South Korea. These rules may make cryptocurrency scarce on regional exchanges, which would raise prices.
High Demand
A sizable section of the populace regularly trades cryptocurrencies in South Korea, where they have become quite popular. Price increases may result from limited supply and excessive demand.
Restricted Opportunities For Arbitrage
The process of purchasing an asset at a discount on one exchange and selling it at a higher price on another in order to profit from the price difference is known as arbitrage. Regarding the Kimchi premium, arbitrage opportunities may be restricted by regulatory measures and difficulties in transferring monies out of South Korea, hence allowing the premium to continue.
The Cultural Factors
Cultural factors and the overall enthusiasm for new technologies and investments can contribute to the higher demand for cryptocurrencies in South Korea, driving up prices locally.
It’s crucial to remember that the Kimchi premium may fluctuate or disappear at any time. The volatile nature of cryptocurrency markets is caused by a multitude of factors, including shifts in regulations, market sentiment, and macroeconomic patterns. Therefore, before attempting to profit from price differences between exchanges, it is important to take into account the mentioned risks.
South Korea’s New Crypto Regulations: Impact On Investor Protection And The Kimchi Premium
South Korea’s Financial Services Commission (FSC) has introduced the Virtual Asset User Protection Act to safeguard crypto investors. Inspired by past incidents like the Terra-Luna crash and the FTX collapse, this law aims to address unfair trading practices.
The Act mandates crypto exchanges to secure users’ funds in financial institutions, implement interest payments, use cold wallets for security, and insure against losses. Additionally, exchanges must monitor and report suspicious activities to enhance market integrity. This legislation underscores South Korea’s commitment to stricter crypto regulation.
So, how does this regulation impact Kimchi premium? Increased investor protection and market integrity may affect local demand and pricing dynamics, potentially impacting the Kimchi Premium by stabilizing the market and reducing speculative trading.
Kimchi Premium Turns Negative: A Sign of an Imminent Bitcoin Rally?
Despite a broader market rebound globally, Bitcoin is trading at a lower price (as of 24 Oct. 2024) in South Korea. This reversal of the Kimchi Premium, the price difference between South Korean and global exchanges, suggests a potential Bitcoin price surge. Let’s understand the factors driving this shift:
- Strict capital controls and limited supply: The negative Kimchi Premium is primarily attributed to South Korea’s strict capital controls, which restrict foreign investors from trading on domestic crypto exchanges. Coupled with the limited supply of cryptocurrencies on South Korean exchanges, this has led to soaring demand and price gaps.
- Market sentiment and global trends: The recent negative trend in the Kimchi Premium aligns with a waning investor sentiment in the South Korean market. Historically, a negative Kimchi Premium has often preceded significant Bitcoin price rallies. Moreover, the Coinbase Premium, another indicator measuring price differences between Coinbase Pro and Binance, has also turned negative. This trend typically foreshadows Bitcoin price surges.
- Interest rate cuts, upcoming US elections: The combination of a negative Kimchi Premium and Coinbase Premium, coupled with the upcoming US elections and the possibility of a Federal Reserve rate cut, suggests that Bitcoin is poised for a potential price surge in the short term.
Kimchi Premium Surge in September Amid Institutional Trading
According to data from Chainalysis, the Korea Premium Index has shown a marked increase , highlighting this gap between South Korean and global crypto prices. The premium is especially prevalent in major cryptocurrencies but is also observed in altcoins.
It often spikes during volatile markets. Institutions exploit this by buying low on global platforms and selling high in South Korea. This arbitrage trading has significantly contributed to the premium’s prominence in South Korea’s crypto market.
Here are the key highlights from the above Bitcoin: Korea Premium Index chart:
- Korea Premium Index (green line) measures the price difference of Bitcoin on South Korean exchanges compared to global exchanges.
- The Bitcoin Price (black line) follows the global market, with fluctuations observed from July 2022 to mid-2024.
- From late 2022, the Korea Premium fluctuated, moving between positive and negative territory, showing volatile interest in South Korea’s market relative to global prices.
- November 2022 – March 2023: The premium frequently spiked above 3%, indicating strong local demand in South Korea, possibly fueled by market volatility or investor sentiment.
- June 2023: A sharp increase in Bitcoin price and the Korea Premium Index suggests high arbitrage opportunities as local prices outpaced global rates.
- Late 2023: Premium surged again, aligning with a significant Bitcoin price increase, peaking near $75,000.
- By mid-2024, both Bitcoin price and Korea Premium fell, with the index occasionally dipping into negative territory, reflecting periods where Bitcoin was cheaper on South Korean exchanges than globally.
- As of Sept. 17, the Kimchi Premium has returned, driven by increased local demand and institutional trading, once again pushing South Korean Bitcoin prices higher than global averages.
Here is a quick summary of the differences between Kimchi Premium and Kimchi Discount:
| Aspect | Kimchi Premium | Kimchi Discount |
| Meaning | Higher cryptocurrency prices in South Korea compared to global prices | Lower cryptocurrency prices in South Korea compared to global prices |
| Market condition | Indicates high demand and limited supply in South Korea | Indicates low demand or oversupply in South Korea |
| Arbitrage opportunities | Traders can profit by selling Korean assets in international markets | Traders can profit by buying Korean assets and selling them internationally |
| Investor sentiment | Reflects bullish sentiment among local investors | Reflects bearish sentiment among local investors |
| Impact on trading volume | Typically leads to increased trading volume and activity | Often results in decreased trading volume and activity |
History of Kimchi Premium in the Cryptosphere
The Kimchi premium, named after the popular Korean delicacy “kimchi,” has been seen for a while in the cryptocurrency markets.
Due to the high degree of interest and participation in cryptocurrencies among its citizens, South Korea has emerged as a major player in the market. Here is a quick synopsis of the Kimchi premium’s history:
2017-2018: Initial Observations
When South Korean cryptocurrency exchanges began to see considerable price divergence from international exchanges for cryptocurrencies, particularly Bitcoin, in late 2017 and early 2018, the phenomenon known as the “Kimchi premium” came to light.
Around that time, there was a sharp increase in Bitcoin trading activity in South Korea, and local exchanges saw a huge influx of new members.
Early 2018: Regulatory Concerns
Early in 2018, local market volatility was exacerbated by regulatory worries and possible government crackdowns on cryptocurrency trading in South Korea.
The government explored taxing cryptocurrency and outlawing anonymous trading accounts, among other steps, to control the market. Because traders were prepared to pay higher prices to obtain Bitcoins before prospective limits came into effect, this regulatory uncertainty led to the Kimchi premium.
2020-2021: Resurgence of the Kimchi Premium
In 2020 and 2021, the Kimchi premium reappeared, particularly during times of significant volatility and demand for cryptocurrencies.
A number of factors, including the COVID-19 outbreak, economic uncertainty, and the increasing acceptability of digital assets by the general public, contributed to a resurgence of interest in cryptocurrencies and the Kimchi premium.
But why did the kimchi premium disappear? The Kimchi premium disappeared primarily due to regulatory interventions and increased scrutiny by South Korean authorities.
2022: Variable Premium
In 2022, the Kimchi premium persisted in the cryptocurrency markets, fluctuating according to market dynamics, legislative changes, and worldwide economic circumstances.
The premium was nevertheless impacted by the South Korean government’s shifting regulatory posture on cryptocurrency. Increased Know Your Customer (KYC) and Anti-Money Laundering (AML) laws, together with possible tax consequences, probably caused demand swings and, in turn, premium oscillations.
The premium may have been impacted by macroeconomic events like the conflict between Russia and Ukraine and rising inflation rates, as investors sought solace in cryptocurrencies at a period of economic instability.
2023: Kimchi Discount & Market Maturity
A significant change happened at the beginning of 2023 when the Kimchi Premium transitioned to a Kimchi Discount. This indicated that, in comparison to foreign exchanges, Bitcoin was trading at a lower price on South Korean exchanges. The reasons for this turnaround were regulatory tightening, heightened surveillance of cryptocurrency exchanges, and a general slowdown in the level of speculative enthusiasm in the South Korean market.
A greater understanding of the risks involved with cryptocurrency investments and increased institutional participation have led to the continuous maturation of the South Korean cryptocurrency industry. This maturity probably helped keep prices stable and lessened the difference in price between domestic and foreign currency.
2024: Persistent Discount & Proposed Tax Delay
The Kimchi Discount has persisted into 2024, albeit with some fluctuations. This suggests a continued trend towards price convergence between South Korean and global cryptocurrency exchanges. The regulatory landscape in South Korea remains a key factor influencing the Kimchi Discount.
In July-2024, the South Korean government and ruling party began considering a proposal to delay the implementation of a tax on cryptocurrency gains from January 2025 to January 2028. This proposed change is intended to complement the country’s first set of crypto regulations, expected to take effect in July 2024. The ruling party’s final decision on the tax delay will be influenced by the upcoming general election.
Why Delaying Taxes on Crypto in South Korea Could Spice up Bitcoin’s Price?
Think of Bitcoin as a global dish to which several nations have added their own unique touches. Due to popular demand, South Korea has its own variant, known as “Kimchi Premium,” which can occasionally be more expensive.
Lately, Bitcoin prices in Korea have dropped (known as the “Kimchi Discount”), much like a kimchi sale. However, the government may now postpone taxing Bitcoin gains. This is like saying, “Enjoy kimchi now, pay later!”
This would encourage more Koreans to purchase Bitcoin, increasing demand and possibly reviving the premium. Imagine it as a well-known food truck that announces a postponed price increase — the line grows longer!
But just like with any sale, there’s no guarantee it’ll last. Other factors like global events or new regulations can also influence Bitcoin’s price in Korea.
The Kimchi Premium has re-emerged in September 2024, fueled by rising local demand and increased institutional trading.
How Crypto Traders Take Advantage of Kimchi Premium?
By taking advantage of the price difference between South Korean exchanges and international platforms, cryptocurrency traders profit from the Kimchi premium.
On local exchanges, traders use Korean won to purchase cryptocurrencies, such as Bitcoin, when their price is much higher in South Korea due to limited supply and rising demand.
Then, in order to sell these cryptocurrencies for a profit, they move them to foreign exchanges where the price is lower. The market dynamics and legislative distinctions between South Korea and other nations give birth to this arbitrage opportunity.
To optimize their profits during the brief period of the Kimchi premium, traders must, however, handle regulatory obstacles, transaction costs, and currency translation problems in addition to keeping an eye on the erratic cryptocurrency market.
Potential earnings can be diminished or possibly result in losses due to regulatory changes, abrupt market fluctuations, and delays in fund transfers. Additionally, regulatory restrictions on fund transfers and currency exchanges into and out of South Korea may restrict arbitrage opportunities.
Therefore, before participating in Kimchi premium arbitrage or any other type of arbitrage activity in the cryptocurrency market, novel traders must fully investigate the concept, comprehend the risks involved, and adhere to all applicable laws.
How Sam Bankman-Fried Used the Kimchi Premium to Profit From Arbitrage Opportunities?
Sam Bankman-Fried (SBF) established Alameda Research, a cryptocurrency research and trading company, in 2017 after realizing the market’s enormous development potential, especially with regard to Bitcoin trading volumes.
He anticipated large pricing differences between nations and exchanges as demand increased worldwide, which would provide favorable circumstances for arbitrage opportunities. One such chance was the Kimchi Premium: due to strong local demand, Bitcoin hit $15,000 on South Korean exchanges, although it was only trading at $10,000 in the United States.
The Korean Won, which is the regulated currency of South Korea, made it difficult to take advantage of these chances. Other arbitrage opportunities did, however, arise, such as in Japan, where the premium was not as high.
SBF took advantage of these crypto arbitrage strategies by using Alameda Research for strategic trading. By leveraging large-scale trades, he was able to generate impressive returns and position himself as a prominent figure in the crypto industry.
Is the Kimchi Premium Legal?
The legality of using arbitrage to take advantage of the Kimchi premium is contingent upon the local laws that control capital movements and cryptocurrency trading in the particular jurisdictions—South Korea and the trader’s home country, for example.
Although trading cryptocurrencies is allowed in South Korea, regulatory safeguards have been put in place to prevent speculative trading and protect investors. Strict rules, including KYC and AML measures, had been implemented by South Korean regulators to keep an eye on cryptocurrency exchanges and transactions.
The legality of taking advantage of price disparities between foreign platforms and South Korean exchanges, however, can be complicated. Arbitrage traders must abide by the rules of the source (South Korea) and destination (global) exchanges, as well as, if they are trading internationally, the financial regulations in their home nation.
Conclusion
The Kimchi premium presents both opportunities and complexities for crypto traders. Understanding the contributing factors, historical context, and legal implications is crucial.
While traders can capitalize on price differences, they must navigate regulatory challenges and market volatility. Staying informed, complying with regulations, and employing strategic trading techniques are essential for successful participation in the ever-changing cryptocurrency landscape.
FAQs
Why did the Kimchi premium disappear?
The Kimchi premium disappeared due to regulatory interventions and increased scrutiny by South Korean authorities, leading to reduced speculative trading and normalized price differentials.
Why did the Kimchi Premium turn into a Kimchi Discount in 2023?
The shift from a premium to a discount in 2023 is mainly attributed to tightening regulations, increased scrutiny of cryptocurrency exchanges, and a general cooling of speculative activity in the South Korean market. As the market matured, with more institutional participation and awareness of risks, the price difference between domestic and international exchanges narrowed.
How does the proposed tax delay in South Korea affect the Kimchi Discount?
The proposed delay of the cryptocurrency gains tax from 2025 to 2028 could potentially influence the Kimchi Discount. It may encourage more trading activity and investment in cryptocurrencies in South Korea, potentially leading to increased demand and a narrowing of the discount. However, the exact impact will depend on various factors, including overall market sentiment and regulatory developments.
Could the Kimchi Premium return in the future?
While the Kimchi Discount is currently the prevailing trend, the return of the premium is not impossible. Several factors could contribute to this, such as a significant increase in demand for cryptocurrencies in South Korea, changes in regulatory policies, or a renewed wave of speculative interest in the market. However, given the maturing market and increasing regulatory oversight, the likelihood of a substantial and sustained premium may be lower than in previous years.
