What is the premium for kimchi?
The kimchi premium is the difference in cryptocurrency prices between South Korean and other global exchanges. The majority of the kimchi premium is reflected in the cryptocurrency Bitcoin (BTC) price.
In other words, Bitcoin may be listed at a higher price on a South Korean exchange than on a U.S. or European exchange. The appellation “kimchi premium” refers to the fermented cabbage dish that is a staple in Korean cuisine.
Understanding Premium Kimchi
Bitcoin prices in South Korea may be higher than on other international exchanges. Unlike stocks, cryptocurrencies such as Bitcoin are decentralized assets, meaning they do not trade on a central exchange. A stock that trades on the New York Stock Exchange (NYSE) has the same price regardless of where it is purchased in the United States. However, cryptocurrencies may be priced differently in various countries and on their exchanges.
Arbitrage of Kimchi Premium Prices
Arbitrage refers to the attempt by some investors to earn a profit by trading price differences between various exchanges. Arbitrage is frequently associated with currency speculators, who identify arbitrage opportunities by identifying disparities in exchange rates.
When a trader engages in currency arbitrage, they place trades based on differences in the quotes provided by various brokers for a particular currency pair, as opposed to placing trades based on the movement of the currency pair’s exchange rate. If executed flawlessly, this transaction can be risk-free, as the trader simultaneously buys and sells two or more currencies, ensuring no open currency exposure.
Arbitrage opportunities are typically transient because, as soon as investors (or their trading algorithms) identify the pricing discrepancy, they execute sufficient trades to render the arbitrage opportunity unprofitable.
By purchasing bitcoins outside of South Korea and then selling them on a South Korean exchange where the bitcoin price is higher, one could take advantage of the arbitrage opportunity that the kimchi premium created. To purchase bitcoins on an international cryptocurrency exchange, South Korean merchants must first convert their local currency (Korean won) into another currency, such as U.S. dollars. From there, they could sell their bitcoins for a higher price on a South Korean exchange. Foreign investors can purchase bitcoins abroad and sell their holdings on a South Korean exchange, simplifying the process.
History of Premium Kimchi
According to a report from the University of Calgary, the kimchi premium on the cryptocurrency market first appeared in 2016. Between early 2016 and 2018, the kimchi premium averaged nearly 4.8 percent and peaked at nearly 55 percent in January 2018.
South Korea has become a prominent market for cryptocurrency trading, including Bitcoin. The open-mindedness and early adoption of digital currencies may be attributable to the nation’s interest in technology and wagering, which may have led to their popularity.
Also leading to the prevalence of cryptos are the potential security issues or threats that South Koreans face from North Korea and its leader, Kim Jong-un. Bitcoin and other cryptocurrencies are typically favored in nations or regions that experience political instability and geopolitical risks. The decentralized nature of cryptocurrencies—i.e., the fact that no government organization owns or controls them—is what makes them appealing.
In South Korea, Bitcoin is more expensive than in other nations, due in part to the cryptocurrency’s popularity. A rise in the kimchi premium may indicate that Korean retail investors are increasing their Bitcoin holdings.
Capital Controls and Premium Kimchi
South Korean investors could eradicate the kimchi premium if they took swift advantage of the arbitrage opportunity. South Korean investors could purchase bitcoins on international exchanges outside the country and then sell their positions on domestic exchanges. The consequence would be a lower Bitcoin price in South Korea and a higher price on international exchanges, eliminating the arbitrage opportunity.
However, South Korean capital constraints, financial regulations, and anti-money laundering laws make the process challenging. Central banks and government regulatory organizations implement capital controls to limit the flow of capital or money into and out of a country. If a significant quantity of capital leaves a country due to a geopolitical event or economic upheaval, the impact on the local economy can be devastating.
Foreign investors may not wish to keep their funds in a country undergoing a difficult period. As foreign investors exit their holdings within that country, the result can lead to depressed real estate prices, a selloff in equity and bond markets, and exacerbate the economic conditions within the country. Capital controls are frequently imposed to Capital controls are frequently imposed to prevent a massive selloff of domestic assets and prevent money from fleeing the economy.
Controls of South Korean Capital
In 2010, the South Korean government instituted capital controls in response to the global financial crisis and the European debt crisis. The measures were intended to reduce the erratic fluctuations or volatility of capital flows, which could be detrimental to the economy.
Due to additional administrative burdens, there is a delay when sending money internationally. Regulators must approve the transfer, and there is an annual cap on the amount of money that can leave the nation.
Even if regulators authorize the transfer, the process could take so long that the arbitrage opportunity has passed. Capital constraints also restrict the inflow of cryptocurrencies by foreign investors, resulting in a situation where South Koreans can only use digital currencies within their own country.
Influence on Cryptocurrency Investing
South Koreans and South Korean businesses are restricted in their international Bitcoin purchases. If regulators suspect money laundering, the amount of a South Korean merchant exchanging their currency for a foreign currency to purchase bitcoin on a foreign exchange would likely be capped, or the transaction could be blocked entirely.
The impact of South Korean regulation on cryptocurrency trading, as well as the threats of a cryptocurrency prohibition in China, may have led to the massive selloff of Bitcoin in January 2018, in which Bitcoin lost nearly 25% of its value in one week. As South Korea’s government signaled its intention to clamp down on cryptocurrency trading, the value of Bitcoin and other cryptocurrencies plummeted. At the time, South Korea was the third-largest bitcoin market in the world, after Japan and the United States.
Noting that there is no centralized exchange that measures the volume of cryptocurrency trading, determining the volume of Bitcoin trading can be difficult. The South Korean government has considered alternatives to a total ban, such as requiring investors to pay capital gains taxes and threatening a total prohibition. They may also require investors to register investment accounts in their names to counteract money laundering.
Example of Premium Kimchi
In January 2021, the kimchi premium reappeared as Bitcoin prices on South Korean exchanges reached two-year highs. It is estimated that the Bitcoin kimchi premium in South Korea was approximately 4% when comparing the Upbit exchange to Binance. By purchasing bitcoins on the Binance exchange and selling them on the Upbit exchange in South Korea at precisely the right time, speculators could have earned a 4% profit from the price differential. On January 4, 2021, Cryptoquant reported that the price gap between Korean and international exchanges was more significant than 6%.
Why did a cryptocurrency premium appear in South Korea?
It isn’t easy to transfer large quantities of foreign currency into and out of South Korean exchanges, and banks must comply with stringent reporting requirements when transferring funds into or out of the country. Due to the immense popularity of cryptocurrencies in South Korea, the prices of specific cryptocurrencies have increased by as much as 20% relative to their prices elsewhere, a phenomenon that has persisted for several years.
Was the Kimchi Premium linked to illegal fund transfers?
While it was previously believed that the Kimchi premium was harmless due to the technical limitations of the Korean banking system and the popularity of cryptocurrencies, a new investigation conducted in the summer of 2022 suspects that more than $3.4 billion in illegal foreign transactions in the country were facilitated by cryptocurrencies.
Is Bitcoin prohibited in South Korea?
In South Korea, Bitcoin ownership and trading on regulated exchanges are legal.
Conclusion
- Kimchi premium is the difference between the prices of cryptocurrencies on South Korean platforms and foreign exchanges.
- People in South Korea may not have many high-return business choices, which could explain the price difference.
- South Korean investors can only profit from the kimchi premium if they buy Bitcoin in other countries and then sell it back to South Korea.
- On the other hand, South Korean businesses find it hard to make money from the kimchi premium because of capital controls and financial rules.
