Kimchi Premium is a phenomenon where the price of Bitcoin is listed higher on South Korean exchanges than on exchanges elsewhere in the world. In the context of crypto, a 'premium' refers to when the market price of a cryptocurrency exceeds its net asset value (NAV). ^[1]

Overview

The term "Kimchi Premium" is named after kimchi, one of South Korea’s most renowned fermented side dishes. As a unique and culturally significant dish in Korea, it aptly represents a pricing phenomenon unique to the Korean cryptocurrency market.

Several interrelated factors contribute to the Kimchi Premium:

• South Korea's capital controls limit the flow of large sums of money into and out of the country. This restricts the large-scale buying and selling of cryptocurrencies like Bitcoin, leading to limited supply and subsequently, premium prices.
• Often, buyers outnumber sellers in the South Korean crypto market. As a result, the price of Bitcoin within this isolated crypto sphere can surge for brief periods.^[1][5]

History

2016

The Kimchi Premium first began in 2016 with a difference in prices of 4.8%, according to a report by the University of Calgary. The difference became significant in late 2017 when Bitcoin prices surged by 30%. This upward trend persisted into 2018, with Bitcoin prices in South Korea soaring to a 55% premium in January of that year.^[1]

2018

In 2018, the Kimchi Premium nearly disappeared. South Korea announced it would restrict crypto trading more heavily. Before this, South Korean Bitcoin exchanges charged around 4.7% more than those in the U.S.^[1]

2021

In 2021, the Kimchi Premium experienced notable volatility. It dipped to -6% in February, surged to 22% by April, and then collapsed again. The market in South Korea continued to fluctuate, but it has started to flip.^[1]

Kimchi Discount

The opposite of Kimchi Premium is Kimchi Discount. Kimchi Discount means Bitcoin trades cheaper in the South Korean exchange than other foreign exchanges at a given time.^[2]

In early 2023, the Kimchi Premium turned into a Kimchi Discount. It has stayed at a negative price difference (around -0.24%) since late 2022.

According to Doo Wan Nam, COO of node validator and venture capital fund Stablenode, the Kimchi premium changing to a discount marks a drop in interest from Korean retail investors. He said:^[7]

Generally it means fall in interest in crypto from Korean retail, which ironically is generally a better time to buy cause you know you can always sell yours to Korean gamblers for 20% premium later when they FOMO

South Korea has evolved by having strict crypto regulations. The country’s Information Security Management System certification alone ended more than half of the nation’s crypto exchanges. These regulations were influenced by various crypto events, including the multibillion-dollar collapse of the South Korean crypto platform, Terra. However, the renewed Kimchi Discount offers new arbitrage trading opportunities.^[1]

Example

Let’s say, the Kimchi Premium rises to an average of 5%, as it was from 2016 to 2018. If Bitcoin is trading at $20,000 in the United States, it would be at $21,000 in South Korea. In this case, the entire Bitcoin can be bought on a United States crypto exchange and then sold on the South Korean markets for $21,000, making $1,000 in profit.

Now considering the Kimchi Discount, though the discount is minimal, it’s still possible to turn a profit. It would only have to buy from the South Korean market and sell it on a foreign exchange instead. However, due to South Korea’s limitations on crypto, this process would take a trader longer to execute. Whether the kimchi premium rises or dips further into a discount, must be considered by looking into arbitrage possibilities.^[1]

Causes of the Kimchi Premium

Here are key factors contributing to the Kimchi Premium existence:^[5]

Capital Controls

Cryptocurrencies, as a relatively borderless asset class, present an opportunity for South Koreans to circumvent these controls. This results in increased demand for cryptocurrencies on local exchanges and, consequently, higher prices.

Limited Supply

Regulatory restrictions in South Korea can make it challenging for cryptocurrency exchanges to maintain ample supplies of digital assets. This scarcity, combined with high demand, can drive up prices.

Speculative Behavior

The cryptocurrency market in South Korea has often been characterized by speculative trading and a Fear of Missing Out (FOMO) sentiment among investors. This kind of behavior can lead to rapid price escalation.

Regulatory Factors

South Korea has implemented various regulatory measures related to cryptocurrencies, including Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements. These regulations can impact market dynamics and contribute to price differences.

Managing Kimchi Premium

For traders and investors looking to navigate the cryptocurrency market in South Korea or take advantage of the Kimchi Premium, several considerations are essential:^[4]

Arbitrage Opportunities

The Kimchi Premium presents arbitrage opportunities for experienced traders. They can buy cryptocurrencies on international exchanges where prices are lower and sell them on South Korean exchanges to profit from the price difference.

Risk Management

Engaging in arbitrage comes with risks, including price volatility and potential difficulties in moving funds between exchanges. Traders must carefully assess these risks and employ robust risk management strategies.

Regulatory Compliance

It's crucial to remain informed about South Korea's evolving cryptocurrency regulations. Compliance with KYC and AML requirements is essential to participate in the market legally.

Market Sentiment

Traders should monitor market sentiment and news related to cryptocurrency regulations and developments in South Korea. These factors can significantly influence the Kimchi Premium.

Kimchi Premium Arbitrage

The Kimchi Premium in arbitrage can present an opportunity for traders to profit by exploiting this price disparity between South Korean exchanges and global exchanges.^[4]

Some investors attempt to earn a profit by trading the price differences that exist on different exchanges. Arbitrage is often associated with currency traders who look for mismatches in exchange rates when identifying arbitrage opportunities.^[5] For instance, in 2017, SBF realized the large price differences in different countries and on different exchanges. At the time that SBF benefitted from the Kimchi Premium, Bitcoin was $10,000 in the US, but it was being traded for $15,000 on exchanges in South Korea due to extreme demand for digital currency in Korea. Other arbitrages also arose in Japan around this period of time, although the premium in Japan was not quite as high as in Korea, due to the restrictions on foreign traders.^[3]