Understanding the Kimchi Premium
The Kimchi premium is the name given for the commonly observed difference between crypto prices in South Korean markets and other markets worldwide.
The name is derived from the popular Korean dish “kimchi” — pickled cabbage.
According to a University of Calgary report, the existence of the Kimichi premium can be traced back to 2016. Researchers observed that Bitcoin was consistently traded at prices in South Korean markets that were, on average, 4.8% higher than those in global markets. Furthermore, in January 2018, the price difference reached almost 55%.
The KimChi premium is a relative overpricing of cryptocurrencies, chiefly bitcoin, in relation to the exchange rate of Korean Won to other currencies.
Nagy, M. (2018)
An Overview History of Kimchi Premium
The emergence of the Kimichi premium is believed to be tied to several social and economic factors in South Korea.
For example, the country’s notable interest in new technologies and desire to protect itself from foreign threats (e.g., North Korea) could have contributed to fast-tracking the country’s early adoption of decentralized currencies.
Most crucial to the premium’s existence, however, are the country’s tight capital controls — a direct response to the 2008 financial crisis.
After 2008, South Korea implemented strict regulatory oversight on capital outflows from the country to mitigate the damage large-scale capital flight could cause. These capital controls put caps on how much money is allowed to leave the country. This process also introduced a lot of complexity to slow it down.
As a result, even with the often large differences in the price of crypto in South Korea, profitable arbitrage can prove difficult.
Kimchi Premium Arbitrage
Arbitrage involves buying assets on markets at a discount and selling them on markets where they go for a premium.
Under normal conditions, Kimchi premium arbitrage would be an irresistible opportunity for traders worldwide. The reason is that the price differences of crypto assets on the market would be “arbbed out” quickly.
However, South Korea’s tight controls work to lock out foreign traders. These controls include who can open trading accounts and how much Korean won can be transferred out of the country per year. These limitations restrict institutional investors and even small-time non-resident traders.
This closed-market environment allows cryptocurrency prices to vary wildly compared to other markets, such as the United States and Europe.
What Kimchi Premium Limitations Are There?
Numerous regulatory policies are in place, designed to control everything from the outflow of funds from South Korean markets to the admission of foreign traders into them.
Restrictive policies
The main restrictive policies in South Korea that are contributing to the Kimchi premium’s existence and, thereby, the impossibility of it being removed through regular arbitrage are:
- Blocking foreign traders: Foreign traders will find it impossible to create full-featured bank accounts that permit them to profit on South Korean cryptocurrency exchanges.
- Capital outflow restrictions: South Korea regulates the national capital leaving the country by capping individual transactions at $10,000 and limiting the total transferable amount per year to $100,000.
- Real name policy: South Korean traders can only deposit money earned from crypto trading to their bank account if their name matches their trading account.
- Transaction approvals: Large transactions require individual regulatory inspection and approval, which are purposefully designed to be time-consuming.
Anti-money laundering laws
South Korea implements strict anti-money laundering practices when processing financial transactions. These practices, coupled with the restrictions on the won, delay transaction finality. This introduces a lot of risk to arbitrage trading, making it less feasible.
Foreign investment policies
Foreign investors in South Korea must be residents to trade. This severely restricts who can access the country’s markets.
Conclusion
The Kimchi premium, while seemingly lucrative on the surface, remains difficult to profit from. It is a unique anomaly brought on by regulatory restrictions in the South Korean cryptocurrency market. The country’s dedication to financial security has put significant barriers in the way of foreign traders who wish to profit from the often major cryptocurrency price discrepancies.
Choi, K. J., Lehar, A., & Stauffer, R. (2019, April). Bitcoin Microstructure and the Kimchi Premium. University of Calgary, Haskayne School of Business.
https://www.snb.ch/n/mmr/reference/sem_2019_05_31_lehar/source/sem_2019_05_31_lehar.n.pdfNagy, M. (2018). Arbitraging the KimChi premium with Bitcoin (Opinnäytetyö, Finanssi- ja talousasiantuntijan koulutusohjelma, Haaga-Helia ammattikorkeakoulu Oy).
https://www.theseus.fi/bitstream/handle/10024/144357/Thesis%20Mikael%20Nagy.pdf
Coinweb requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial process.
