What Is the Kimchi Premium?
The Kimchi premium refers to a phenomenon observed on South Korean cryptocurrency exchanges where certain tokens are valued higher than their counterparts on international exchanges.
This creates an opportunity for traders in South Korea to profit from the price difference potentially.
To capitalize on this premium, traders typically purchase tokens like Bitcoin from exchanges outside South Korea and sell them on local exchanges such as Upbit and Bithumb.
Valuation Disparity in South Korean
The valuation disparity between South Korean and global exchanges is due to several factors.
While centralized institutions regulate traditional assets, cryptocurrency trading operates decentralized.
As the blockchain ecosystem evolves and new tokens emerge, exchanges worldwide sometimes struggle to handle the surge in activity, leading to price discrepancies—the Kimchi premium results from this phenomenon specific to South Korean exchanges.
The Strategy of Arbitrage
Exploiting differences in valuation between exchanges is not unique to the Kimchi premium; similar small discrepancies can be found on exchanges worldwide.
Traders have recognized these variations and have been able to profit from them. This trading strategy, which takes advantage of price differences, is known as arbitrage.
Regulatory Measures to Curtail Kimchi Premium Exploitation
Although trading to exploit the Kimchi premium can be seen as arbitrage, South Korean authorities have proactively regulated cryptocurrency exchanges to eliminate such irregularities.
Strict capital control rules have been enforced to restrict profit opportunities from the Kimchi premium.
Additionally, financial regulations and anti-money laundering legislation aim to prevent market manipulation through this phenomenon.