level
Mid Level Reading
04 Jun, 2024

Kimchi Premium

[ Kim-chee pee-mee-uhm ]

The Kimchi premium is the price difference of cryptocurrencies, typically Bitcoin, on South Korean exchanges vs foreign exchanges.

Yulia Zakharchuk
Written by
Julia Zakharchuk
Yulia Zakharchuk Julia Zakharchuk Expert Author
Julia is a professional crypto and blockchain writer known for her insightful YouTube channel "MoneyFest." She showcases her dynamic presentation skills as a host and moderator at blockchain conferences. Julia drives also business development at ChainUp and advises UNITBOX, an innovative NFT renting protocol. With her exceptional expertise, Julia is a highly valued industry contributor...
Sam Kazemian
Fact checked by
Sam Kazemian
Sam Kazemian Sam Kazemian Expert
Sam Hamidi-Kazemian is an accomplished American software engineer and entrepreneur. As the Co-Founder and President of Brainfund, he has demonstrated exceptional leadership in the tech industry. Sam pursued higher education at the University of California, Los Angeles, graduating with a double major in neuroscience and philosophy. During his time at UCLA in 2014, Sam co-founded...

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.

blockquote icon

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

A chart depicting two lines, one for the price of Bitcoin in USD and the other for the Kimchi Premium Index.
Korea Premium Index | Source: CryptoQuant.com

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.

A chart depicting two lines — one is for the price of BTC on Korean exchanges and the other for the price on foreign exchanges.
Price Difference Between Korean and Non-Korean Exchanges in Jan 2018 | BitHumb.com

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. 

doc ico
Article Sources
arrow ico

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.

Yulia Zakharchuk
Written by

Julia is a professional crypto and blockchain writer known for her insightful YouTube channel “MoneyFest.” She showcases her dynamic presentation skills as a host and moderator at blockchain conferences.

Julia drives also business development at ChainUp and advises UNITBOX, an innovative NFT renting protocol. With her exceptional expertise, Julia is a highly valued industry contributor and is set to make a lasting impact.