Hi Token Tribe!
You all will agree that the Crypto space has a whole new language with many unique terminologies and abbreviations. Be it ‘Diamond hands’, ‘Whales’, or ‘ No coiners’, these terms make a different dictionary altogether. While most crypto enthusiasts know these terms, only OG crypto heads know about - Kimchi Premium.
Kimchi Premium is a crypto-centric phenomenon with a sour and savoury origin. If that intrigues you, this blog will be a mouth-watering delight to your curious senses.
What is Kimchi Premium?
To understand Kimchi Premium, one must understand ‘Kimchi’ first. Kimchi is a South Korean version of a pickle made from salted and fermented cabbage and other vegetables. Some people consume it with curries and soups, while others prefer having it as a side dish. It is a famous staple in every South Korean household and is thus synonymous with South Korea.
But what does this South Korean dish have to do with crypto?
Let’s find out.
Kimchi Premium is the term used to describe the Bitcoin price difference between South Korean exchanges and the remaining world markets.
In simple terms, the price of Bitcoin might be different in South Korean exchanges than on Exchanges based in other countries like the USA, Europe, and India. In its name, “Premium” refers to the higher than the standard price of an asset, Bitcoin. Since it involves the crypto market of South Korea, where Kimchi is a famous dish, it was named Kimchi Premium.
Historically, the change in the price of Bitcoin has mostly ranged from 3% to 50%, giving arbitrage opportunities to traders. For those who do not know about arbitrage, it is the tactic of buying an asset from one market and selling it to another to benefit from the price difference of that asset in those two markets.
Kimchi Premium is predominantly used for Bitcoin arbitrage but also applies to other cryptocurrencies.
Still feeling like a lost crypto explorer?
Then, be ready for a 'Phew' moment cause we are about to look at an example.
Let’s imagine that 1 Bitcoin in the USA is around $10,000, and 1 Bitcoin in South Korea is $14,000. Then, the Kimchi Premium, in this case, is a whopping 40%!!
Thus, if someone purchases Bitcoin from the US market at $10,000 and sells it at $14000 in South Korea, it will give them a profit of $4000 per Bitcoin. If someone does the same for 10 Bitcoins, they will make a $40,000 profit by simply buying and selling.
Before some of you start buying Bitcoin to do the same, read on.
Over the years, the Korean government has tightened its capital control regulations to ensure economic stability in its market. Thus, it has become difficult for exchanges and investors to move large amounts overseas. It has also taken many other steps to narrow the price discrepancy and curb the Kimchi Premium.
An interesting fact about Kimchi Premium is that it can also occasionally turn into a Kimchi Discount.
Kimchi discount is a situation when Bitcoin trades on South Korean exchanges at a price lower than the exchange price of other countries.
But let's dig deeper: What sets this in motion?
Why does Kimchi Premium Exist in South Korea?
Kimchi Premium exists in South Korea due to its high capital controls laid in 2010. South Korea imposed multiple capital controls to minimize the wild fluctuations in the capital flow in the country due to the global financial crisis and the European debt crisis. These capital controls created an administrative burden that further caused time delays for anyone sending or receiving money internationally through South Korea. They also restrict international money transfers in large amounts that hinder the large-scale buying of cryptocurrencies such as Bitcoin. Additionally, it became mandatory to approve the money transfer from various regulators.
Moreover, the progressive crypto economy of South Korea works in a way that buyers usually outnumber the sellers. It keeps the supply of the crypto sparse and their prices at a premium (higher than the standard price).
It is worth mentioning that such a similar situation is broader than just South Korea. Native crypto exchanges in many countries (Hong Kong, Japan, Thailand, Brazil, etc.) with similar capital flow control occasionally offer Premium bitcoin and other digital asset prices. However, their Premium is smaller compared to that of South Korea.
History of Kimchi Premium
Kimchi Premium first came into notice in 2016 with a price discrepancy of 4.8%. This difference continued to soar and reached 30% in late 2017, but it did not stop there. Kimchi Premium kept flying until 2018 and hit a massive value of 55% for some time. The country imposed some limitations on crypto trading in January 2018, shaking the South Korean crypto market. As a result, the Kimchi Premium started evaporating and almost disappeared by the end of February 2018. At the same time, the South Korean Bitcoin Exchanges were charging nearly 4.7% higher than their US counterparts.
In mid-2019, the Kimchi Premium reappeared temporarily when the price spread between the South Korean and global bitcoin markets reached $1K on respective crypto exchanges. It hit a 16-month high in June but disappeared again by August. As per various news sources, this vanishing of Premium bitcoin prices in Korea was due to the weakening of the Korean Won, which lost almost 3% value against USD by the end of July 2019. Moreover, the country's regulatory environment was also becoming challenging as banks started being more strict with native crypto exchanges. The AML (Money Laundering) guidelines and direct supervision of the market by authorities led to trades taking longer, making arbitrage challenging to execute.
In 2020, Kimchi Premium did not make any headlines. However, the following year came with considerable volatility for Kimchi Premium. In January 2021, the Premium resurfaced, and Bitcoin hit a 2-year high in South Korea. At that time, the price difference was around 6% on the popular Korean exchanges. According to a report by Financial Times, the South Korean won was the third most popular fiat currency for bitcoin trading after USD and Euro. Many newspapers also related this surge to the large number of unemployed youth in the country starting to gain interest in Bitcoin, hoping to get rich quickly. It was because most Korean crypto investors were in their 20s and 30s. In September 2021, the Kimchi Premium was at 10.7%. It dropped to 6.28% by December 2021.
The Bitcoin price difference in Korea dropped to nearly 3.39% in May 2022. This lowering was due to investors’ loss of confidence in virtual assets post Terra LUNA and other institutional collapses in the crypto space. The further fall of the FTX exchange also provoked stricter laws and higher regulations for fiat and crypto trades in Korea.
As an outcome of these events, the crypto space has been experiencing a prolonged crypto winter. This situation turned the tables as the Kimchi premium converted to a Kimchi discount in 2023. That means Bitcoin was spotted trading in the Korean market at a price lower than its global price, which looks like a sign of changing market sentiments.
Is Kimchi Premium Legal?
Kimchi Premium may look like an illegal activity. Still, it is legal in itself, given that the doer complies with the foreign exchange laws of the countries involved and declares the transaction or trade. It is important to note that executing Kimchi Premium arbitrage is easier for traders living outside Korea than those living in it. The reason is the strict rules and time-consuming framework for Korean traders to do the same.
Another crucial thing worth mentioning is while Kimchi Premium isn’t illegal, using it to do prohibited deeds like money laundering is illegal; according to Investopedia, a new investigation in 2022 suspected that over $3.4 billion of illicit foreign transactions in Korea were executed via cryptocurrencies. It shows the possibility that many bad actors may have used Kimchi Premium for wrongdoings.
How do you benefit from Kimchi Premium?
Imagine this scenario:
You notice that Bitcoin trades at a 10% higher price on a South Korean exchange than on an international one. Here's where the opportunity lies.
You could purchase Bitcoin at a lower price on an international exchange, then swiftly transfer it to a South Korean Exchange and sell it at an inflated rate. This trade allows you to pocket that price difference as profit.
Let's look back at 2017 when the cryptocurrency market was on fire. The Kimchi Premium was prominent, with Bitcoin trading at a whopping 50% premium on South Korean exchanges. Traders worldwide pounced on this chance, engaging in rapid cross-border trades to make the most of this substantial gap.
It's essential to note that the Kimchi Premium is anything but static. It can change rapidly due to factors like market shifts and evolving regulations. This dynamic nature means traders must be nimble and well-informed to effectively harness this opportunity.
Parting Note
Kimchi Premium is an exciting phenomenon in the crypto space that gives good Bitcoin arbitrage opportunities for traders to make a profit. Being limited to the South Korean crypto market, Kimchi Premium got its name from the famous Korean dish Kimchi. To take benefit of this Premium, a trader needs to be agile and adaptable. Since the crypto market is highly volatile, the value of Kimchi premium also keeps changing. With time, more regulations have entered the Korean trading space, diminishing the scope for Kimchi premium. However, it still resurfaces occasionally.
