Kimchi premium is the difference in crypto asset prices between South Korean exchanges and foreign exchanges. Seen mostly in bitcoin, prices are noticeably higher in South Korea compared to other Western and Asian nations.
The visible difference in South Korean bitcoin prices stimulated an influx in crypto trading. The price difference motivated cryptocurrency traders to purchase large amounts of bitcoin from their own market and sell it back on the Korean market to gain a profit. The phenomenon is referred to as “arbitrage trading.”
Kimchi premium is the cryptocurrency price differential between South Korean exchanges and foreign exchanges.
Cryptocurrency traders quickly took advantage of the kimchi premium.
Since 2017, the kimchi premium’s steadily increased, reaching as high as 50%.
History of the Kimchi Premium
During the beginning of 2017, there was no noticeable difference in the price of bitcoin between South Korea and other Western/Asian nations.
The difference in price did not become noticeable until the end of 2017, when the gap in bitcoin prices (kimchi premium) soared up to 30%.
The kimchi premium continued to grow in early 2018 when the price differential reached above 50%. It is speculated to be caused by a lack of other high-return investment opportunities in South Korea.
The kimchi premium’s also been linked to the country’s interest in technology and online gambling.
Kimchi Premium Example
As stated, the kimchi premium is the price differential of cryptocurrency between South Korean and other Western/Asian nations. But how is it mathematically represented?
For example: If the price of 1 bitcoin in the United States was $10,000 and the price of bitcoin in South Korea was $18,000, the kimchi premium will be 80%.
It means that you can purchase bitcoin on the U.S. market and sell it on the Korean market for an 80% profit. In such a case, buying 1 bitcoin can result in an $8,000 profit if it was sold on the South Korean market. Buying 10 bitcoins will result in an $80,000 profit.
What is Bitcoin and Arbitrage Trading?
Bitcoin is a form of digital currency. Generated by computational solutions, it is widely popular due to its high exchange rate. In 2020, 1 bitcoin is estimated to be worth approximately 10,000 USD.
Arbitrage trading is a strategy that is used to take advantage of differences in market prices. As mentioned, cryptocurrency traders took advantage of the kimchi premium by purchasing their own market’s bitcoin to then sell it on the Korean market for a profit.
The arbitrage trading phenomenon is generally short-lived since investors take advantage of the price differential to the point that the opportunity is no longer profitable.
Restrictions Regarding Kimchi Premium
Investors were only able to take advantage of the price gap for a short period of time. Such type of cryptocurrency trading became almost impossible in South Korea due to a variety of different reasons.
1. Domestic restrictive policies
Koreans are required to follow regulatory policies and must have overseas remittance to buy cryptocurrency on the foreign exchange. Also, the legal status of South Korean cryptocurrency is vague. The South Korean government has not yet decided if cryptocurrency is a “financial currency” or a “good.” In the case of financial currency, cryptocurrency will be subject to the “Foreign Exchange Transactions Act.”
It will mean that people who want to import cryptocurrency will need to first declare it to the South Korean bank. It is not entirely regulated, though. In the case of goods, cryptocurrency will be subject to the “Foreign Trade Act” and “Customs Law.” It will must be reported as imports and exports to customs.
2. Anti-money laundering laws
There are a variety of anti-money laundering laws in South Korea to prevent the exchange and trading of illegally obtained cryptocurrency.
3. Foreign investment policies
South Korea prohibits all non-domestic traders from doing business on South Korean exchanges. The restriction’s caused cryptocurrency trading from China and Japan (to South Korea) to drop significantly.
The foreign investment policies enacted by South Korea prevents cryptocurrencies from being exchanged on the world market; they must remain domestic.
4. Transaction complexity
The complexity in taking advantage of the kimchi premium also discourages investors from engaging in the practice. It is because the investor will be required to open a new bank account just for foreign exchange.
It is generally considered less complex to hold onto the cryptocurrency until the domestic price increases rather than going through the struggle of a lengthy transaction process.
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