What Is Kimchi Premium?

Kimchi premium is a distinctive and mostly outdated phenomenon in the cryptocurrency market, exclusive to South Korea, offering alluring yet precarious opportunities for traders due to the country’s stringent regulations. Throughout this guide, we’ll unravel the precise nature of this South Korean phenomenon, exploring its history and origins, providing illustrative examples, and delving into both the legality and strategies for capitalizing on price disparities between domestic and foreign exchanges.

Additionally, we will explore the underlying reasons for the emergence of this disparity, including stringent capital controls in South Korea, high domestic demand for crypto assets, and, above all, regulatory limitations.

What Is Kimchi Premium?

Kimchi premium is the difference between the trading prices of Bitcoin (BTC) and other cryptocurrencies when traded on South Korean and foreign exchanges.

The premium arose due to various factors, mainly favorable trade regulations in South Korea, people’s willingness to use Bitcoin, and the country’s strict financial controls. Since the introduction of cryptocurrency arbitrage trading, it has become quite popular, with traders taking advantage of the price difference by buying Bitcoin on foreign exchanges and selling it on South Korean exchanges, pocketing the profit.

This price difference has varied dramatically over the years and even reached over 55% in 2018. However, the phenomenon has mostly disappeared thanks to improved regulatory oversight, better infrastructure, and tight integration between global exchanges.

To understand the reason behind price variations, it is crucial to consider the disparities in regulation and adoption of cryptocurrencies among different countries. The lack of uniformity in attitudes towards digital currencies significantly complicates their trade, introducing greater complexity and exposing the market to higher volatility levels.

History of Kimchi Premium

Kimchi premium first appeared in the cryptocurrency market in 2016, according to a report from the University of Calgary. Findings show that between early 2016 and 2018, kimchi premium averaged nearly 4.80% of trades, reaching almost 55% in January 2018.

The emergence of kimchi premium could be traced back to late 2017 when the price gap between Bitcoin in South Korea surged to around 30%.

This upward trend continued in early 2018, with the price difference exceeding 50%. Speculations suggest that this was caused by the lack of other high-yield investment options in South Korea due to the country’s strict regulations.

Kimchi premium has also been linked to the country’s interest in cryptocurrency technology and gaming, possibly leading to a more open mindset and early adoption of digital currencies.

In 2018, the kimchi premium nearly disappeared when the South Korean government announced plans to further restrict cryptocurrency trading, causing a market shock. At that time, South Korea was the world’s third-largest market for Bitcoin trades, behind Japan and the United States.

However, despite the South Korean government threatening a total ban, they are currently working to create regulations that are more accommodating to the cryptocurrency industry.

Kimchi Premium: Example

Below is a prime example to better understand the concept of kimchi premium.

Bruce, a cryptocurrency trader seeking quick profits, acquired Bitcoin on a US exchange when its value was $40,000. Immediately, Bruce sold that Bitcoin on a South Korean exchange, where the price was notably higher, reaching $46,000.

This transaction resulted in a profit of $4,000 for Bruce, effectively capitalizing on the price disparity between the two exchanges. This phenomenon, where Bruce achieved a percentage profit in arbitrage trading of approximately 15%, is known as kimchi premium.

This is a basic example illustrating the concept in theory. However, executing this type of arbitrage is not as easy in reality, mainly due to the rigorous regulations in South Korea related to capital flows and bank accounts, among other aspects. Additionally, to seize these opportunities, traders require specialized software and automated solutions.

Is Kimchi Premium Legal?

Exploiting kimchi premium through arbitrage is not necessarily illegal per se. However, due to Korea’s strict currency control laws and regulations, most people cannot legally and compliantly take advantage of it. It is often legally precarious for long-term Korean residents if they aren’t extremely careful.

To open and use an account with a South Korean exchange like Upbit, you must have a Korean bank account with real-name verification, Korean residency status (or qualifying long-term visas), and exactly matching identities across your exchange and bank accounts. It is illegal for users outside of South Korea to use false residency, nominee accounts, or borrowed identities to open or operate an account.

Even Korean residents would have a hard time taking advantage of any of these arbitrage opportunities because of the strict regulations. They would face extremely strict reporting requirements and could not simply move their profits back into KRW. If any of these laws (or other related regulations) are broken, it may be considered financial fraud, which is heavily prosecuted in Korea.

The difficulty of taking advantage of this premium is precisely why it exists. It creates a bottleneck that few traders or firms want to navigate. However, as the crypto market has become larger and more mature, tighter integration between exchanges and better market infrastructure have mostly eliminated these discrepancies.

Taking Advantage of Kimchi Premium

Although initially associated only with Bitcoin trading, kimchi premium can crop up in the prices of other cryptocurrencies. In fact, Bitcoin prices aren’t usually much higher on Korean exchanges than on other global platforms these days, so it is mostly limited to altcoins.

The concept is also not entirely limited to South Korea. Some nations like Nigeria and Argentina also have strict capital controls, which can lead to higher crypto prices at certain times. Other potential causes are inflation, black market currency markets, and USD shortages.

Here are some ways that traders use to take advantage of kimchi premium:

• Arbitrage: As explained in the above example, compliant traders can buy BTC or other cryptocurrencies on foreign exchanges where prices are lower and then sell them on South Korean exchanges at higher prices to make profits, as long as they follow every relevant law and regulation to the letter.
• Market analysis: Kimchi premium can sometimes be a useful data point in crypto market analysis, especially in Korean markets.
• Automation: Many investors who take advantage of this premium use automated bots to monitor prices and look for promising arbitrage opportunities.

Finally, it’s important to remember that taking advantage of kimchi premium (or other similar concepts in countries like Nigeria or Argentina) can be legally precarious. Even if you believe that you can do it legally, consider seeking legal advice from a professional in the relevant laws.

What Is the Future of Kimchi Premium?

Kimchi premium is a fascinating and unique phenomenon in the South Korean cryptocurrency market, originating from the country’s strict capital controls. Additionally, this premium on international prices of bitcoin and other cryptocurrencies has persisted for years, helping capitalize on price gaps.

However, beyond valuable arbitrage, kimchi premium provides considerable information about demand and sentiment in the South Korean crypto market. High premiums signal price increases, while discounts anticipate corrections. Therefore, tracking this metric can help avid traders anticipate local and global trends, securing substantial profits.

Marco T. Lanz

Managing Editor, 50 posts

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Marco is a passionate journalist with a deep addiction to cryptocurrencies and a keen interest in photography. He is fascinated by trading and market analysis. He has 5+ years of experience working with cryptocurrency projects.