The legendary “Kimchi Premium” — a price spread that saw BTC trade far higher on Korean exchanges than others — appears to be back. At the time of writing, the bitcoin spot price on Bithumb was $11,116.77 USD and the equivalent of $11,259 USD on Korea’s largest and won-only exchange, Korbit. Over at Bitfinex the price was only $10,767; representing a theoretical premium of almost 5 percent in Korea.
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Why Does the Kimchi Premium Exist?
The colloquial traders’ term “Kimchi Premium” comes from the ubiquitous Korean side dish.
It is the product of two forces. The first is the Korean appetite for virtual currency, which late last year had skyrocketed to dizzying heights, causing demand for bitcoin on the peninsula to drive up local prices.
The second is Korea’s strict capital control laws. The Korean won is a non-convertible currency, not unlike a number of other Asian currencies. Formally exchanging between non-convertible currencies and convertible currencies (to gain exposure to non-convertible currencies), requires the use of non-deliverable forward (NDF) contracts. Upon expiration, these contracts settle in the convertible currency, not the non-convertible currency.
It is illegal to remit over $50,000 USD worth of won abroad annually without proving the source of the funds and gaining Bank of Korea approval. Hence, it is difficult for Koreans to use offshore exchanges, so when demand for cryptocurrencies rises in Korea, local exchanges tend to sell them at a premium.
Not Quite as High as 2017
As Bitsonline reported on February 3rd, the Kimchi Premium hit peaks of almost 50 percent during the December 2017 bull run. Such a disparity led to a decision by CoinMarketCap to exclude Korean exchange data when calculating crypto prices. By the end of January, the Kimchi Premium had disappeared.
It was a tumultuous month in cryptocurrency’s third largest market (after the Chinese exit). The Korean government was thought to have been considering banning cryptocurrencies, with Justice Minister Park Sang-ki declaring at a press conference on the 11th:
“There are great concerns regarding virtual currencies and justice ministry is basically preparing a bill to ban cryptocurrency trading through exchanges.”
The ban never eventuated, and it was announced that the government would require all domestic crypto trading to be linked to real-name bank accounts and that foreigners would not be permitted to trade on Korean exchanges.
Premium Difficult to Profit From
With the legislative landscape cleared for cryptocurrency markets to continue in Korea, albeit under regulatory supervision, it appears local demand for bitcoin is returning.
The arbitrage opportunities the price spreads presented were always difficult to take advantage of. With the new ban on foreign investment in crypto assets locally, they are now even less accessible to Koreans and foreigners alike.
Insofar as the Kimchi Premium represents Koreans’ thirst for cryptocurrencies and their government’s acceptance of the industry, the global market will stand to benefit.
Are Korean traders and the country’s government helping or hindering the crypto industry? Let’s hear your thoughts.
Images via Pixabay, The Business Times