Kimchi Premium

Publication Date :

31 May, 2023

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Table Of Contents

What Is Kimchi Premium?

Kimchi Premium is the difference in the trading prices of crypto assets, typically Bitcoin, between the South Korean and foreign exchanges operating worldwide. The Bitcoin price is relatively higher in South Korean exchanges than in other foreign exchanges.

Crypto traders usually leverage this difference to earn profits. There is a general practice of buying bitcoin in foreign exchanges, selling them in South Korean exchanges, and pocketing the difference. It is called "arbitrage trading." When bitcoins become cheaper on stock exchanges in South Korea than those trading on other exchanges worldwide, it is called a Kimchi Discount.

What Is Kimchi Premium?

Kimchi Premium is the difference between the trading prices of Bitcoin and other cryptocurrencies when they are traded on South Korean exchanges and various foreign exchanges worldwide.
From the time it was introduced in the crypto sphere, the practice of arbitrage trading among crypto traders was established. Since then, arbitrage trading has been quite popular.
This difference in prices of Bitcoins trading on foreign exchanges and South Korean exchanges is usually between 3% and 20%, which is easily seen in the charts published online.
The opposite of Kimchi Premium is Kimchi Discount. Kimchi Discount means Bitcoins trade cheaper in the South Korean exchange than other foreign exchanges at a given time.

How Does Kimchi Premium Work?

Kimchi Premium is the difference between the prices of Bitcoin and other cryptocurrencies traded on South Korean exchanges and other international exchanges worldwide. The premium is named after a pickle made of salted and fermented vegetables, served with curries and soups as a side dish.

The primary reasons for the price difference are South Korea’s suitable trading regulations, people’s willingness to use Bitcoins, and the country’s strict financial controls. South Korea’s stringent laws govern the country’s foreign investment policies and prevent money laundering, among other important measures taken to control capital inflows and outflows.

The Kimchi premium on crypto justifies investors being charged more than the listed price on Google and other tracking platforms. As far as foreign traders are concerned, they earn premiums through arbitrage trades, but volatility makes it risky for them. In nations without capital control norms, no such premium is seen, as Bitcoins are considered assets for wealth creation and not just a payment mode.

In the initial period of 2018, the price difference was over 50%, and the South Korean government was able to regulate it with strict regulations and trading prohibitions. After it was introduced, traders benefitted from the price difference, but only briefly. Today, traders can use Kimchi premium trackers to determine their trading strategies. But they must follow many regulations to comply with relevant countries’ legal trading practices. Hence, the process has become complex. Also, market volatility makes it highly risky.

Chart

Let us look at the chart to understand Kimchi premium better:

SOURCE

The Kimchi premium chart seen above is from September 10, 2021, when the Kimchi premium hit a high of 10.74%. In the chart, the two indicators signify the movement of Bitcoin prices. The lower indicator represents foreign exchanges, and the line above signifies the Korean Bitcoin Index. The difference between them is called the Kimchi Premium.

Examples

Let us consider the following examples to understand the concept better:

Example #1

Calvin is a crypto trader. He wants to make an instant profit, so he buys a Bitcoin from one of the US exchanges. When the Bitcoin was trading at $8100 on the US exchange, Calvin promptly sold it on a South Korean exchange with a different and relatively higher Bitcoin trading price of $9900.

It means Calvin made a profit of $1800 just by cashing in on the price difference between the two exchanges. This difference is what is referred to as the Kimchi Premium. Percentage-wise, Calvin made approximately 20% profit from the Kimchi premium arbitrage trade. This is a simple example to explain how it works. However, in real-world trading, the process is highly complex, risky, and requires automation.

Example #2

In February 2023, the Kimchi premium turned into a Kimchi discount. During this period, cryptocurrencies became cheaper on South Korean exchanges. According to the blockchain analytics provider CryptoQuant’s data, the index fluctuated between -0.24 and 0.01, mainly from February 17 to 19.

Based on Doo Wan Nam’s opinion, the CEO of node validator and venture capital fund, Stablenode, the Kimchi premium’s crossing over to the discount side also signaled a decline in interest in crypto among Korean retail investors. Later, in 2018, the premium dissipated when the South Korean government declared it planned to abolish cryptocurrency trading.

How To Take Advantage Of It?

Initially, the Kimchi premium was associated only with Bitcoins. However, it is also used and monitored for other cryptocurrencies now. Additionally, the premium pricing advantage is now not limited just to South Korea. Since many other countries have enforced strict capital control regulations, they have also been able to post a premium on Bitcoin prices compared to other global markets.

The advantage is that it is used to predict the price of Bitcoin and other cryptocurrencies. When the premium is high, it indicates a bull run. Similarly, when the price is low, it signifies a collapse in the market. The second important advantage is the Kimchi premium arbitrage, which uses the difference between trading prices to book profits.

Now, this works both ways. One may check Bitcoin prices in South Korean exchanges and other foreign exchanges, buy where the price is lower, and sell where the price is higher. However, due to new laws and regulations and highly evolved markets, traders need automation because it is nearly impossible to execute such trades manually.

Traders can use different platforms to access Kimchi premium trackers. To select the right platform, one must note that BTC is considered a commodity in South Korea. Local traders pay customs charges to purchase it from international markets.

Frequently Asked Questions (FAQs)

1. Why does Kimchi Premium exist?

Yes, the Kimchi premium crypto mainly exists because of two reasons:

· South Korea restricts large-scale cash flows from both inside and outside the country; this impacts large-scale buying and the supply-demand equation, making room for a premium.
· With the new age crypto economy established in South Korea, buyers exceed sellers, increasing a bubble for a short span.

2. Is the Kimchi Premium legal?

No, it is not illegal. But during arbitrage trading, many non-compliances are usually noted. South Korean exchanges have strict laws, and trading is complex. Traders must create a new account to trade in South Korea. If traders follow the relevant regulations, they can use Kimchi premium for arbitrage trading.

3. When did the Kimchi Premium start?

According to the University of Calgary, the Kimchi Premium first appeared in 2016 and is named after a popular Korean pickled side dish. On the other hand, when Bitcoins become more expensive in South Korean exchanges than in the rest of the world, it is called a Kimchi Discount.