Kimchi Premium: How Traders Exploit Markets For Profits | Bybit Learn

The term “premium kimchi” describes the price differences between cryptocurrency exchanges in South Korea and those in global markets. These kimchi premiums remain high, making South Korea a major player in the crypto market. however, government officials have sought ways to discourage foreign investors from exploiting the premiums, in order to protect the integrity of their markets.

what is premium kimchi?

kimchi premium is the price gap that occurs on South Korean cryptocurrency exchanges compared to foreign cryptocurrency exchanges. this difference is due to the lack of high-yield investment options for South Korean investors.

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how does premium kimchi work?

Kimchi premiums that occur on South Korean cryptocurrency exchanges can cause the valuations of certain coins to be higher than those of other cryptocurrency exchanges. For many, the kimchi premium creates an advantage for merchants located in South Korea. however, there are many points to consider. For example, to make a profit, traders must purchase a token like bitcoin in a foreign currency. After that, the investor can sell the coins for a higher price on a South Korean exchange like bithumb or upbit.

Kimchi premium is driven by restrictive capital controls in South Korea. many regulations reduce the flow of capital into and out of the country. The South Korean government enacted these restrictions to prevent foreign influence on its domestic investments.

Over the years, the government has tightened these capital controls to ensure the economic stability of the South Korean markets. this has made it difficult for exchanges to move large amounts of cryptocurrencies, such as bitcoin, and capital controls limit the ability of South Koreans to buy cryptocurrencies in foreign markets. For this reason, South Korean exchanges are able to sell their limited cryptocurrencies at high rates to meet the demand of their country.

How is the kimchi premium price differential represented mathematically? As an example, if a bitcoin in the United States is trading at $10,000, but the price is $18,000 in South Korea, the kimchi premium is rendered at 80%. with that, a bitcoin bought in the us. uu. the market can be sold to the Korean market at a profit of 80%, resulting in a profit of $8,000 using the example above.

does premium kimchi only apply to bitcoin?

premium kimchi is not exclusive to bitcoin; it can also be found in other cryptocurrencies and is often considered a reliable indicator of the demand for bitcoin. however, other factors can affect the price of bitcoin. As a result, premium kimchi can present a false narrative about the value of a crypto. When buying any cryptocurrency, investors should not base their decisions on a single factor, such as the kimchi premium.

why are there discrepancies in crypto valuations on south korean exchanges relative to those in the rest of the world? While many of these assets and commodities are regulated through centralized institutions, cryptocurrency is decentralized. As blockchain technology continues to evolve, many more crypto tokens will emerge. currency exchanges may find it difficult to keep up with a large amount of cryptocurrency trading activity.

This is why premium kimchi was created. Exploiting these valuation differences is not unique to the world of cryptocurrencies. in fact, slight differences in valuation appear between multiple currencies. Traders often notice and profit from these discrepancies. the process of trading between multiple exchanges to profit from valuation differences is called arbitrage.

why does premium kimchi exist?

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Capital controls have been one of the reasons the kimchi premium has been around for many years. Following the 2008 global financial crisis, the South Korean government implemented strict capital controls in 2010. These regulations were designed to prevent foreign investors from using the Korean won for short-term foreign debt, causing problems for many European markets. Such precautionary measures reduced the volatility of capital investment, which could pose a systemic risk to South Korean markets.

history of premium kimchi

In early 2017, South Korean bitcoin prices were unchanged from foreign markets. however, the price disparity became apparent in late 2018, peaking at 30%. the kimchi premium remained bullish during the first quarter of the following year, with cryptocurrency prices reaching levels of more than 50% in foreign markets. those discrepancies fueled investor demands and pushed up the country’s cryptocurrency prices.

The popularity of cryptocurrencies has been linked to potential security issues and threats from neighboring North Korea. Bitcoin and other cryptocurrencies are often favored by those in regions facing geopolitical risks or uncertainty.

Kimchi premiums are also related to South Koreans’ interest in online gambling and technology. During bull markets, South Korean investors experience fear of missing out (fomo), which drives them to invest in cryptocurrencies.

The rising kimchi premium has also been an indicator of rising retail investment in South Korean bitcoin. Furthermore, South Korea has issued cryptocurrencies, known as kimchi coins, which have low liquidity and small market gains. Over the years, many of these tokens have been removed from major exchanges in South Korea. many of the markets have moved away from these currencies to be in line with the new regulations.

Despite these high premiums, many investors in South Korea are investing in cryptocurrencies and will pay higher fees for the kimchi premium.

Kimchi Premium Arbitrage Exchange

As mentioned, investors can take advantage of differences in market prices with arbitrage trades. With the kimchi premium, cryptocurrency traders buy BTC in forex and then sell it on the South Korean market for higher profits. The phenomenon of arbitrage trading is usually short-lived, as many investors take advantage of price differences to the point that they are no longer profitable.

Arbitration can help alleviate any price differences and market inefficiencies on an exchange. Generally, arbitrage involves buying crypto currencies from a non-South Korean exchange and selling them on the South Korean one. However, the arbitration process in South Korea is not that simple. South Korean traders often need to exchange their South Korean currency for the currency of a different country in order to buy cryptocurrencies on an international exchange. In many cases, this exchange process can take time. It can also be risky, as crypto assets are volatile and their prices change frequently. any drastic price changes in the market may undermine such arbitrage efforts before the transaction can be completed.

Since South Korea has enacted many capital controls over the years, exchanging money on the international market can expose South Korean traders to taxes. There are also annual limits on international transactions and other expenses associated with arbitration. In South Korea, BTC is considered a commodity. For that reason, South Korean merchants must pay customs when buying cryptocurrencies on the international market.

Premium kimchi crackdown

Before the kimchi premium peaked in 2018, South Koreans could only send up to $3,000 in a single transfer, or $20,000 per year with a single financial institution. The South Korean government has recently launched new research on kimchi’s cousin. Previously, it was difficult for many foreigners to open their own accounts on South Korean exchanges. they would need a phone number and bank account in south korea. those rules made it impossible to take advantage of arbitration simply by visiting the country.

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Restrictions on cryptocurrencies over the years have contributed to the rapid growth of the kimchi premium. In April 2021, a prominent South Korean exchange prevented withdrawals on new accounts. a few days earlier, some South Korean banks had stopped money transfers to international crypto firms. as a result, the kimchi premium increased to 18%.

In September 2021, the government began to introduce new money laundering restrictions, which smaller exchanges were unable to implement. upbit is the largest exchange in south korea, followed by bithumb, coinone, and korbit. together, these exchanges are responsible for 90% of all cryptocurrencies in the country. Each exchange has complied with the strict laws of the South Korean government.

The government is also launching investigations into illegal foreign transactions related to the Korean won. foreign investors gained a large part of the money supply by trading kimchi premiums. woori bank and shinhan bank are the main companies being investigated by the financial supervisory service. The companies allegedly mined the kimchi premium in bitcoin and transferred the profits abroad, mainly to China. The investigation is looking at foreign exchange transactions at Shinhan Bank and Woori Bank, estimated at more than 2 trillion Korean won. These two banks have also been accused of margin sharing illegal profits involving bitcoin.

south korean standards

With South Korean regulations, taking advantage of the kimchi premium is nearly impossible outside of the country. there are many strict restrictions to discourage these exchanges.

national restrictive policies

South Koreans must follow regulatory policies and must have an overseas remittance to purchase crypto in any foreign currency. the legal status of any South Korean cryptocurrency is vague, and the government does not declare it to be a valid financial currency. The cryptocurrency must be declared in a bank in South Korea. any profit is also subject to customs regulations and foreign trade law.

anti-money laundering laws

In South Korea, many anti-money laundering laws prevent the trading and exchange of any illegally obtained cryptocurrency.

foreign investment policies

South Korea also prohibits all non-domestic transfers from doing business on the country’s exchanges. these policies do not allow South Korean cryptocurrencies to be traded on the world market.

complexity of the transaction

This complexity has discouraged investors from taking advantage of the kimchi premium. traders must open a new bank account to access foreign exchanges.

Is crypto arbitrage trading legal?

yes, crypto arbitrage is legal in most markets. however, not all exchanges follow the same regulations. Ecuador, Egypt, India and Bolivia do not allow bitcoin in their markets. South Korean regulations have made it increasingly difficult for foreign investors to access the market. While there are opportunities for crypto arbitrage on different exchanges around the world, it is best to check local rules and regulations.

the end result

The kimchi premium often inflates the prices of cryptocurrencies on the South Korean market, compared to those on other international exchanges. Some investors have taken advantage of arbitrage to reap the rewards of these higher prices. However, the South Korean government has enacted regulations to make it more difficult for foreign investors to exploit the kimchi premium.

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