The “kimchi premium” has returned.
Price premiums for bitcoin on South Korean exchanges have hit two-year highs, indicating retail investment interest in cryptocurrencies is surging in that country. However, analysts and traders warn that certain market players could take advantage of arbitrage opportunities, resulting in short-term price volatility.
The “kimchi premium,” named for a popular Korean pickled side dish, also helps to explain why bitcoin prices drop during Asia’s trading hours – some traders sell bitcoin at higher prices on South Korea-based crypto exchanges.
As of press time, bitcoin’s “kimchi premium,” as quantified by the difference in prices between South Korean’s upbit exchange and Binance, was at 4.15%, or 1,444,941 won (approximately $1328.97), according to real-time exchange data-tracking site scolkg.com. Such a mark-up in prices has not been seen since early 2018.
Data from blockchain analytics firm CryptoQuant also shows the price gap between Korean exchanges and the rest of the market went as high as 6.18% on Jan. 4. On that day, 3,001 bitcoin flowed to Bithumb, one of the biggest crypto exchanges in South Korea.
“It is clear that the greatest selling happened during the Asia trading hours,” Andrew Tu, an executive at quant firm Efficient Frontier, told CoinDesk.
South Korea’s retail FOMO in crypto
The “kimchi premium” first appeared in early 2016, according to researchers at the University of Calgary. Between January 2016 and February 2018, it averaged at 4.73% and reached its highest at 54.48% in January 2018.
There are several reasons for the sometimes exceptionally wide price gap, including historical background, economic situation and regulatory environment.
Driving some of the sudden bitcoin frenzy could be the delayed implementation of a 20% crypto tax in South Korea, according to Simons Chen, executive director of investment and trading at Hong Kong-based crypto lender Babel Finance. He said some traders may be rushing to purchase cryptocurrencies before the tax is implemented in 2022.
South Koreans are buying crypto on exchanges closed to non-Korean nationals, making prices a little bit removed from the global market.
“The South Korean government has banned exchanges from servicing foreigners,” according to the book “Mastering Blockchain,” co-written by CoinDesk’s senior markets reporter, Daniel Cawrey. “In addition, South Korea has capital controls that limit the amount of funds that can leave the country.”
Jason Kim, the chief investment officer of Tokyo-headquartered investment firm Anchor Value, noted the lack of institutional traders in South Korea’s crypto market, meaning that the market is mainly driven by retail customers who use exchanges more frequently and tend to follow “fear of missing out” (FOMO) trends during each bull run, likely causing more drastic market volatility. Retail crypto buyers are able to do so easily because they can make their…