The pricing variations between cryptocurrency exchanges in South Korea and those in other markets are referred to as the “Kimchi premium.” South Korea continues to command huge Kimchi premiums, making it a major player in the >cryptocurrency> market. >
To preserve the integrity of domestic markets, however, government authorities there have searched for strategies to deter international investors from taking advantage of the premiums.>
History
A decentralized cryptocurrency is bitcoin. Governments struggle to control its cross-border flow or stop it in its tracks. Governments and central banks, however, are able to impose restrictions on how their citizens spend fiat money, including how it is brought into and exported from the nation as well as how it is used to purchase >Bitcoin>.>
Since 2016, the price of Bitcoin in South Korea has increased due to capital control and anti-money laundering regulations on the won, the country’s currency. This is due to the difficulty of converting won back into dollars, which discourages foreign arbitrageurs from taking advantage of the pricing difference.>
Trading delays on South Korean exchanges make it difficult for dealers to convert dollars for other currencies, which causes a backlog in demand and a brief increase in the price of Bitcoin. The phenomena is affectionately known as the “Kimchi Premium” after the national dish of pickled radish and cabbage.>
What Is Premium Kimchi?
The difference between cryptocurrency exchange prices in South Korean exchanges and exchanges elsewhere is known as the “kimchi premium.” The price of Bitcoin is where the kimchi premium is most noticeable (BTC).>
In other words, a South Korean exchange may publish the price of Bitcoin at a greater level than an exchange based in the US or Europe. The term “kimchi premium” refers to the dish of fermented cabbage that is a mainstay of Korean cooking.>
How Does the Premium Kimchi Work?
Kimchi premiums that exist on South Korean cryptocurrency exchanges can raise the value of some coins above what is available on other cryptocurrency exchanges. Many believe that the Kimchi premium gives South Korean traders an advantage. >
There are, however, a lot of things to think about. For instance, traders there must buy a token like Bitcoin on a foreign exchange in order to benefit. The investor can then sell the coins on a South Korean exchange like Bithumb or Upbit for a higher price.>
The tight capital controls in South Korea are the cause of the Kimchi premium. Numerous rules limit the amount of money that enters and leaves the nation. These limitations were put in place by the South Korean government to guard against foreign influence over indigenous investments.>
To maintain economic stability for South Korean markets, the government has tightened these capital regulations throughout time. This has made it challenging for exchanges to move significant sums of cryptocurrencies, including Bitcoin, and the capital controls restrict South Koreans’ access to purchasing cryptocurrencies in other countries. Because of this, South Korean exchanges are able to offer a restricted number of cryptocurrencies at premium prices to satisfy domestic demand.>
How is the price difference for premium kimchi represented mathematically? For instance, the Kimchi premium is equal to 80% if one Bitcoin is listed in the United States at $10,000 but costs $18,000 in South Korea. Thus, using the example from above, a Bitcoin purchased on the U.S. market may be sold on the Korean market for an 80% profit, resulting in a profit of $8,000 in total.>
Is There a Kimchi Premium Outside of Bitcoin?
The Kimchi premium is a cryptocurrency feature that isn’t unique to Bitcoin; it may be seen on other cryptocurrencies as well. It’s frequently used as a reliable predictor of Bitcoin demand. The price of Bitcoin can, however, be influenced by other things. As a result, the Kimchi premium may give the wrong impression of a cryptocurrency’s worth. Investors shouldn’t acquire any cryptocurrency based solely on a single reason, like the Kimchi premium.>
Why are cryptocurrency exchanges in South Korea valued differently from those in other parts of the world? Cryptocurrency is decentralized, in contrast to many of these assets and commodities, which are governed by centralized authorities. >
There will be an enormous increase in the number of crypto tokens as blockchain technology develops. Foreign exchanges may find it difficult to keep up with the volume of cryptocurrency trading that occurs.>
The Kimchi premium was developed as a result. The realm of cryptocurrencies is not the only one that may take advantage of these valuation discrepancies. In actuality, there are little valuation discrepancies between various foreign exchanges. These differences are frequently noticed by traders, who profit from them. Arbitrage is the practice of trading across multiple exchanges in an effort to profit on valuation discrepancies.>
Why is there a Kimchi Premium?
One of the reasons the Kimchi premium has persisted for so long is due to capital limitations. In 2010, the South Korean government adopted strict capital controls in response to the global financial crisis of 2008. These rules were put in place to stop foreign investors from utilizing the Korean won to purchase short-term foreign debt, which had negative effects on many European markets. >
These preventative steps decreased the volatility of capital investments, which may have been a systemic danger for the South Korean markets.>
Regulations in South Korea
Taking advantage of the Kimchi premium outside of South Korea is very hard due to rules there. To deter these trades, numerous rigid prohibitions are in place.>
Domestic Prohibitive Laws
To purchase cryptocurrency on any foreign exchange, South Koreans must adhere to regulatory requirements and have an offshore >remittance>. Any cryptocurrency in South Korea has an ambiguous legal position because the government hasn’t recognized it as a legitimate form of payment. A South Korean bank must receive a cryptocurrency declaration. The Foreign Trade Act and the Customs Regulations also apply to any gains.>
Laws Against Money Laundering
Numerous anti-money laundering rules in South Korea forbid the exchange and trade of any cryptocurrency obtained unlawfully.>
Please read: >Recent Scams to Watch Out For in 2023>
Policies for Foreign Investment
Additionally, no non-domestic transfers are allowed to conduct business on South Korea’s exchanges. Due to these regulations, South Korean cryptocurrencies cannot be traded internationally.>
Complexity of Transactions
Investors have been discouraged from profiting from the Kimchi premium due to its complexity. To access any foreign exchanges, traders must open a brand-new bank account.>
Conclusion
When compared to pricing on other foreign exchanges, the Kimchi premium frequently drives up cryptocurrency prices on the South Korean market. Arbitrage has been used by some investors to profit from these increased prices. >
However, in order to make it impossible for foreign investors to profit from the Kimchi premium, the South Korean government has implemented laws.>
