A staple in all Korean meals, kimchi is a fermented vegetable side dish that adds a unique flavor to any dish. The dish has gained widespread popularity around the world, with many people attempting to capitalize on the kimchi premium – the price discrepancy between bitcoin prices in South Korea and other global markets. However, taking advantage of this price gap is not as easy as it may seem.
The kimchi premium has been in the spotlight again recently as bitcoin reached record highs in mid-March, surpassing $73,000. As the cryptocurrency tested new highs, the kimchi premium also soared, reaching its highest level since May 2021. This means that the trading price of bitcoin in South Korea was about 10% higher than the global spot price.
In 2017, FTX founder Sam Bankman-Fried saw an opportunity in the price gap across different exchanges and launched his proprietary trading firm, Alameda Research. However, this strategy is not as feasible as it once was, as regulations and capital controls have made it challenging for institutional players to enter the market. In fact, South Korea received the largest amount of crypto value in East Asia from July 2022 to June 2023, but it appears to be the least institutionally driven market in the region.
The reason for the price discrepancy is the high demand for cryptocurrencies in South Korea, creating a “closed market environment.” To prevent money laundering in crypto trading, the country’s Financial Services Commission has implemented a “real name” policy, making it difficult for international investors to participate freely. Additionally, the won, South Korea’s currency, is highly restricted, limiting the rate of gains that traders can cash out.
Attempting to capitalize on the kimchi premium is not a straightforward process either. The transfer of bitcoin from a foreign exchange to a South Korean exchange can take time, and during that time, the price of bitcoin can change. Furthermore, exchanges that are compliant with regulations may limit an investor’s ability to send money overseas without proper documentation and regulatory support. Overall, the complications of time, fees, and capital controls make capitalizing on the kimchi premium either less attractive or outright unviable.
