Observers of the local market noted that the so-called “Kimchi premium” has recently passed the two-year high point.
- The term “Kimchi premium” describes the discrepancy between Bitcoin prices on Korean exchanges and international markets. In South Korea, bitcoin is presently trading at a premium of 10%.
- Buying bitcoin on a global exchange and selling it on a Korean exchange for a risk-free profit in Korean won is known as arbitrage, and it was made popular by Sam Bankman-Fried.
- Because of the stringent capital controls in South Korea, it is challenging to pocket the actual gains.
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With bitcoin prices commanding an average 10% premium in South Korea, an advantageous but operationally challenging arbitrage trade has returned in popularity.
Bitcoin is trading slightly over $66,000 on the majority of international exchanges as of this morning (Asian time). On Korean exchanges like Upbit, it fetches over 93 million won, or more than $71,000 in today’s currency.
The term “Kimchi premium” describes a phenomenon wherein the price of bitcoin on local Korean exchanges differs from that on international bourses. The term comes from a popular Korean dish called fermented cabbage.
Theoretically, the trade is straightforward: one can purchase bitcoin on a worldwide exchange, move it to a Korean exchange, and then sell it for a risk-free 10% profit in Korean won.
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But it can be challenging to pocket arbitrage profits. Due to tight capital controls, it can be difficult for foreigners to take out sizable sums of money from Korea. It implies that large funds are unable to profit from the trade, and smaller investors might not have the necessary resources.
FTX exchange founder Sam Bankman-Fried, the founder of the now-bankrupt trading firm Alameda Research, is a notorious example of someone who abused the Kimchi premium. According to CNBC, Bankman-Fried has stated in multiple interviews that his company was able to make up to one million dollars a day in 2019 and 2020 because the premium was as high as 50%.
Conversely, some analysts claim that the premium is a reflection of retail involvement and that it results from strong local demand for the asset.
The founder of the on-chain analysis company CryptoQuant, Ki Young Ju, stated in an X post that “Korean retail investors are getting back.” “The Korea Premium Index, also known as Kimchi Premium, is an indicator of pure retail FOMO.”
Bradley Park, head of research at CryptoQuant, informed CoinDesk via Telegram that it was possible that some traders were abusing the trade.
“Traders will take advantage of the arb opportunity and bring their overseas holdings home as the kimchi premium increases, which means Upbit’s Bitcoin reserves will increase,” Park stated. “At the end of February, we noticed a notable increase (in these reserves).”
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