The so-called “Kimchi Premium,” the difference between Bitcoin’s price on South Korean exchanges versus the international price spiked to 23% before dropping to roughly 14% at the time of writing. This meant that BTC traded for almost $70K on Apr. 5 in South Korea, while the price was around $58K internationally.
The 23% peak is the highest since the premium hit 47.3% on Jan. 8, 2018 according to data compiled by Vetle Lunde of Arcane Research. BTC dropped 51% in the following month. This has some investors worried that the premium signifies a buying frenzy before a 2018-style bear market which started in January of that year and saw BTC drop 73% over the next 12 months.
On the other hand, the premium widened to 19.3% on Jan. 5 and 22.2% on Mar. 17 of 2017. Bitcoin jumped 16% and 25% in the following respective months indicating that the only conclusive takeaway from the premium’s increase is that demand for BTC has increased in Korea.
The knife-like drop to a 14% premium, which is still historically high, is likely due to a party finally cracking the arbitrage code. Bithumb, one of South Korea’s largest exchanges, saw massive inflows to its Bitcoin wallets relative to average inflows in the past few days. It’s likely arbiteurs purchased BTC and then sent it to Bithumb to be sold at the premium.
Tight Capital Controls
The premium comes from South Korean retail demand for Bitcoin combined with the country’s closed off exchanges and strict capital controls which make it difficult for South Koreans to exchange their currency for another. The capital controls prevent would-be arbiteurs from buying Bitcoin in the international markets with foreign currency, and then sending the asset to a South Korean exchange and cashing out for the local currency, won.
Likewise, closed off exchanges make it difficult for non-South Koreans to make accounts with the country’s exchanges, thereby locking the international market out from arbitraging the premium.
The South Korean premium on crypto assets extends beyond Bitcoin. ETH, UNI, and others show similar spikes, suggesting the South Koreans are not favoring one cryptocurrency in particular, but the sector as a Whole.