Just recently, South Korean authorities started a new investigation into the infamous Kimchi Premium and how some institutions are exploiting it to make huge profits; $6.5 billion to be precise.
The Financial Supervisory Service (FSS) alleged that two major South Korean banks were involved in crypto speculation using the price gap in the Korean crypto market, also known as Kimchi Premium. FSS is responsible for overseeing the financial institutions within the country.
The South Korean authorities have been on Kimchi Premium for a while now. Just last year, the rate reached 21.5%, its record high, which led to a new law coming into effect according to which all crypto exchanges were required to register within the country to be able to offer their services to Korean users.
What is Kimchi Premium?
Kimchi Premium refers to the price difference between Korean crypto exchanges and other cryptocurrency platforms. A 10% Kimchi Premium for Bitcoin, for instance, indicates that Bitcoin is being sold 10% higher in Korean crypto exchanges compared to the rest of the world.
According to CryptoQuant’s Korea Premium Index, the measure sits at 2,4%, which is quite low compared to its peak in May 2021 (21.5%).
Check out the chart below to see the fluctuations of the measure throughout the years:
Why Does Kimchi Premium Exist?
The South Korean government controls the flow of capital in and out of the country quite strictly. This simply means that foreign investors can not easily invest in South Korean markets, and cryptocurrency markets are no exception.
These rules also limit the ability of South Koreans to buy cryptocurrencies from foreign exchanges which allows local crypto exchanges to sell their limited supply for higher prices. That’s the main reason why the price gap increases when the Korean market heats up more.
What is Kimchi Premium Telling Us?
Retail investors are the main contributors in the Korean crypto market as the capital control rules set up by the Korean government make it harder for institutional investors to take part in the market.
This actually makes the Korean crypto market quite interesting and Kimchi Premium provides an open window into the “retailers’ sentiment and buying power” within the country. In other words, the higher Kimchi Premium indicates that more retail investors are joining the crypto market due to the surged interest or FOMO.
How Investors Are Exploiting Kimchi Premium?
Arbitrage trading allows investors and traders to benefit from price differences in various markets. Kimchi Premium offers such an opportunity to traders as they can buy Bitcoin from foreign exchanges and sell them in Korean crypto platforms at higher prices to earn profits.
However, the process is not as easy as it sounds. Capital control rules, taxes, limited international transactions allowed for a year, and other arbitrage expenses can make this process quite complicated and risky at the same time.