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By Anna J. Park
Ahead of the much-anticipated public listing of U.S.-headquartered cryptocurrency exchange Coinbase last week, one of the frequently talked-about issues in Korea's crypto trading circle has been the so-called "kimchi premium" ― the price gap between cryptocurrencies on Korean and foreign exchanges.
During the past week, the kimchi premium soared up to 23 percent, meaning that the price of a bitcoin on Korean exchanges was 23 percent higher than that on foreign ones. The price gap is easily checked in real time at various crypto-related sites in Korea; as of 3:25 p.m. Sunday (KST), the kimchi premium stood at 17 percent for the bitcoin price at Korea's largest coin exchange Upbit compared to the overseas-operated Binance.
This has led some local investors to take arbitrage profits, as they purchase cryptocurrency on foreign exchanges where they're sold at a lower price and then resell on domestic exchanges for higher prices. Due to active arbitrage trading in the past week, the kimchi premium fell below 10 percent, but later rose again up to the 10-percent range.
One of the main reasons why the kimchi premium still exists is that there's more demand for cryptocurrencies in Korea than in other countries. However, more than the imbalance between supply and demand, a key reason behind the price gap is that global coin investors find it difficult and cumbersome to trade cryptocurrencies on Korean crypto exchanges with Korean won. If the process was easier, active arbitrage trading would remove the price gap among global exchanges. Yet procedural difficulties involving foreign exchanges of Korean won on the part of global coin investors, as well as local investors' preference to trade on domestic exchanges, maintains the kimchi premium.
Kimchi premium increases ahead of Bitcoin plunges?
What is more concerning for coin investors here is whether the recent increasing level of the kimchi premium is an omen for an imminent price plunge in cryptocurrencies.
This concern is not entirely groundless. The kimchi premium reached up to 50 percent back in 2017 due to local investors' frenzied entry into the crypto asset world as well as the country's strict foreign exchange laws. This huge price gap was followed by a nosedive in cryptocurrency prices during the following years. Until last February, the local price for bitcoin was around five percent to six percent lower than that of foreign exchanges, experiencing a "reverse kimchi premium" for the past couple of years.
Investors who experienced the dark period are reminded of that shock amid the rising crypto price gaps in the country. Market experts, however, say the current situation is different from 2017, when Korea's daily cryptocurrency trading volume was the highest among all countries. Watchers say the price fall following the kimchi premium negatively affected the global crypto market, but times have changed.
"Back in 2017, the Korean crypto market led the world's digital assets with much more global influence. However, the dominance has been not only transferred from Korea to the U.S. but also from retail investors to institutional investors," Han Dae-hoon, an SK Securities analyst specializing in cryptocurrencies, said.
"It's true that the high level of the kimchi premium is burdensome, and the bitcoin price in Korea could be corrected as the price gap narrows. However, it won't lead to any drastic changes in the crypto market," the analyst added, explaining that demand for cryptocurrencies remains solid, and institutional investors are making moves to embrace it into their asset allocation.
Following the very first bitcoin ETF listed in Canada, Fidelity Investments is set to launch a bitcoin exchange-traded fund (ETF), heralding the digital asset joining the traditional asset market. Both global financial giants and global companies, such as Square, Visa, PayPal and Tesla have announced plans to strengthen their cryptocurrency-related businesses.
