The Resurgence of the โKimchi Premiumโ in South Korea
Bitcoinโs infamous โKimchi premiumโ has made a comeback in South Korea, with the cryptocurrency commanding an average 10% price premium compared to global exchanges. While Bitcoin was trading just above $66,000 on most global exchanges, it reached over 93 million won (equivalent to over $71,000) on Korean exchanges like Upbit.
Understanding the Kimchi Premium
The Kimchi premium phenomenon refers to the price difference of Bitcoin on local Korean exchanges compared to global platforms. In theory, traders can exploit this arbitrage opportunity by purchasing Bitcoin on a global exchange, transferring it to a Korean exchange, and selling it for a risk-free 10% profit in Korean won. However, capital controls and challenges in withdrawing large sums of money from Korea make it difficult for most investors to take advantage of this opportunity.
Sam Bankman-Fried Profited From Kimchi Premium
One notable figure who capitalized on the Kimchi premium was Sam Bankman-Fried, the founder of Alameda Research and FTX exchange. Bankman-Fried claimed that the premium reached as high as 50% during 2019 and 2020, enabling his firm to make significant profits. The return of the Kimchi premium indicates renewed interest and participation from retail investors in South Korea, driven by local demand for the asset.
โKorea Premium Index (a.k.a. Kimchi Premium) is a pure retail FOMO indicator because:
1/ There are no notable crypto funds in Korea
2/ Korea has very strict capital control policiesโ
โ Ki Young Ju (@ki_young_ju)
The increased premium creates an arbitrage opportunity, prompting traders to bring their overseas holdings back to Korea and leading to a rise in Bitcoin reserves on local exchanges like Upbit. While the Kimchi premium provides potential gains for traders, it also highlights the unique dynamics of the South Korean cryptocurrency market. The countryโs strict capital controls, combined with limited infrastructure for smaller investors, present challenges for capitalizing on the arbitrage trade. Nevertheless, as the premium continues to rise, more traders are likely to exploit the opportunity, further increasing Bitcoin reserves on Korean exchanges.
South Korea Considers Spot ETFs
Recently, South Koreaโs chief of the financial watchdog revealed that authorities are discussing the potential approval of spot Bitcoin exchange-traded funds (ETFs) in the country. Lee Bok-hyun, governor of the Financial Supervisory Service, stated that there are differing opinions among authorities regarding virtual assets. While some hold a positive stance, others are more cautious. Internal discussions are ongoing to consider all perspectives.
As of now, spot Bitcoin ETFs are not available for South Korean crypto investors. In January, the countryโs financial authorities announced that they had no plans to regulate the sales of Bitcoin futures ETFs.
Hot Take: Opportunities and Challenges
The resurgence of the โKimchi Premiumโ in South Korea presents both opportunities and challenges for crypto investors:
Opportunities:
- The Kimchi premium offers an arbitrage opportunity for traders to profit from the price difference between global and Korean exchanges.
- Retail investors in South Korea are showing renewed interest in Bitcoin, indicating growing participation in the market.
- Increased premiums incentivize traders to bring their overseas holdings back to Korean exchanges, boosting Bitcoin reserves locally.
Challenges:
- Strict capital controls and limited infrastructure for smaller investors make it difficult to exploit the arbitrage trade.
- Most investors face challenges in withdrawing large sums of money from Korea, hindering their ability to take advantage of the Kimchi premium.
- The unique dynamics of the South Korean cryptocurrency market require careful consideration and understanding.
As South Korea continues to discuss the potential approval of spot Bitcoin ETFs, it remains to be seen how this development will impact the market and further shape the crypto landscape in the country.
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