Lee Ju-seung, a 33-year-old office worker, started investing in bitcoin for the first time earlier this year. A newspaper article that said Bitcoin came back after breaking the previous high point recorded in late 2017 stimulated him.
Lee, who had experience investing in stocks, bought bitcoins through a cryptocurrency exchange with the help of friends. It felt easier than I thought, but there was a problem. While reading a foreign bitcoin article, he realized that he had bought it 4.5% more than the global price. This was because the’Kimchi Premium’ was stuck in the domestic bitcoin price due to the successive bull market.
A few days later, when the global bitcoin price fell by more than 20%, his premium disappeared like a snow melt. The 20% decline was also depressing, but it was an absurd situation to lose 25%. Mr. Lee said, “I feel like I’ve been scammed, but the acquaintances who introduced the cryptocurrency laughed, asking if they didn’t know the kimchi premium.”
Kimchi premium refers to the price difference between buying bitcoin in Korean won in Korean cryptocurrency exchanges and in dollar currency or dollar-based stablecoin in foreign exchanges. When comparing the two, if the domestic price is high, it becomes’Kimchi Premium’, and if the domestic price is low, it becomes’Kimchi Discount (reverse premium)’. Recently, as the volatility of bitcoin has increased, there are more and more cases of being frustrated by not knowing the kimchi premium like Lee.
In fact, looking at past examples, Mr. Lee may be fortunate to start investing in cryptocurrency now. This is because at the end of 2017, when the cryptocurrency craze first blew in Korea, the situation was more serious than it is now.
In particular, from December 18, 2017 to January 22, 2018, the basic kimchi premium of 10% or more was steadily maintained. It means that domestic investors have bought bitcoin at a price that is 10% higher than that of foreign investors throughout the month. Meanwhile, the all-time high of Bitcoin Kimchi premium achieved was 54.48%, recorded in January 2018. Of course, this premium also disappeared as if snow melted during the subsequent collapse.
This kimchi premium incident served as an opportunity for foreign investors to look at Korea with wonderful eyes. This is why’Kimchi Premium’ has become a proper noun. In fact, among overseas cryptocurrency projects, there were a number of places that cited Korea as a market that should be targeted when making cryptocurrency disclosure (ICO) due to the image created at this time.
Closed market + explosive buying tax = Kimchi premium
There has never been such a heavy bitcoin premium in other countries. But why did this happen in Korea? Researchers at the University of Calgary, Canada, in a report on this phenomenon in April 2019, pointed to the unique market structure and high transaction costs of the Korean market as the cause of the kimchi premium.
Usually, a product’s premium is created when there is an instantaneous gap between supply and demand in the market. If there are many people to buy or there are few people to sell, a positive (+) premium occurs, and if there are few people to buy or many people to sell, a negative (-) premium occurs.
The more active the product is traded, the less likely the premium is generated. In the case of bitcoin, the basic value is the same everywhere in the world, and even if a premium is formed in any one country due to the environmental characteristics of an exchange, it is common that it disappears soon after the arbitrage transaction targeting it.
However, even if Korea has a premium, it is not easy to make arbitrage deals using it. This is because it is one of the countries that has a solid dominance of the won and strict foreign exchange management. In order to trade Kimchi premium arbitrage, it is necessary to buy bitcoin cheaply by giving the legal currency of other countries such as dollars from overseas exchanges, but it is difficult for domestic investors to have a large amount of dollars by default. In such a closed and high transaction cost environment, it is difficult for arbitrage trading to occur actively. Basically, it is an environment that does not resolve well when kimchi premium occurs.
Against this backdrop, the demand for buying from domestic investors exploded from late 2017 to early 2018. Mr. A, a former domestic exchange official whom CoinDesk Korea met, said, “At the time, the domestic volume ran so that exchanges bought bitcoins that were insufficient at overseas exchanges and airlifted them.” “Bitcoin bundle longevity,” who bought bitcoins with the yen exchanged by riding them, and sent them to Korean exchanges to get a kimchi premium, was also popular. This is why the kimchi premium exceeded 50%.
These days, the cryptocurrency market is quite technologically advanced compared to 2018. However, if you look at it specifically, the environment in which it is difficult to resolve the kimchi premium is still maintained. Stable coins with fast transaction speeds such as Tether (USDT) have become popular around the world, but are rarely used on Korean exchanges. This is because the financial infrastructure is complete, so the usability of the won is excellent.
In some ways, it is worse than in the past. It is difficult to expect the effect of resolving the kimchi premium for foreign investors in neighboring countries such as China. It is known that most of the foreign accounts remaining on the domestic exchanges were cleared as the National Tax Service charged more than 80 billion won in withholding tax on Bithumb Exchange at the end of 2019. Choi Ji-hye, head of the Hexland Research Center, said, “The domestic cryptocurrency market still maintains the character of a remote island.”
Complete survey of’Bitcoin GIMP’ in 2017-2021
CoinDesk Korea used TradingView, a website that provides chart data, to investigate the total number of kimchi premiums that occurred between the domestic exchange Upbit and the US exchange Bit Finance from the second half of 2017 to early 2021. When I selected only large kimchi premiums that exceed 5% per day, an interesting common point was found.
There are six periods that meet this condition. From March 12th to 15th, 2020, a high level of kimchi premium was formed due to the fact that the global bitcoin price plummeted more than 50% in a short period of time and the domestic price could not keep up. Except for all, prices were a short-term high.
In other words, most of the kimchi premiums of 5% or higher are the indicators of the’FOMO’ (Fear of missing out) sentiment of domestic investors who cannot tolerate being alienated from the bull market and press the buy button when the bitcoin price reaches its virtual peak. It means that it can be seen.
Even when Bitcoin reached a record high of $41,950 in January 2021, a kimchi premium that was 5% or more was unavoidably high. The highest figure was 7.89% recorded on January 9, 2021. Bitcoin has been sideways for a while since this day and then fell to the 3,400 dollar level on the 12th.
Even in reverse premium, investors’ sentiment is read. The situation in which the kimchi premium represents an inverse premium is most likely when the bitcoin price rises, but the volatility level is too high just before, and investors do not believe that the rise will continue. The representative section is the period from March 22 to June 5, when Bitcoin, which fell to the 3700 dollar level after the crash in March 2020, recovers to the 6000 dollar level and rises to 9000 USD.
For a considerable period of these three months, the domestic bitcoin price was in reverse premium, and on April 4th, the reverse premium of -3% was recorded. The reverse premium of -3.62% per day occurred even recently, with bitcoin at its peak and a wide range between $30,000 and $40,000.
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