A bowl of kimchi, a fermented vegetable side dish that is a staple of any Korean meal
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You may have heard of the “Korean discount” in the Korean stock market. Now, get ready for “Premium Kimchi,” named after the fermented vegetable side dish commonly found in Korean cuisine.
The “kimchi premium” refers to the price gap between cryptocurrencies (particularly Bitcoin) listed in South Korea and those listed on U.S. or European exchanges.
While this may be seen as an arbitrage opportunity to some, it’s not easy to make money quickly.
Kimchi premium takes center stage again Bitcoin Bitcoin reached an all-time high in mid-March and surged above $73,000 on March 13, setting a new all-time high, according to Coin Metrics. The digital currency has since fallen below the $70,000 level.
As Bitcoin tests new highs, the pickle premium surges. According to cryptocurrency data provider Cryptoquant, the South Korean Premium Index reached its highest level since May 2021 on March 16, reaching 10.88%.
This means that Bitcoin is trading in South Korea at a premium of approximately 10% to the global spot price.
As early as 2017, FTX founder Sam Bankman-Fried saw arbitrage opportunities in the price differences between different exchanges. The CEO of failed cryptocurrency exchange FTX was found guilty of cryptocurrency fraud last week and sentenced to 25 years in prison.
In 2017, as a quantitative trader, he noticed that Bitcoin price differences could sometimes be as high as 60%. Arbitrage opportunities are particularly compelling in South Korea, where prices are significantly higher than in other countries.
He then founded his own proprietary trading firm, Alameda Research, and began trading digital currencies full-time, earning in some cases a million dollars a day.
In 2022, the then-30-year-old billionaire told CNBC that he was attracted to the industry because the broad arbitrage opportunities seemed “too good to be true.”
“Premium”
Bitcoin reportedly often trades at higher prices in South Korea compared to other markets Research from the University of Calgary.
According to a report released in 2019, although the average premium for kimchi between January 2016 and February 2018 was 4.73%, it reached a maximum of 54.48% in January 2018.
Why is there a price difference?
This happens because, unlike stocks or bonds, cryptocurrencies are decentralized digital assets that use blockchain technology that are not controlled by a central authority and therefore can be traded at different prices around the world.
One of the factors contributing to the price gap is South Korea’s high demand for cryptocurrencies, sometimes referred to as “closed market environment”.
To prevent money laundering in cryptocurrency transactions, the country’s Financial Services Commission implemented a so-called “anti-money laundering law.” “Real-name system” policyrequiring the name of the domestic virtual asset trading account to be consistent with the name of the bank deposit account.
Only South Korean nationals or foreigners holding a resident registration card can open full bank accounts in the country, effectively blocking overseas access to its domestic cryptocurrency exchanges.
“South Korea requires a specific type of bank account linked to an individual to open a cryptocurrency trading account, making it challenging for institutional players to enter the cryptocurrency market.” Encrypted data platform Chainaanalysis said in the 2023 report.
Bitcoin prices in South Korea are higher than on other global exchanges because institutional and foreign investors are not able to participate freely and demand is mainly driven by retail investors.
chain analysis It added that from July 2022 to June 2023, the total value of cryptocurrency obtained by South Korea exceeded US$111.82 billion, the largest amount among East Asian countries, even surpassing Japan and China, the largest economies in the region.
The report also pointed out that in terms of transaction size, South Korea seems to be the market with the weakest institutional drive in East Asia.
“This may be due to local regulations making it difficult for financial institutions to conduct transactions,” the report said.
hard arbitrage
The pickle premium may seem like an arbitrage opportunity, but it’s not that simple.
In theory, investors could buy Bitcoin at a lower price on an international exchange, move the cryptocurrency to a Korean Bitcoin exchange at a higher price, and make a risk-free profit by selling on the Korean exchange.
However, the fact is won Baik Seunghoon, South Korea country manager for cryptocurrency mining company GoMining, explained that being regulated makes this arbitrage strategy difficult for international investors.
He pointed out that the Korean won is a severely restricted currency and the transfer of Korean won overseas is strictly controlled.
Citing South Korea’s capital controls, Baik pointed out that so-called “small overseas remittance institutions” can only remit up to US$10,000 per person per transaction, and the cumulative amount of remittances per year by the same person cannot exceed US$100,000.
This means that the amount of fiat currency that can be withdrawn is limited, limiting the yield that traders can cash out.
There are other risks to this arbitrage strategy, according to research from the University of Calgary.
First, it takes time to transfer Bitcoin from foreign exchange to a Korean exchange, during which time the price of Bitcoin may change.
CNBC Check It was revealed that transferring cryptocurrencies to an external wallet can take anywhere from an hour to a day.
This means that investors face the risk that the pickle premium becomes smaller or disappears completely during the execution of the arbitrage trade.
Paul Brody, global blockchain leader at Ernst & Young, told CNBC that while the pickle premium has been around for some time, he believes it is more difficult to conduct arbitrage trades today than in the past.
“What’s different now is that in many other parts of the world, it’s becoming increasingly difficult to send money through the blockchain without any KYC,” Brody noted. He was referring to the “know your customer” process, in which financial institutions need to verify the identity of customers to reduce financial crime.
In addition, he said that unless investors have the necessary documentation and regulatory support, exchanges that comply with regulations will limit investors’ ability to send money overseas.
in short, The reality is that time, expense and capital controls can create complexities that make leveraging this strategy either less attractive or completely unfeasible.
—CNBC’s MacKenzie Sigalos and Kate Rooney contributed to this report.
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