The phenomenon known as the “Kimchi premium” has once again caught the attention of the cryptocurrency world, reaching a two-year high in South Korea. This term refers to the higher price of Bitcoin on South Korean exchanges compared to international markets, with the premium currently sitting at around 10%. Such a discrepancy presents a seemingly risk-free arbitrage opportunity for traders, reminiscent of the strategy that once earned Sam Bankman-Fried millions of dollars.
Understanding the Kimchi Premium
The “Kimchi premium” is named after Korea’s famous fermented cabbage dish and highlights the price gap in Bitcoin values between local Korean exchanges and global platforms. As of now, Bitcoin is trading above $66,000 on most global exchanges, whereas in South Korea, it’s valued over 93 million won (approximately $71,000) on exchanges like Upbit.
The Arbitrage Challenge
While the concept of buying Bitcoin on a global exchange and selling it at a higher price in South Korea seems straightforward, executing this trade is fraught with hurdles. South Korea’s stringent capital controls complicate the process of repatriating profits, particularly for large funds and foreign investors. These restrictions limit the ability to exploit the arbitrage opportunity, making it more accessible to smaller investors or those with the necessary local infrastructure.
Sam Bankman-Fried and the Kimchi Premium
Sam Bankman-Fried, the founder of Alameda Research and the now-defunct FTX exchange, famously capitalized on the Kimchi premium during 2019 and 2020. At times, the premium reached as high as 50%, allowing his firm to reportedly generate up to a million dollars per day. This strategy underscores the potential financial gains from arbitrage opportunities in the crypto market, despite the operational challenges involved.
Market Implications
The resurgence of the Kimchi premium is viewed by some as an indicator of growing retail investor interest in South Korea. Ki Young Ju, founder of on-chain analysis firm CryptoQuant, regards the premium as a “pure retail FOMO (fear of missing out) indicator.” The firm’s head of research, Bradley Park, noted that traders are likely to seize this arbitrage opportunity, which could lead to an increase in Bitcoin reserves on South Korean exchanges, as was observed at the end of February.
This revival of the Kimchi premium not only highlights the unique market dynamics in South Korea but also signals a possible uptick in retail investor activity within the cryptocurrency sector. While the arbitrage opportunity appears enticing, the practical difficulties due to regulatory constraints emphasize the complexities of global cryptocurrency trading.
