A bowl of kimchi, a fermented vegetable side dish that is a staple of all Korean cuisine
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Some may see this as an arbitrage opportunity, but making a quick buck isn't all that easy.
After Bitcoin reached an all-time high in mid-March, Kimchi Premium has once again gained attention, reaching an all-time high of over $73,000 on March 13, according to data from Coinmetrics. did. After that, the digital currency fell below the $70,000 level.
As Bitcoin tests new highs, the premium for kimchi also soars. According to crypto data provider CryptoQuant, the Korea Premium Index reached 10.88% on March 16, its highest level since May 2021.
This means that the trading price of Bitcoin in South Korea was about 10% higher than the global spot price.
Back in 2017, FTX founder Sam Bankman Fried saw an arbitrage opportunity in 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.
As a quantitative trader in 2017, he noticed that Bitcoin price differences could reach 60%. Arbitrage opportunities were particularly attractive in South Korea, where prices were significantly higher than in other countries.
He then started his own trading company, Alameda Research, and began trading digital currencies full-time, sometimes raking in $1 million a day.
In 2022, the then 30-year-old billionaire told CNBC that he was drawn to the industry because the extensive arbitrage opportunities seemed “too good to be true.”
According to a study by the University of Calgary, Bitcoin is often traded at a higher price in South Korea than in other markets.
According to a report published in 2019, the average kimchi premium from January 2016 to February 2018 was 4.73%, but reached the highest level of 54.48% in January 2018.
Why the price difference?
This occurs because, unlike stocks and bonds, cryptocurrencies are decentralized digital assets using 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 difference is the high demand for cryptocurrencies in South Korea, which is sometimes referred to as a “closed market environment.”
To prevent money laundering in crypto transactions, the country's Financial Services Commission introduced a so-called “real name” policy, requiring that individuals' domestic crypto transaction account names match the names on their bank savings accounts.
Only Korean citizens or foreigners with resident registration cards can open full-fledged bank accounts in the country, effectively blocking access to domestic virtual currency exchanges from overseas.
Cryptocurrency data platform Chainalysis said in a 2023 report that “South Korea requires a specific type of bank account associated with an individual to open a crypto exchange account, making institutional investment “It's becoming difficult for families to enter the cryptocurrency market.”
With institutional and foreign investors unable to freely participate, demand is mainly driven by retail investors, and Korean bitcoin prices have risen higher than prices on other global exchanges.
Chainalysis said the total amount of virtual currency received by South Korea from July 2022 to June 2023 exceeded $111.82 billion, the largest amount among East Asian countries and the region's largest economy. He added that it is even higher than Japan and China.
The report also noted that South Korea appears to be the least institutionally driven market in East Asia, based on deal size.
“This is likely due to local regulations that make it difficult for financial institutions to do business,” the report said.
While the kimchi premium may seem like an arbitrage opportunity, it's not that simple.
In theory, an investor could buy Bitcoin at a lower price on an international exchange, transfer the cryptocurrency to a Korean Bitcoin exchange at a higher price, and sell it on a Korean exchange, reducing the risk. You can profit without.
However, the fact that the Korean won is regulated makes this arbitrage strategy difficult for international investors, explained Baik Seunghoon, South Korea country manager at crypto mining company GoMining.
He pointed out that the won is a highly restricted currency, and overseas won remittances are strictly controlled.
Bai cited South Korea's capital controls, which say so-called “small overseas remittance institutions” are only allowed to transfer up to $10,000 per transaction for each individual, and the same person can transfer a cumulative total of $100,000 per year. He pointed out that only up to this point is allowed.
This means there is a limit to the amount of fiat currency that can be withdrawn, which in turn limits the percentage of profits traders can cash out.
There are other risks to this arbitrage strategy, according to research from the University of Calgary.
First, transferring Bitcoin from a foreign exchange to a Korean exchange takes time, and the price of Bitcoin may fluctuate during that time.
Checked by CNBC It has been revealed that it can take anywhere from an hour to a day for your cryptocurrencies to be migrated to an external wallet.
This means that investors run the risk that the kimchi premium will shrink or disappear completely during the time it takes to execute the arbitrage trade.
Paul Brody, global blockchain leader at EY, told CNBC that while kimchi premiums have been around for a while, he believes it is now harder to arbitrage 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 via blockchain without KYC,” Brody noted. He was referring to the know-your-customer process, which requires financial institutions to verify the identity of their customers to reduce financial crime.
Additionally, he said regulated exchanges limit investors' ability to send money abroad unless they have the necessary documentation and regulatory support.
in short, In reality, managing time, fees, and capital can introduce complexities that make leveraging this strategy less attractive or completely unfeasible.
— CNBC's MacKenzie Sigalos and Kate Rooney contributed to this report.
