South Korea’s kimchi premium in the spotlight after BTC’s record highs

You may have heard of the “Korean discount” in South Korean stock markets. Now get ready for “premium kimchi,” named after the popular fermented vegetable side dish that is a staple of Korean cuisine.

The “kimchi premium” refers to the price differential of cryptocurrencies, particularly bitcoin, when listed in South Korea compared to those listed on US or European exchanges.

Although this may be considered an arbitrage opportunity for some, it is not that easy to make money quickly.

Premium kimchi is in the spotlight again after bitcoin reached all-time highs in mid-March, surpassing $73,000 to reach an all-time high on March 13, according to Coin Metrics data. The digital currency has since fallen below the $70,000 level.

As Bitcoin tested new highs, the kimchi premium also skyrocketed. According to cryptocurrency data provider Cryptoquant, the Korea Premium Index on March 16 reached its highest level since May 2021, reaching 10.88%.

This means that the price of Bitcoin in South Korea was around 10% higher than the global spot price.

In 2017, FTX founder Sam Bankman-Fried saw an arbitrage opportunity in the price gap between different exchanges. The CEO of failed crypto exchange FTX was convicted last week of crypto fraud and sentenced to 25 years in prison.

As a quantitative trader in 2017, he noticed that bitcoin’s price spread could sometimes be as high as 60%. The arbitrage opportunity was particularly attractive in South Korea, where prices there were significantly higher than in other countries.

He then launched his proprietary trading company Alameda Research to begin trading the digital currency full time, in some cases raking in a million dollars a day.

In 2022, the then-30-year-old billionaire told CNBC that he was attracted to the industry because the vast arbitrage opportunities seemed “too good to be true.”

Bitcoin frequently trades at a higher price in South Korea than in other markets, according to a University of Calgary study.

While the average kimchi premium was 4.73% between January 2016 and February 2018, it reached levels of up to 54.48% in January 2018, according to the report released in 2019.

Why is there a price gap?

This happens because cryptocurrencies, unlike stocks or bonds, are decentralized digital assets that use blockchain technology that is not controlled by a central authority and therefore can be traded at different prices around the world.

One factor behind the price gap is the high demand for cryptocurrencies in South Korea, in what has sometimes been called a “closed market environment.”

To prevent money laundering in cryptocurrency trading, the country’s Financial Services Commission has implemented what is known as a “real name” policy, requiring that the name of the trading account of A person’s national virtual assets correspond to the name of their deposit account at a bank.

Only South Korean nationals or foreigners with a resident registration card are allowed to open full-fledged bank accounts in the country, blocking overseas access to its domestic crypto exchanges.

“South Korea requires a specific type of bank account linked to an individual in order to open a crypto exchange account, making it difficult for institutional players to enter the crypto market,” the platform said of Chainalysis crypto data in a 2023 report.

Bitcoin prices in South Korea are higher than other global exchanges as demand is mainly driven by retail investors as institutional and foreign investors cannot participate freely.

Chainalysis added that South Korea received a total crypto value of over $111.82 billion from July 2022 to June 2023 – the highest amount of any East Asian country, even surpassing the Japan and China, the largest economies in the region.

The report also notes 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.

The kimchi bounty may appear to be an arbitrage opportunity, but it’s not that simple.

In theory, an investor can buy bitcoin on an international exchange at a lower price, transfer the cryptocurrency to a South Korean bitcoin exchange at a higher price, and make a risk-free profit by selling it on the South Korean exchange. Korean.

However, the fact that the South Korean won is regulated makes this arbitrage strategy difficult for international investors, explained Baik Seunghoon, country manager for South Korea at crypto mining company GoMining.

He stressed that the won is a highly regulated currency and transfers of won outside the country are tightly controlled.

Citing South Korea’s capital controls, Baik pointed out that so-called “small overseas remittance agencies” are only allowed to send up to $10,000 per transaction per individual, up to to a cumulative amount of $100,000 for the same person per year.

This means that there is a limit to the amount of fiat currency that can be withdrawn, which, by extension, limits the rate of winnings that traders can cash out.

This arbitrage strategy also presents other risks, according to a University of Calgary study.

First, transferring bitcoin from a foreign exchange to a South Korean exchange takes time, and during this time the price of bitcoin might change.

Checks by CNBC revealed that transfers can take between an hour and a day for cryptocurrencies to be transferred to an external wallet.

This means that investors run the risk of the kimchi premium decreasing or disappearing completely during the time it takes to execute the arbitrage transaction.

Paul Brody, global blockchain leader at EY, told CNBC that while the kimchi bounty has been around for a while, he believes it is more difficult to conduct arbitrage operations today than in the past .

“What’s different now is that in many other parts of the world it’s increasingly difficult to send money via blockchain without doing KYC,” Brody pointed out. He was referring to the know-your-customer process, whereby the identity of customers must be verified by financial institutions in order to mitigate financial crime.

Additionally, he said regulatory-compliant exchanges will limit an investor’s ability to send money overseas unless the investor has the necessary documentation and regulatory support.

In short, the reality is that time, fees and capital controls can introduce complications, making exploiting this strategy either less attractive or downright unviable.

— CNBC’s MacKenzie Sigalos and Kate Rooney contributed to this report.