Authors: Jay Jo & Yoon Lee
Translated by: Felix, PANews
Key points:
Korea's cryptocurrency market has gained global attention due to high trading volumes and wide participation. In the first quarter of this year, trading volumes in KRW surpassed those in USD.
This has led to a phenomenon known as the 'kimchi premium', representing the price differences between global and Korean exchanges, manifesting in various forms.
The kimchi premium results from domestic investors making large purchases in a constrained market environment. It serves as a meaningful indicator for understanding the Korean market.
1. Introduction
The Korean crypto market has gained attention for its active investor participation and high trading volumes, with approximately 7.78 million users on Korean exchanges (about 15% of Korea's total population). This enthusiasm extends to the global market. In the first quarter of 2024, the global trading volume of KRW exceeded that of USD, continuing to outperform other fiat currencies in subsequent quarters.
The enthusiasm for cryptocurrencies in the Korean market is reflected in a unique phenomenon: the 'kimchi premium'. This is a major characteristic of the Korean market, reflecting the price differences between domestic exchanges and international exchanges. Premiums typically exhibit high volatility and vary with market conditions. This report explores the causes and forms of the kimchi premium to reveal the unique dynamics of the Korean crypto market.
2. Reasons for the existence of the kimchi premium
The main reasons for the existence of the kimchi premium are: the high participation of Korean investors in the crypto market and the constrained market environment leading to inefficiencies.
2.1. Enthusiasm of Korean investors for cryptocurrencies
A key factor behind the kimchi premium is the proactive risk-taking behavior of Korean investors. They show strong interest in high-risk investments, even in traditional markets. Investment in leveraged ETFs with a volatility of three times has surged from $190 million in 2020 to $5.8 billion in 2023. This aggressive tendency also influences the Korean crypto market.
The aggressive investment tendencies of Korean investors are more pronounced in the crypto market. Compared to the KOSPI (Korea Composite Stock Price Index) and KOSDAQ (KOSDAQ, Korea's startup board), cryptocurrencies exhibit higher volatility, creating more profit opportunities. In the first half of 2024, the average MDD (Maximum Drawdown) of cryptocurrency assets was about 70%, while the MDD for KOSPI and KOSDAQ was around 10%. Data from trading volumes on Coinbase and Upbit show that Korean investors have a clear preference for low-market-cap, highly volatile altcoins.
2.2. Market constraints lead to market inefficiencies
Another reason for the kimchi premium is that the Korean crypto market is constrained and structurally inefficient. This inefficiency is primarily reflected in three aspects:
First, domestic cryptocurrency exchanges in Korea adopt a decentralized structure. Each exchange has its own liquidity pool, unlike centralized systems such as NASDAQ or the S&P. This setup disperses liquidity and reduces the efficiency of individual exchanges. To improve this situation, some exchanges connect their liquidity pools with others to create a better trading environment.
The second reason is the access restrictions of domestic exchanges. Only citizens who meet specific criteria can use these platforms: they must 1) reside in Korea, 2) possess a local phone, 3) hold a verified real-name bank account.
Finally, regulatory restrictions are also impacting the market. Although cryptocurrencies are not defined under the (Foreign Exchange Act), large transactions utilizing the kimchi premium have faced prosecution. Regulators plan to define crypto assets and operators in the (Foreign Exchange Act), which will further limit the transfer of crypto assets between local and international exchanges.
These limitations regarding liquidity, access, and regulation reduce arbitrage opportunities and exacerbate structural inefficiencies.
3. Various forms of kimchi premium
The two factors mentioned above are key reasons for the kimchi premium, but they do not fully capture its uniqueness. The kimchi premium is the result of multiple factors working together. The market structure, regulatory environment, and investment culture vary in their influence on the market at different times.
This article primarily studies three types of kimchi premiums. The first is the kimchi discount, where prices are lower than those on global exchanges. The second is individual kimchi premiums, which arise from unusual price fluctuations of specific cryptocurrencies. The third is based on Gaduri Pumping, a unique phenomenon in the market.
3.1. Kimchi discount
Due to active participation from investors, Korean domestic cryptocurrency exchanges often exhibit higher premiums, but this is not always the case. As crypto assets can still flow between global and local exchanges, premiums gradually diminish. Changes in domestic investor sentiment may also convert premiums into discounts.
Recent changes in the kimchi premium can be attributed to three main reasons. First, the long-term slump in cryptocurrency prices has led to massive sell-offs by investors, reducing buying interest. Data from domestic exchanges in Korea reflect this trend, with an increase in won deposits and a decrease in average daily trading volume.
The second factor is the recent slight increase in cryptocurrency prices after a long decline, which may lead to more profit-taking. As the number of holders of bitcoin, ethereum, and major altcoins on Bithumb decreases, the premium has also turned into a discount. Finally, some analysts believe that due to the implementation of the (Virtual Asset User Protection Act), sentiment in the domestic market has cooled.
External factors also play a role. In late January 2021, as domestic investors turned their attention to GameStop (GME) stocks, the bitcoin kimchi discount reached about 5%. During that week, Korean investors traded $1.58 billion in GameStop stocks. This illustrates how the kimchi premium is influenced by the 'attention economy', with fluctuations driven by investor interest.
3.2. Individual kimchi premiums
The kimchi premium represents the price differences between major cryptocurrencies like bitcoin and ethereum across global and local exchanges. Most cryptocurrencies maintain premiums within a certain baseline range. However, under conditions of surging buying interest, certain factors can drive some cryptocurrencies higher. A common example is the initial price surge during an exchange listing, often referred to as the 'listing beam'. This initial spike also appears in global exchanges like Binance, but tends to be more extreme and volatile in Korea.
A typical example is AVAIL, which was listed on Bithumb in July 2024. Shortly after its listing, Avail attracted a lot of attention, and its kimchi premium surged to about 1,255%.
However, as trading volumes stabilize, the premium has returned to a typical level of around 3%. This example illustrates how early trading peaks may slow down with increasing supply.
The kimchi premium also appears in fiat-backed stablecoins like USDT and USDC. When USDC was first listed on Bithumb, its trading price was 165% higher than the KRW to USD exchange rate due to initial strong buying interest. Although this premium fluctuates, it is typically higher than the KRW to USD exchange rate, occasionally surging. These price differences may be caused by automated trading and misunderstandings among retail investors, resulting in temporary premiums.
3.3. Gaduri Pumping premium
Gaduri Pumping premiums occur when exchanges suspend withdrawals and deposits for cryptocurrencies. This restriction allows certain participants to exploit reduced liquidity by artificially inflating prices. Some retail investors also see this as an investment opportunity, further driving up the premium rapidly.
Gaduri Pumping premiums are not limited to deposit and withdrawal suspensions due to network upgrades; they can also occur under bearish conditions. In August 2023, during the CurvedAoToken ($CRV) incident, a security vulnerability led to the suspension of deposits and withdrawals, but a 700% price premium appeared on local exchanges. This pattern often recurs during hacking attacks or other significant disruption events.
Some believe that certain entities use APIs to achieve circular trading and street pumping through alias accounts. Evidence continues to mount. The Financial Intelligence Unit (FIU) has found numerous elderly users engaged in automatic trading from the same overseas IP address. Despite the (Virtual Asset User Protection Act), such activities persist. Recently, similar patterns have appeared in cryptocurrencies like WoNetwork (WOO), LumiWave (LWA), and Radiant Capital (RNDT).
4. Reflections on the kimchi premium
The kimchi premium is a unique aspect of the Korean crypto market driven by multiple factors. It represents more than just price differences. Market structure, investor sentiment, and a constrained trading environment all contribute to this phenomenon. While this article emphasizes the main factors, other aspects also play a role. Fully explaining the kimchi premium remains challenging, as there is no single rule or pattern that applies.
For example, in the second half of 2024, the kimchi premium remained relatively stable and low, possibly due to an increase in the ratio of Korean investors using overseas exchanges. In the first half of 2024, the number of days with a kimchi premium above 5% was approximately 5.6 times that of the second half of 2023. This trend indicates that many investors are shifting their assets overseas to profit from potential price differences. According to the (Foreign Exchange Act), outbound remittances of over 1 million won to overseas operators reached about 52 trillion won, more than double that of the second half of 2023.
However, these individual factors do not fully explain the kimchi premium. As economist Keynes described, the 'animal spirits' arise from the various uncertainties and irrational behaviors of market participants. A recent example illustrates this complexity: the price of the CARV token on Upbit was lower than on other exchanges like Bithumb and Bybit.
So how should we view this unique phenomenon of the kimchi premium? Rather than seeing it as an anomaly, it should be regarded as a valuable market indicator. Price premiums in the crypto market are not exclusive to Korea. In other countries, premiums can also emerge for various reasons based on local market conditions. For example, Coinbase in the US exhibits premiums due to institutional investor interest. In Turkey, as the currency depreciates, people turn to alternative assets, leading to the emergence of premiums. Similar patterns have been observed in Japan, Europe, and elsewhere.
Thus, the kimchi premium can serve as an indicator reflecting the unique market environment of different regions. Korea is particularly notable for its constrained trading environment and strong retail investor sentiment. The premium reflects the level of retail interest and capital inflow into the market. It provides valuable insights into the characteristics of the Korean market, which may help predict cryptocurrency trends. However, speculative trading can sometimes lead to the kimchi premium, resulting in price distortions that may not reflect genuine market interest.
Related reading: Opinion: Three changes anticipated in the virtual asset market after the Korean National Assembly elections