Written by Victor Ramirez, Coin Metrics
Compiled by: Luffy, Foresight News
Key Takeaways:
During South Korea’s brief period of political unrest, the “Kimchi premium” phenomenon reappeared. At its peak, Bitcoin traded at nearly $115,000.
Cryptocurrency trading shows strong regional differences across exchanges and assets.
Since the beginning of the year, there has been a significant increase in on-chain activity for established altcoins, especially tokens that are primarily traded in Asia and have been the target of enforcement actions by the U.S. Securities and Exchange Commission.
introduce
Broadly speaking, cryptocurrency is considered a borderless, always-on market. While it is true that the underlying technology of cryptocurrency is agnostic to your location, individual markets are sensitive to regional patterns, regulatory peculiarities, and preferences of residents around the world.
In this week’s (State of the Network), we will explore the regional and geographic characteristics of cryptocurrency trading activity using the Korean market as an example. Using time zone data, we can observe the local characteristics of multiple cryptocurrency exchanges and assets. Finally, we will provide an update on the status of on-chain activity in various altcoins.
Capital controls lead to kimchi premium
The “Kimchi premium” is an interesting case study of peculiar market behavior occurring in a specific region. The Kimchi premium refers to the difference between the price of cryptocurrencies traded in the Korean market and the global “reference” price. The Kimchi premium is mainly due to the strong demand for crypto assets in closed market environments and the fact that years of strict regulation have reduced the efficiency of these markets due to difficulties in international arbitrage.
While this may present an obvious carry trading opportunity, local regulations make it difficult for foreigners and institutional investors to profit from it. Capital controls on the Korean won restrict the flow of fiat currency in and out of Korean exchanges. By law, only Korean nationals or foreign residents holding a residency certificate can trade through Korean exchanges. At the same time, foreign exchanges in South Korea face stricter regulations than domestic exchanges. In order for Koreans to trade cryptocurrencies on foreign exchanges, they must first purchase them from domestic exchanges and then transfer them out to foreign exchanges. Together, these conditions restrict the flow of Korean capital in the system.
Finally, banking channels make it very slow to respond to any arbitrage opportunities. It can take hours, sometimes up to a day, to transfer funds from a bank to an exchange, by which time the arbitrage opportunity may have already disappeared.
The kimchi premium is well documented in the history of cryptocurrencies and began to gain traction in late 2017.
Data source: Coin Metrics
The kimchi premium persisted at the height of the 2017-2018 bull run, when thin market volume led to wide spreads. Notably, FTX’s sister trading firm, Alameda Research, began taking advantage of this regulatory arbitrage in 2017 and became one of the largest cryptocurrency trading firms at its peak.
Data source: Coin Metrics
In the 2021 bull run, we again observed a continuation of the Kimchi premium phenomenon, but to a lesser extent and with less frequency than in 2017. The Korean won-Bitcoin market on the Korean exchange Upbit was volatile, with the discount reaching 12.5% during the May 2021 flash crash.
Data source: Coin Metrics
The market has grown steadily over time, and the kimchi premium has largely disappeared today, with some exceptions. The kimchi premium even pushed Bitcoin quotes above $100,000 in some South Korean markets, two weeks before the global market as a whole broke through $100,000. On December 3, South Korean President Yoon Seok-yeol declared martial law, and the kimchi premium resumed again. According to Coin Metrics' 1-minute reference quote, the premium reached a maximum of 20%, and the price of Bitcoin was close to $115,000.
Although the “Kimchi premium” phenomenon is now well known, strict capital controls make it difficult for overseas investors to participate in the South Korean market. This makes the market vulnerable to liquidity shocks that can cause price instability.
Cryptocurrency trading shows strong regional characteristics
Regionality of Cryptocurrency Exchanges
Although blockchain itself is permissionless, cryptocurrency exchanges are still necessary intermediaries for the vast majority of market participants. The cryptocurrency market is global, but each exchange must comply with local regulations to serve users in a certain country. Given the different levels of regulation around the world, trading activity on cryptocurrency exchanges is concentrated in a few geographic regions. Few exchanges are truly borderless.
We can use this knowledge of local legal restrictions, along with known user preferences in specific regions and metrics derived from market data to understand how trading activity is distributed around the world. The chart below shows the share of trading activity on specific exchanges in different time zones.
Each row represents an exchange, and each column represents the spot volume of that exchange during peak hours in a certain time zone: 9am to 5pm. The value of each cell is the exchange's average volume compared to its average hourly volume in a given time zone. The last column is the average hourly volume for each exchange. For example, Binance's volume during the East Asian session was 12.1% less than its average of $802 million, but it increased its volume by 19.4% during the European session.
Data source: Coin Metrics
As expected, we see that the volume index for Korean exchanges Bithumb and Upbit, and Japanese exchanges Bitbank and Bitflyer, tends to the East Asian session. Upbit only provides services in East Asian markets such as South Korea and Singapore. In fact, it is illegal for anyone in the United States to trade on Upbit. Assuming that trading activity from Upbit users outside of East Asia is negligible, we can use trading activity occurring outside of the East Asian session as a benchmark for off-peak trading activity.
As the European and US time zones overlap, it is difficult to distinguish activity in specific regions, but there are still clear patterns of trading activity. Kraken is a US exchange, but it has slightly more trading activity during the EU hours than the US hours.
Overall, we see that most exchanges over-rely on US trading hours. Coinbase, Gemini, and Crypto.com have the largest preference for US trading hours at 36.1%, 57.3%, and 37.1%, respectively. Interestingly, Bullish is not legal in the US but shows a strong preference for US Eastern Time (38.6%).
Regionality of asset transactions
Data source: Coin Metrics
We can apply the same methodology to asset volumes across all exchanges. Similar to the exchange breakdown, most asset trading activity still occurs during the EU/US session. The Bitcoin, Ethereum, and USDC indices are particularly consistent with the US session.
Ripple, Tron, Stellar, and Cardano performed better during the East Asian session compared to other cryptocurrencies. South Koreans showed strong interest in XRP, while Tether on Tron was the most widely used stablecoin in Asia.
Time zone analysis is obviously limited by longitude, so we can’t rely on it alone. We also rely on known user preferences. Bitso’s (Latin America’s Crypto Landscape) and (Stablecoins: The Story of Emerging Markets) show that Latin American residents strongly prefer stablecoins, especially Tether, which offers an attractive and stable alternative to inflationary currencies. On the other hand, Tether’s solvency is under scrutiny from US regulators, although it remains compliant and still serves US users. While we see USDT activity concentrated in US hours, its trading volume may come more from South America than North America.
We can go a step further and view the transfer value of assets directly on-chain.
Data source: Coin Metrics
The results in the above table are consistent with what we know from previous articles, where we saw that on-chain activity for several assets showed different time period preferences. The on-chain transfer value of Bitcoin, Ethereum, and USDC is biased towards the EU/US session, which is consistent with the trading volume.
Tether’s on-chain activity is slightly different from its off-chain activity. USDT’s on-chain activity reaches a clear peak in the EU session at +46.4%, while exchange off-chain activity is +17.8%. During the US session, Tether sees a +15.5% deviation when trading on exchanges, but a -5.6% deviation in on-chain activity.
This is consistent with the regional differences in stablecoin preferences we observed in our article (From East to West: the Global Pulse of Stablecoin Transactions).
On-chain activity: a carnival for established altcoins
Old altcoins from 2017 and 2021 have seen significant price increases in recent weeks. XRP, TRX, ADA, XLM prices have performed quite well, but does the price increase correspond to more on-chain activity?
We examined on-chain metrics for these chains and compared them across networks. Different blockchains account for transactions differently, so we normalized on-chain metrics using percentage growth rates at the beginning of 2024.
Source: Coin Metrics
Overall, network activity is increasing across several chains. Ripple (XRP) has seen the largest increase in activity when measuring the number of transactions and active addresses. We also saw an increase in trading volume for Cardano (ADA) and Tron (TRX). It can be seen that there are some striking similarities between the assets with the largest increases in price and on-chain activity:
As we can see above, these tokens have a strong regional bias in East Asia compared to Bitcoin and Ethereum. Many of them are currently considered securities by the U.S. Securities and Exchange Commission (SEC).
Traders may be vying for the Trump administration’s all-around tolerant policy toward cryptocurrencies, and Paul Atkins, recently appointed as chairman of the SEC, is considered “friendly” to cryptocurrencies. Of course, when Gensler was originally appointed, he was also considered friendly by the cryptocurrency industry.
in conclusion
In this article, we highlight the differences in how cryptocurrency markets behave around the world. Local regulations, such as those we see in South Korea, tightly control the flow of capital in the market, leading to price distortions. Time zone analysis can shed light on how markets express preferences for certain trading channels or assets in specific regions. Overall, the preferences shown by global market participants make up the global cryptocurrency economy. Understanding the nuances of each market around the world will help guide cryptocurrency adoption as it continues to grow worldwide.
