Written by: Victor Ramirez, Coin Metrics
Compiled by: Luffy, Foresight News
Key Points:
During a brief period of political turmoil in South Korea, the 'kimchi premium' phenomenon reemerged. At its peak, the trading price of Bitcoin approached $115,000.
Cryptocurrency trading shows strong regional differences across exchanges and assets.
Since the beginning of this year, on-chain activity of established altcoins has significantly increased, especially tokens that primarily trade in Asia and have become targets of enforcement actions by the U.S. Securities and Exchange Commission.
Introduction
Broadly speaking, cryptocurrencies are considered a borderless, always-open market. Although the underlying technology of cryptocurrencies does not depend on your geographical location, various markets are sensitive to regional patterns, regulatory characteristics, and the preferences of residents around the world.
In this week's (Network Status), we will take the South Korean market as an example to explore the regional and geographical characteristics of cryptocurrency trading activity. Using time zone data, we can observe the localization characteristics of various cryptocurrency exchanges and assets. Finally, we will provide the latest status of on-chain activity for various altcoins.
Capital controls lead to kimchi premium
"Kimchi premium" is an interesting case of special market behavior occurring in specific regions. The kimchi premium refers to the difference between the price of cryptocurrencies traded in the South Korean market and the global 'reference' price. The kimchi premium is mainly due to strong demand for crypto assets in a closed market environment, as well as the efficiency of these markets being reduced over the years due to strict regulations and difficulties in international arbitrage.
While there may be apparent arbitrage trading opportunities, local regulations make it difficult for foreigners and institutional investors to profit from them. Capital controls on the Korean won restrict the inflow and outflow of fiat currency to South Korean exchanges. According to the law, only South Korean nationals or foreign residents holding a resident card can trade through South Korean exchanges. Additionally, foreign exchanges face stricter regulations compared to domestic exchanges. Koreans must first purchase cryptocurrencies from domestic exchanges before transferring them to foreign exchanges. These conditions collectively restrict the flow of Korean capital within the system.
Lastly, banking channels result in a slow response to any arbitrage opportunities. Moving funds from banks to exchanges may take several hours, sometimes even up to a day, by which time the arbitrage opportunity may have already vanished.
The kimchi premium has a detailed record in the history of cryptocurrencies and began to gain attention at the end of 2017.
Data Source: Coin Metrics
During the peak of the 2017-2018 bull market, the kimchi premium persisted. At that time, market trading volume was low, leading to significant spreads. Notably, FTX's sister trading company Alameda Research began exploiting this regulatory arbitrage from 2017 onwards and became one of the largest cryptocurrency trading companies at the peak.
Data Source: Coin Metrics
In the bull market of 2021, we once again observed the continued presence of the kimchi premium, but to a lesser extent and with lower frequency compared to 2017. The Korean exchange Upbit's KRW-Bitcoin market was highly volatile, with discounts during the May 2021 flash crash reaching up to 12.5%.
Data Source: Coin Metrics
The market has steadily grown over time, and today the kimchi premium phenomenon has virtually disappeared, although there are some exceptions. The kimchi premium even pushed Bitcoin prices in certain Korean markets above $100,000, two weeks ahead of the global market's overall Bitcoin price breaking $100,000. On December 3rd, South Korean President Yoon Suk-yeol announced martial law, and the kimchi premium reemerged. According to Coin Metrics' 1-minute reference quotes, the premium reached as high as 20%, with Bitcoin's price approaching $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 has made the market vulnerable to liquidity shocks, leading to price instability.
Cryptocurrency trading exhibits strong regional characteristics
Regionality of Cryptocurrency Exchanges
Although blockchains themselves are permissionless, cryptocurrency exchanges remain a necessary intermediary for the vast majority of market participants. The cryptocurrency market is global, but each exchange must comply with local regulations to provide services to users in a specific country. Given the varying levels of regulation worldwide, trading activity at cryptocurrency exchanges is concentrated in a few geographic regions. Very few exchanges truly operate without borders.
We can use this knowledge about local legal restrictions, as well as known user preferences in specific regions and metrics derived from market data, to understand the distribution of trading activity around the world. The following chart shows the share of trading activity for specific exchanges across different time zones.
Each row represents an exchange, and each column represents the spot trading volume of that exchange during peak hours in a certain time zone: from 9 AM to 5 PM. The value in each cell compares the average trading volume of the exchange in a given time zone to its average hourly trading volume. The last column shows the average hourly trading volume for each exchange. For example, Binance's trading volume in East Asian time zones was 12.1% lower than its average of $802 million, but its trading volume in European time zones increased by 19.4%.
Data Source: Coin Metrics
As expected, we see that the trading volume indices for Korean exchanges Bithumb and Upbit, as well as Japanese exchanges Bitbank and Bitflyer, tend to align with East Asian time zones. Upbit only provides services in East Asian markets such as South Korea and Singapore. In fact, it is illegal for anyone in the U.S. to trade on Upbit. Assuming that trading activity from Upbit users outside East Asia can be disregarded, we can use trading activity outside East Asian time zones as a baseline for non-peak trading activity.
Due to the overlap between European and U.S. time zones, it is difficult to distinguish activity in specific regions, but trading activity still exhibits significant characteristics. Kraken is a U.S. exchange, but its trading activity during EU time zones slightly exceeds that during U.S. time zones.
Overall, we see that most exchanges are overly reliant on U.S. trading hours. Coinbase, Gemini, and Crypto.com show the highest preferences for U.S. trading hours, at 36.1%, 57.3%, and 37.1%, respectively. Interestingly, Bullish is illegal in the U.S. but shows a strong preference for Eastern time (38.6%).
Regionality of Asset Trading
Data Source: Coin Metrics
We can apply the same approach to the trading volume of assets across all exchanges. Similar to the classification of exchanges, most asset trading activity still occurs in the EU/U.S. time zones. Bitcoin, Ethereum, and USDC indices particularly align with U.S. time zones.
Compared to other cryptocurrencies, Ripple, Tron, Stellar, and Cardano perform better during East Asian time zones. Koreans have shown a keen interest in XRP, while Tether on Tron is the most widely used stablecoin in Asia.
Time zone analysis is clearly limited by longitude, so we cannot rely on it alone. We also need to rely on known user preferences. Bitso's (Latin America's cryptocurrency landscape) and (Stablecoins: The Emerging Market Story) indicate that residents of Latin America have a strong preference for stablecoins, particularly Tether, which provides an attractive and stable alternative to inflationary currencies. On the other hand, Tether's solvency is under scrutiny by U.S. regulators, although it remains compliant and continues to serve U.S. users. While we see USDT activity concentrated in U.S. time zones, its trading volume may come more from South America rather than North America.
We can take it a step further and directly look at the on-chain transfer value of assets.
Data Source: Coin Metrics
The results in the above table are consistent with what we learned from previous articles, where we observed different time preference patterns for on-chain activity of several assets. The on-chain transfer values for Bitcoin, Ethereum, and USDC tend to favor the EU/U.S. time zones, aligning with trading volume.
Tether's on-chain activity differs slightly from its off-chain activity. On-chain activity for USDT peaks significantly during EU time zones at +46.4%, while off-chain activity at exchanges is +17.8%. During U.S. time zones, Tether's trading at exchanges shows a deviation of +15.5%, while on-chain activity shows a deviation of -5.6%.
This aligns with the regional differences in stablecoin preferences observed in our article (From East to West: The Global Pulse of Stablecoin Transactions).
On-chain activity: The frenzy of established altcoins
In recent weeks, the prices of established altcoins from 2017 and 2021 have risen significantly. XRP, TRX, and ADA have performed quite well, but does the price increase correspond to more on-chain activity?
We examined the on-chain metrics of these chains and compared them across different networks. Different blockchains account for transactions differently, so we standardized the on-chain metrics using percentage growth rates from early 2024.
Source: Coin Metrics
Overall, network activity across several chains is increasing. When measuring transaction volume and active addresses, Ripple (XRP) shows the largest increase in activity. We also see an increase in transaction volume for Cardano (ADA) and Tron (TRX). Thus, there are some notable similarities between assets with the largest increases in price and on-chain activity:
As we have seen above, these tokens have a strong regional preference in East Asia compared to Bitcoin and Ethereum. Many of them have been deemed securities by the current U.S. Securities and Exchange Commission (SEC).
Traders may be vying for the Trump administration's comprehensive tolerant policy towards cryptocurrencies, with Paul Atkins, recently appointed as the chairman of the U.S. Securities and Exchange Commission, considered to have a 'friendly' attitude towards cryptocurrencies. Of course, when Gensler was initially appointed, the cryptocurrency industry also viewed him as friendly.
Conclusion
In this article, we focus on the differences in the performance of the cryptocurrency market around the world. Local regulations (such as those we see in South Korea) strictly control the flow of capital in the market, leading to price distortions. Time zone analysis can clarify how the market expresses preferences for certain trading channels or assets in specific regions. Overall, the preferences shown by global market participants constitute the global cryptocurrency economy. Understanding the nuances of each market around the world will help guide the continued adoption of cryptocurrencies globally.
