Kimchi premium is a phenomenon occurring in South Korean crypto exchanges, making valuations appear higher than on other international exchanges.
Kimchi premium is a phenomenon happening on South Korean cryptocurrency exchanges that makes the valuation of certain tokens higher than their valuation on other international exchanges. The kimchi premium phenomenon is potentially perceived as an advantageous point for traders in South Korea. However, in order to actually secure gains, traders need to purchase tokens like Bitcoin, for example, on an exchange outside of South Korea, and sell it on one of the Korean exchanges like Upbit and Bithumb.
There is a reason for the discrepancy between valuations on exchanges in South Korea and the rest of the world. While other tradeable commodities and assets are regulated through centralized institutions, cryptocurrency trading is decentralized by design. As blockchain technology evolves and more crypto tokens emerge, exchanges worldwide sometimes struggle to keep up with big waves of activity. Consequently, the kimchi premium phenomenon occurs.
Exploiting the differences in valuation between exchanges is not new in the crypto world. The kimchi premium phenomenon happens exclusively in South Korea; however, small differences in valuation appear in exchanges all over the world. Traders have noticed that and started gaining profit from these discrepancies. The process of trading between exchanges to make a profit from the differences in valuation is called arbitrage.
Technically, trading to exploit the kimchi premium is a form of arbitrage. However, authorities in South Korea are adamant about regulating trades on crypto exchanges and eliminate the irregularity. The government has enforced strict capital control rules that usually prevent traders from making a profit because of the kimchi premium. Other financial regulations and anti-money laundering legislation also inhibit traders from manipulating the market through the kimchi premium.
The kimchi premium was first identified as a phenomenon around the beginning of 2016. According to professors from the University of Calgary, between 2016 and 2018, the discrepancies due to kimchi premiums were the highest. Some reports show that in January 2018, the difference in pricing for one Bitcoin in South Korea and other international exchanges was about 55%. On average, the kimchi premium settles around 4.5%.
While the kimchi premium has been proven by data, there is nothing more regulators can do to control the phenomenon. As blockchains and cryptocurrencies are meant to be decentralized, enforcing rules that cover all crypto tokens is simply impossible.