A new study, published in December 2022, has uncovered evidence of the South Korea’s ‘kimchi premium’- the divergence between cryptocurrency values on Korean exchanges and those on Western ones. Moreover, it suggests that an increase in international remittances to China is closely correlated with this premium.
Analyzing Overseas Payments to China, and Its Link to the ‘Kimchi Premium’
According to a study by Jangyoun Lee, Assistant professor at Incheon National University, and Taehee Oh, of The Bank of Korea, the kimchi premium was first observed in South Korea in 2016, when bitcoin was in high demand. There was a limited supply of BTC available to investors in the country, leading to the significantly higher prices on Korean exchanges compared to those on Western ones.
The authors of the study looked at financial data related to foreign remittances to China between January 2016 and May 2021. During the 2017 bitcoin bull run, they claim the premium peaked at 55%, before dropping off. However, in Q1 2021 the premium resurfaced, with the price on Korean exchanges being more than 20% higher than on Western trading platforms.
Our findings suggest that Chinese arbitrageurs used Korean financial institutions, such as bitcoin outlets, to convert virtual currencies into fiat currencies when the kimchi premium was high.
The researchers believe that the rise of the premium was partly due to events in China. For example, while China banned cryptocurrency trading, other countries, including the US, began to regulate it. This meant Chinese traders could only cash out their coins outside of the country.
South Korea Still Experiences Bitcoin Premiums in 2023
The kimchi premium is still a significant factor in the economy, even though it is no longer available at 9:00 PM ET on January 9, 2023. At that time, the cost of bitcoin on Korean exchanges Upbit and Bithumb was around $17,427 to $27,437 per unit. However, the global average price of bitcoin on coinmarketcap.com, which includes western exchanges, was $17,205. This translates to an arbitrage opportunity of around 1.35% when trading BTC on South Korean exchanges versus western ones.
Premiums were also occasionally high for bitcoin on the Japanese exchange market. In countries such as the US, Thailand, Hong Kong, Brazil, Malaysia, Philippines, and Chile, arbitrage opportunities were offered prior to local bans on in-person trading. This trend has been declining due to bitcoin liquidity in the region, but international traders can still capitalize on differences in prices between locations.
What do you think about the findings of this study on the kimchi premium and its link to Chinese remittances? Let us know your thoughts in the comments section below.
