Arbitrage is an infamous word in the realm of trading. The cunning traders have utilised it for centuries to create value by exploiting inconsistent market prices. While arbitrage has been all but abolished from conventional forex trading and stock markets, this practice is alive and well in the crypto sector.
This article delves into one of the most fascinating cases of crypto arbitrage, called the Kimchi premium. Found in the South Korean market, this unique arbitrage method is a great case study for showcasing the massive impact of laws and regulations on the crypto market.
What is a Kimchi Premium?
Named after a delicious Korean meal, the Kimchi premium was coined by South Korean traders to signify the unique arbitrage opportunity in this market. The Kimchi premium opportunity was first presented in 2015 when traders realised that Bitcoin and other cryptos traded at considerably higher rates on the South Korean exchanges. This unusually high price difference was caused by the South Korean government's stringent approach to monitoring the capital inflow and outflow from the country's economy.
To further visualise this concept, let's take a look at the price charts of Bitcoin on the South Korean market compared to the international trading average. The Kimchi premium chart showcases that Bitcoin's price is almost always greater on the Korean crypto exchange. However, Kimchi's premium is not limited to Bitcoin, as the Korean market has higher demands for other flagship cryptos.
How South Korean Exchange Makes Kimchi Premium Possible
In simple terms, South Korean regulations effectively create a closed-out economy from the rest of the world. The government closely monitors the domestic markets and ensures that South Korean investors stay isolated from international exchanges and that the country's domestic money stays within the confines of South Korea. While other countries also employ similar trade regulations on their domestic markets, South Korea's measures are the most restrictive.
Thus, the Korean government has created a standalone trading market within the domestic boundaries. The demand and supply for tradable assets in Korea differs from the rest of the world, as it has not been assimilated into international exchanges. Therefore, the Korean market presents one of the last great opportunities to conduct massive arbitrage in cryptocurrency trading.
Explaining the Crypto Arbitrage
But what is arbitrage, exactly? Arbitrage refers to identifying a price gap between exchange markets and making profits by buying low and selling high. For example, suppose trader X finds that Bitcoin is worth 10 Ethers in one market and 12 Ethers in the other. To reap profits, trader X must purchase Bitcoin in the first market and immediately sell it in the other. In the end, trader X will pocket the difference of 2 Ethers without any losses on their part.
Naturally, the arbitrage practice is mostly illegal on the international market and impossible due to international laws. Most conventional asset markets like Fiat, stocks and securities have already standardised the prices worldwide. Thus, it is no longer possible to reap profits from buying and selling the same asset on different foreign exchanges.
However, the crypto markets and exchange platforms are far from reaching the same equilibrium, presenting lucrative arbitrage opportunities. The Kimchi premium is one of the most prominent examples in this niche, thanks to the strict regulations set by the South Korean government.
Understanding the Kimchi Premium Arbitrage
So, how is Kimchi premium arbitrage possible if the Korean government restricts international capital movements? The answer is the decentralisation and anonymity of blockchain. Unlike conventional markets, tracking or restricting the capital movements on the blockchain networks is currently impossible. Thus, despite Korea's best efforts, their crypto market remains open for international traders, creating one of the few remaining arbitrage opportunities with a considerably high premium.
Kimchi arbitrage remains a viable option for international traders even in 2023. However, it is far from easy to execute. While not strictly illegal or impossible, the Kimchi swap requires much effort from the arbitrage traders. The biggest challenge is entering the Korean crypto market and finding the correct channels to conduct arbitrage. Although there are several guidelines online, becoming a Kimchi arbitrage trader requires having a trustworthy network of partners in the domestic Korean market.
It is also important to remember that Kimchi premium is not always lucrative. In recent years, the Kimchi premium has witnessed considerable drops, sometimes equaling the international average of Bitcoin and altcoins. However, the demand for cryptos in the Korean market remains strong due to political reasons. South Korea is widely known to be treading dangerous waters with its closest neighbour, North Korea.
The tensions are always high in this region, and the general public demand for cryptocurrencies is consistently higher than the international average. Thus, Kimchi arbitrage is still very feasible and lucrative for experienced investors with the expertise to conduct this tricky exchange.
How Can You Capitalise On the Kimchi Premium?
While the Kimchi premium presents exciting opportunities, capitalising on this phenomenon is easier said than done. Due to strict governmental supervision, South Korean traders are isolated from the rest of the world. In some cases, conducting Kimchi arbitrage might get them in trouble, as the government has introduced new laws regarding illegal foreign transactions.
Thus, the biggest roadblock to conducting Kimchi arbitrage is finding the right players in the South Korean market. Also, it is essential to perform Kimchi arbitrage with the assistance of automated trading tools. Bitcoin and other altcoins are quite volatile, and even a slight delay in the foreign exchange might offset the Kimchi premium. So, capitalising on Kimchi premium is about identifying trustworthy channels and executing the arbitrage trades in the shortest possible window.
Can South Korea Support Kimchi Premium in The Long Term?
The South Korean government is trying to eradicate the Kimchi premium with numerous money laundering and illegal transaction laws. However, blockchain's decentralised and anonymous nature makes this task almost impossible. Thus, it is likely that the Kimchi premium will be available in the foreseeable future.
Moreover, South Korea's increased interest in crypto isn't going anywhere as political tensions rise. So, for now, the unique combination of restrictive regulations and above-average crypto demand on the Korean market promises to support the Kimchi premium, barring any unforeseen developments.
Final Takeaways - The Curious Case of Kimchi Premiums
Crypto arbitrage is a dying breed. The biggest crypto exchange platforms and regulatory bodies are working together to eradicate the price gap between different markets completely. However, South Korea's unique financial and political situation has created a fascinating exception to this trend. While challenging, Kimchi premiums are still very profitable for crypto traders. It will be interesting to see whether this outlier phenomenon will endure or be eliminated from the rest of the arbitrage market.
