Bitcoin ‘Kimchi premuim’ missing, vanishes again as trading range tightens

It has disappeared once again, the spread between the price of bitcoin on South Korean and U.S.-based crypto exchanges, which returned in June and hit 16-month highs

“kimchi premium,” has reached remarkable levels, peaking at 54.48%, Kimchi is a spread and measure of how much more South Koreans pay for bitcoin, according to researchers at the University of Calgary. It has then dropped and totally vanished, only to return again recently, running at around 5 to 10%.

But last week, Local newspapers as at last week began to notice that bitcoin was back to trading lower in won terms. One of the country’s major publications, ‘The Dong-a Ilbo’ reported on August 5 that bitcoin was priced just 2.15% higher in dollar markets than in won on South Korean exchanges.

The deficit still persits. On August 13, Bitcoin was trading on Upbit at 13,678,000 won and at $11,429.14, as at August 13th which translates to 13,931,951 won, a difference of 253,951 ($208). Which is about 1.8% lower.
At the end of the day on Tuesday in Korea, The gap had narrowed, but it remained at the end of the day in Korea on Tueday.

The Dong-a Ilbo believes that The end of the kimchi premium has something to do with the fall of the Korean won , citing the believes of Dong-a llbo. Since the end of July, the local currency has lost almost 3 percent of its value against the dollar.

Crypto exchanges in Korea has been facing many regulations existing in the country altogether. The authorities have recently said they are going to directly supervise the markets even as Banks also have started applying AML guidelines and local regulatory like real name accounts.

The kimchi premium is largely structural, argued by The University of Calgary researchers in an April 2019 paper which transfers between markets can take time, and this makes arbitrage difficult.
Due to the delay and the volatility of the coin, hence, profiting on the price difference is a risky trade therefore the volume of these price correcting transactions is usually too low to close the gap.

High transaction costs might also disincentive moves between the markets , according to the researchers.
Though Exchange controls in Korea is primarily administrative these days, but the do add friction and can slow the movement of funds needed to balance the arbitrage trade as well.

The researchers added in their paper :
“But then, the controls poses a good asset as they have a way of making bitcoin more attractive to people in Korea, since the coin is transnational in nature and potentially a good vehicle for bypassing the exchange controls”.

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Credit: Richard Meyer

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