Kimchi Premium: Key Features and Reasons of the Korean Crypto Market

Original Title: "Kimchi Premium: Key Traits and Causes in Korea's Crypto Market"

Authors: Jay Jo & Yoon Lee

Compiled by: Felix, PANews

Key Points:

• Korea's crypto market has garnered global attention due to its high trading volume and broad participation. In the first quarter of this year, the global trading volume of cryptocurrencies in Korean won surpassed that of the US dollar.
• This has led to a phenomenon known as the "Kimchi Premium," which represents the price differences between global and Korean exchanges and manifests in various forms.
• The Kimchi Premium is the result of domestic investors making large purchases in a limited market environment. It serves as a meaningful indicator for understanding the Korean market.

1. Introduction

The Korean crypto market has attracted attention due to active investor participation and high trading volumes, with approximately 7.78 million users on Korean exchanges (about 15% of the total population). This enthusiasm extends to the global market. In the first quarter of 2024, the global trading volume of the Korean won (KRW) exceeded that of the US dollar (USD) and continued to outperform other fiat currencies in the following quarters.

The enthusiasm for cryptocurrencies in the Korean market is reflected in a unique phenomenon: the "Kimchi Premium." This is a significant feature of the Korean market, reflecting the price differences between domestic exchanges and international exchanges. The premium is often highly volatile and changes with market conditions. This report explores the causes and forms of the Kimchi Premium to reveal the unique dynamics of the Korean crypto market.

2. Reasons for the Existence of the Kimchi Premium

The reasons for the existence of the Kimchi Premium can be primarily attributed to two factors: the high participation of Korean investors in the crypto market and the inefficiencies caused by a constrained market environment.

2.1. Korean Investors' Enthusiasm for Cryptocurrencies

A key factor behind the Kimchi Premium is the active risk-taking behavior of Korean investors. They show a strong interest in high-risk investments, even in traditional markets. Investments in leveraged ETFs with a volatility of three times have surged from $190 million in 2020 to $5.8 billion in 2023. This aggressive tendency also influences the Korean crypto market.

The aggressive investment tendency of Korean investors is more pronounced in the crypto market. Compared to KOSPI (Korea Composite Stock Price Index) and KOSDAQ (Korea's startup board market), cryptocurrencies exhibit higher volatility, creating more profit opportunities. In the first half of 2024, the average MDD (Maximum Drawdown) of crypto assets was about 70%, while the MDD for KOSPI and KOSDAQ was around 10%. Data from Coinbase and Upbit shows that Korean investors clearly prefer low-market-cap, highly volatile altcoins.

2.2. Market Inefficiencies Due to Constrained Environment

Another reason for the Kimchi Premium is the constrained and structurally inefficient nature of the Korean crypto market. This inefficiency is primarily reflected in three aspects:

First, domestic crypto exchanges in Korea adopt a decentralized structure. Each exchange has its own liquidity pool, unlike centralized systems such as NASDAQ or S&P. This setup disperses liquidity and reduces the efficiency of individual exchanges. To improve this situation, some exchanges connect their liquidity pools with others to create a better trading environment.

The second reason is the access restrictions on domestic exchanges. Only citizens who meet specific criteria can use these platforms: they must 1) reside in Korea, 2) have a local phone, and 3) hold a verified real-name bank account.

Finally, regulatory restrictions also impact the market. Although cryptocurrencies are not defined in the Foreign Exchange Act, large transactions utilizing the Kimchi Premium have faced lawsuits. Regulators plan to define crypto assets and operators in the Foreign Exchange Act, which will further restrict the transfer of crypto assets between local and international exchanges.

These limitations on liquidity, access, and regulation reduce arbitrage opportunities and exacerbate structural inefficiencies.

3. Various Forms of the Kimchi Premium

The two factors mentioned above are key reasons for the Kimchi Premium, but they do not fully capture its uniqueness. The Kimchi Premium is the result of multiple factors working together. Market structure, regulatory environment, and investment culture influence the market differently at various times.

This article primarily examines three types of Kimchi Premium. The first is the Kimchi Discount, where prices are lower than those on global exchanges. The second is the individual Kimchi Premium, caused by abnormal price fluctuations of specific cryptocurrencies. The third is based on Gaduri Pumping, a unique phenomenon in the market.

3.1. Kimchi Discount

Due to active participation from investors, domestic crypto exchanges in Korea often experience high premiums, but this is not always the case. Since crypto assets can still flow between global and local exchanges, the premium gradually disappears. Changes in domestic investor sentiment can also convert the premium into a discount.

Recent changes in the Kimchi Premium can be attributed to three main reasons. First, the prolonged slump in cryptocurrency prices has led to massive sell-offs by investors, reducing buying interest. Data from domestic exchanges reflects this trend, with an increase in KRW deposits and a decline in daily trading volume.

The second factor is a slight recent increase in cryptocurrency prices after a long decline, which may lead to more profit-taking. As the number of Bitcoin, Ethereum, and major altcoin holders on Bithumb decreases, the premium turns into a discount. Finally, some analyses suggest that the implementation of the "Virtual Asset User Protection Act" has cooled market sentiment in Korea.

External factors also play a role. In late January 2021, as domestic investors shifted their attention to GameStop (GME) stocks, the Kimchi discount for Bitcoin reached about 5%. During that week, Korean investors traded $1.58 billion in GameStop stocks. This illustrates how the Kimchi Premium is influenced by the "attention economy," with fluctuations driven by investor interest.

3.2. Individual Kimchi Premium

The Kimchi Premium represents the price differences between major cryptocurrencies like Bitcoin and Ethereum on global and local exchanges. Most cryptocurrencies maintain their premiums within a certain benchmark range. However, under conditions of surging buying interest, certain circumstances may drive some cryptocurrencies higher. A common example is the initial price surge during an exchange listing, often referred to as the "listing beam." This initial spike also occurs on global exchanges like Binance but tends to be more extreme and unstable in Korea.

A typical example is AVAIL, which was listed on Bithumb in July 2024. Shortly after its listing, Avail attracted significant attention, with its Kimchi Premium soaring to about 1,255%.

However, as trading volume stabilized, the premium returned to a typical level of around 3%. This example illustrates how early trading peaks can slow down as supply increases.

The Kimchi Premium also appears in fiat-backed stablecoins like USDT and USDC. When USDC was first listed on Bithumb, its trading price was 165% higher than the KRW to USD exchange rate due to strong initial buying interest. Although this premium fluctuates, it typically remains above the KRW to USD exchange rate and occasionally spikes. These price differences may be caused by automated trading and misunderstandings among retail investors, resulting in temporary premiums.

3.3. Gaduri Pumping Premium

The Gaduri Pumping Premium occurs when exchanges suspend deposits and withdrawals of cryptocurrencies. This restriction allows certain participants to artificially inflate prices by taking advantage of reduced liquidity. Some retail investors also perceive this as an investment opportunity, further driving the rapid increase in premiums.

The Gaduri Pumping Premium is not limited to deposit suspensions due to network upgrades; it can also occur in bearish situations. In August 2023, the CurvedAoToken ($CRV) experienced a 700% price premium when a security vulnerability led to the suspension of deposits and withdrawals. This pattern often recurs during hacker attacks or other major disruption events.

Some believe that certain entities use APIs to achieve circular trading and street pumping through alias accounts. Evidence is continually emerging. The Financial Intelligence Unit (FIU) has discovered numerous cases of elderly users conducting automated trading from the same overseas IP address. Despite the "Virtual Asset User Protection Act," such activities continue. Recently, similar patterns have appeared in cryptocurrencies like WoNetwork (WOO), LumiWave (LWA), and Radiant Capital (RNDT).

4. Reflections on the Kimchi Premium

The Kimchi Premium is a unique aspect of the Korean crypto market, driven by multiple factors. It represents more than just price differences. Market structure, investor sentiment, and a constrained trading environment all contribute to this phenomenon. While this article emphasizes the main factors, other elements also play a role. Fully explaining the Kimchi Premium remains challenging, as there is no single rule or pattern that applies.

For instance, in the second half of 2024, the Kimchi Premium was relatively stable and low, possibly due to an increased rate of Korean investors using overseas exchanges. In the first half of 2024, the number of days with a Kimchi Premium above 5% was about 5.6 times that of the second half of 2023. This trend indicates that many investors are transferring assets overseas to profit from potential price differences. According to the "Travel Regulations," outbound remittances of over 1 million KRW to overseas operators reached about 52 trillion KRW, more than double that of the second half of 2023.

However, these individual factors do not fully explain the Kimchi Premium. As economist Keynes described, "animal spirits" arise from various uncertainties and irrational behaviors of market participants. A recent example illustrates this complexity: the price of CARV tokens on Upbit was lower than on other exchanges like Bithumb and Bybit.

So how should we view the unique phenomenon of the Kimchi Premium? Rather than seeing it as an anomaly, it can be regarded as a valuable market indicator. Price premiums in the crypto market are not unique to Korea. In other countries, premiums can arise for different reasons based on local market conditions. For example, Coinbase in the US experiences premiums due to institutional investor interest. In Turkey, as the currency depreciates, people turn to alternative assets, leading to premiums. Similar patterns have been observed in Japan, Europe, and elsewhere.

Thus, the Kimchi Premium can serve as an indicator reflecting the unique market environments of various regions. Korea is particularly noteworthy due to its constrained trading environment and strong retail investor sentiment. The premium reflects the level of retail interest and market capital inflow. It provides valuable insights into the characteristics of the Korean market and may help predict trends in cryptocurrencies. However, speculative trading can sometimes lead to the Kimchi Premium, resulting in price distortions that may not reflect genuine market interest.