Kimchi premium is a phenomenon occurring in South Korean crypto exchanges, making valuations appear higher than on other international exchanges.
What Is the Kimchi Premium?
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.