Investigating the Great Korean Bitcoin Arbitrage Opportunity
For over a month now, Korean Bitcoin exchanges have seen BTC prices that are consistently higher than international exchanges Bitfinex and Bitstamp — sometimes by as much as $25.
The Bitcoin community has been in the throes of ecstasy over the past two weeks as the BTC price has soared past various resistance levels and finally broke the $300 threshold. (As of this writing, $366.) But our friends in South Korea have been living in the future since mid-September, with the price of Bitcoin on their two largest exchanges — Bithumb and Korbit — consistently more expensive than those observed on Bitfinex or Bitstamp, even during the period when the global price was still relatively sideways.
This kind of gap exists in other markets too, but the South Korean situation is atypical because it’s by no means a small or immature market. The trading volume on Bithumb (the larger of the two exchanges, with nearly twice the depth of its competitor Korbit) during the last 30 days has never dropped below 1,390BTC, with an average of about 3,000BTC (and a high of over 6,000). When you combine that figure with Korbit and the smaller retailers, it’d be easy to estimate an average of 5,000BTC trading hands every day within the republic.
Counter-intuitively, the gap appears to be widening instead of narrowing, even while the daily trading volume increases. The narrowest it has been in the last 30 days was for a short period between October 23rd and 25th, during which time the gap shrunk to “only” $5, which still represented an arbitrage opportunity of 2%.
Which brings me to the subject of this piece: where are all the arbitrage traders? Even a novice would look at this and initially dismiss it as a temporary anomaly — the kind of oddity that the market should correct very quickly — but it has instead persisted for weeks.
A closer investigation seems to point to the fact that South Korea’s anti-money laundering laws may have something to do with this. If a Korean-owned business were to attempt to buy Bitcoin in large quantities from overseas, they would be questioned and likely fined if they couldn’t properly explain the purpose of the purchase. And because Bitcoin has a “no value” in the eyes of the government, the notion that these businesses were sending millions of Korean won (or thousands of USD) overseas looks a lot like money-laundering. Even traders acting as individuals would have difficulty: citizens cannot transfer more than $50,000 in funds per year without the necessary paperwork and tax declarations.
It’s likely these same laws that are causing the huge imbalance in buy/sell pressure, and the subsequent price gap. Korean citizens and residents who want to have the ability to move their money in or out of the country without the banks getting involved are probably converting it all to cryptocurrency.
In other words, it’s possible that it’s the very nature of Bitcoin — its ability to circumvent legal restrictions — that is causing it to be so expensive in Korea.
(As an aside, China has similar capital controls but the three major Bitcoin exchanges there don’t believe that the rising price has anything to do with people circumventing those controls. Not that I don’t believe them, but it seems like a bad idea to go on record and acknowledge that folks can use crypto to circumvent the law in China.)
Regardless of the driver, the situation remains the same. How will Bitcoin find its way into Korea to meet this demand? Selling Bitcoin is easy: a foreign trader would only need to open an account with Bithumb or Korbit, and then flood the market with their cheaply-acquired coins. The arbitrage opportunity would wither overnight if enough traders did this. With a daily market volume of less than $2M, you wouldn’t even need that many people to pull it off.
The challenging part, of course, is getting your fiat back out. Operationally, getting a Korean business entity and a Korean bank account should be straightforward, especially if you have a local partner. But once you have those set up, you’re back at the original anti-money-laundering problem mentioned above.
It seems that in order for the crypto-floodgates to truly be opened for Korea, their government needs to acknowledge Bitcoin as a taxable, invoice-able asset. When and if that will ever happen remains to be seen.
And in the meantime, whoever can sort out this opportunity will be immensely rewarded.
Important disclaimer (that should go without saying, but here it is anyway):
The information published here is provided by the author as is, and does not constitute trading or business advice.
