KimChi Premium. The hidden history of cryptocurrency in Korea
This article is Part 1 in a new series we’re running about Korea — where we believe many important events for the crypto community are happening right now. Maksim Balashevich, founder of Santiment.net, just spent the past few weeks here. Impressed by the complexity of issues around cryptocurrency in this country, and the unique historical, economic and political influences here, he asked me — one of his newly found crypto friends (who is also well connected and informed in these areas :) to write this “Hidden history of cryptocurrency in Korea” series in collaboration.
First, we‘ll talk about this special Korean phenomenon where the local prices for crypto assets have been visibly higher than prices on Western or even Chinese exchanges.
This price premium is called in Korea, the “KimChi premium”.
CNN first reported about cryptocurrency fever in Korea and pointed out this “Kimchi Premium” on Dec. 12, 2017.
It hadn’t always been this way. Cryptocurrency prices between Korea and other countries were not that different in early 2017. But this difference soared up to 30% higher at the end of 2017, and finally recorded an all time high at more than 50% higher on Jan. 8, 2018.
Why is this important?
To see the significance, check the charts for the total cryptocurrency market capitalization for the same period.
As we constantly mention in our articles, there are only two major powers at work in crypto: greed (can also described as hype) and fear (shows itself as depression too). The extreme at either side marks the top in case of greed, or bottom in case of fear. Measuring these swings is not an easy task… while we share insight in our community and sometimes even in our Twitter account (see the examples for “building the top” in OMG, NEO and lately ETH)… this is easily a topic for a different article or even a book by itself.
For now — just keep this concept in mind as we come back to the Korean market and learn where the Kimchi Premium came from, how it works, and what it might tell us about crypto markets in the future.
A microcosm of crypto — magnified
It’s easy to see (at least in theory) that you could have profited quite well from the Kimchi premium. Just buy crypto at an exchange abroad, and sell it on a Korean exchange for the higher price — so called ‘arbitrage trading’ — and there you go, you earned the premium margin.
Simple example. Suppose 1 bitcoin is 13,000 USD on a Korean exchange but 10,000 USD in Hong Kong. The Kimchi Premium is therefore 30%. Person “A” in Korea sends 10,000 USD to his friend “B” in Hong Kong. “B” buys 1 Bitcoin in Hong Kong, sends it to “A” in Korea, and “A” sells it there for 13,000 USD. A and B claim 3,000 USD profit. If they trade 10 Bitcoin, they get 30,000 USD… trade 100 Bitcoin, get 300,000 USD… and so on. Looks like an easy way to earn profit from the arbitrage trading.
However, this type of trading is almost impossible in Korea.
Here’s why.
1. Domestic currency restriction policies
First, Koreans need overseas remittance to buy cryptocurrency at a foreign exchange. However, one can only send up to 50,000 USD per year abroad. This rule is strictly enforced. If someone tries to send more, they are required to provide a detailed purpose and supporting evidence to Customs. Plus, other government regulations for overseas remittance have been greatly increased during the last year, making it that much tougher.
Then there is cryptocurrency legal status… the Korean government has not defined whether crypto is a “goods” or a “financial currency”. But either brings implications. Goods are controlled by the ‘Foreign Trade Act’ and ‘Customs Law’ and need to be reported as imports and exports to Customs. Currency is subject to the ‘Foreign Exchange Transaction Act’. According to this law, people who want to import Cryptocurrency should declare their trade to the Korean Bank. However, there is no regulation about it.
People of course have been trying to find ways around these restrictions. According to a recent news report, some Korean people visited Hong Kong or Thailand to purchase Cryptocurrency in cash. People must declare to Customs if they take more than 10,000 USD out of Korea, but if they insist that their purpose is only for traveling expenses, then the sky is the limit. Many people have abused this legal hiatus and got profits from arbitrage trading since May, 2017. This particular activity is not illegal yet — but it could be soon, as the government is considering criminal charges for people who lie in this manner. To track down this speculation, Korean Customs announced on Jan 23, 2018 that it is under investigation.
Another way to purchase cryptocurrency abroad is by using a credit card. Without carrying cash, it is more convenient. However, the Korean government has banned using credit cards in cryptocurrency trading too. Some people have stubbornly found an alternative way, using Paypal, but it is unclear how many are actually using it.
2. Complexity of transactions
Also it is quite complex for Koreans to try to make trades using offshore methods. Considering the gap trading within legal permission (=50,000 USD per year), it’s not a good idea. To send money to a foreign bank, one must open a new account at the bank and pay transaction fees. Then send money, wait 2 or 3 days, check the deposit… pay the fee again. Buy cryptocurrency, send it to a Korean exchange wallet, and finally exchange it into KRW. It’s too complex and takes too much time for Korean investors. In contrast, just holding cryptocurrency, and waiting until the price increases, is regarded as a more simple and convenient way to build wealth than conducting many trades. Considering the soaring returns lately, just holding on seems clever. Moreover, as prices have dropped a lot in the last few days, arbitrage trading has become much more dangerous.
3. Prohibit Foreign Investment Policy
In addition to blocking money going out, the Korean government has restricted all foreigners from cryptocurrency trading on domestic exchanges. As a result, total inflow of cryptocurrencies from China and Japan to the Korean market has dropped sharply. In essence, cryptocurrency in Korea cannot be exchanged abroad, just domestically.
But Korea FOMOs too
At the same time, domestic demand for speculation has increased a lot. Remember, we were building the last top in cryptocurrency as a whole over the past few months. This top was fueled by constantly growing “greed/hype” throughout the global crypto market, and like the rest of the world we wanted to take part also. (Actually, in the case of Korea the motivations are more complicated than just pure greed… but more on that in the next article).
But with nowhere to go to take advantage of arbitrage, Koreans have plowed money into the only place their FOMO could go — their own exchanges. According to a recent news report, more than 3 million Koreans are participating in cryptocurrency trading today, including housewives, seniors, and college students. Among world’s biggest 15 exchanges, three are in Korea. More than 15% of Bitcoin trading happens in Korea.
The friction from government combined with the intensity of people’s desire created the perfect crypto “microcosm” for the Kimchi premium to skyrocket from 10–50%.
The Kimchi premuim was the simplest yet the most powerful indicator of the top of investor fever.
Where are we now? The current Kimchi premium is going down.
Now that overall prices are going down, the Kimchi premium is going down with it. The decline is not because people want to speculate less, but because this is the natural reaction to the current restrictive matter from the Government (which has caught up with the crypto demand).
But the people are not done. Although the Korean government has shared a list of foreign exchange names with the credit card companies, and prohibited the user payment with a credit card, many new exchanges are opening all around the world day by day, that are not listed on Korean government’s list immediately.
Speculation fever is still there, but it doesn’t have way to show itself. Currently, the crowd emotions are turning into aggression.
TLDR; The Kimchi Premium was de-facto the most powerful indicator of “hyped crowd sentiment” in Korea. It has leveled off at the moment, but might come back at any time. There are many changes happening in Korea right now. More on them in our next article.
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