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Explained: Kimchi Premium and why it exists

Explained: Kimchi Premium and why it exists

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By CNBCTV18.com  IST (Published)


While Kimchi Premium generally refers to a difference in Bitcoin prices, it is also applicable on other cryptocurrencies. You should also know that this increased pricing phenomenon is not restricted to just South Korea either.

When something receives as much attention as Bitcoin has, even small intricacies surrounding the subject can turn into global phenomena; this is what happened with the term 'Kimchi Premium.' People were intrigued when the phrase first started making rounds within the cryptosphere in 2016.
Kimchi is the South Korean equivalent of a pickle that consists of salted and fermented vegetables. Kimchi is either mixed with curries and soups or served on the side with food. It is a well-known staple that has become synonymous with South Korea. But why does Kimchi have anything to do with Bitcoin? Let's find out!
What is Kimchi Premium?
Kimchi Premium is the name given to the price difference between Bitcoin on South Korean crypto exchanges and the world markets. This discrepancy usually ranges from 3 percent to close to 20 percent. It is called Kimchi Premium because the phenomenon is restricted to South Korea, which is known for its Kimchi. It could have been called South Korean premium too, but where's the fun in that?
Why does Kimchi Premium exist?
Kimchi Premium is the result of a couple of interrelated factors. First, the capital controls in South Korea restrict large amounts of money from going in and out of the country. This hinders the large-scale purchase and sale of cryptocurrencies such as Bitcoin, keeping the supply sparse and prices at a premium.
Second, with the up-and-coming crypto economy that South Korea is, buyers often outnumber sellers and the price of Bitcoin within the country's bubbled cryptosphere increases for a short duration. These two factors, in combination, are responsible for the Kimchi Premium.
While Kimchi Premium generally refers to a difference in Bitcoin prices, it is also applicable on other cryptocurrencies. You should also know that this increased pricing phenomenon is not restricted to just South Korea either.
Most countries with strict capital control, including India, end up with a premium on the price of Bitcoin compared to the international markets. The premium, however, is smaller (in the range of 2-4 percent) compared to South Korea.
This premium is the reason why you are charged more than the price listed on Google or common price-tracking websites.
What is the importance of the Kimchi Premium?
Since its first occurrence in crypto discourse in 2016, Kimchi Premium has been seen as an indicator to predict the price of Bitcoin. When the Kimchi Premium is high, it is seen as an indicator of a bull run, and when it is at the lower end of the range, it could signal falling prices.
For instance, a CoinDesk article reported that the Kimchi Premium fell from 20 percent to around 3 percent between April 2021 and April 2022, coinciding with tumbling Bitcoin and ether prices. Of course, this is not always true, as prices in the volatile crypto markets can rise and fall before exchanges can take a breather.
The second popular utility of the Kimchi Premium (or premiums charged in other countries) is the opportunity for crypto arbitrage. This practice refers to buying where (instead of when) prices are lower and selling where the prices are higher. However, with the highly evolved crypto markets, it is impossible to pull arbitrage off manually — you need sophisticated automation to make full use of the Kimchi Premium.
Also, arbitrage trading for South Koreans can be difficult with the significant capital control measures. Further, BTC is considered a commodity in South Korea, and local traders are required to pay customs on the purchase of crypto from international markets.
It is a bit easier for international traders to exploit the Kimchi Premium when executing arbitrage trades. However, even then, the crypto market is highly volatile, and prices may change significantly before an arbitrage trade is successfully completed, making it a risky practice.
In countries with no capital control, there is no premium on Bitcoin and other cryptocurrencies. Also, this premium only exists in certain countries because Bitcoin is still seen as a store of wealth and an asset rather than a regular mode of payment. If and when bitcoin becomes a global means of exchange (without having to swap it for fiat currency to buy things), Kimchi and other premiums may not apply.
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