Earlier this week Bitcoin hit a surprising $ 66,000 in South Korea . The price of the main cryptocurrency on the Korean peninsula was due to the return of the “Kimchi premium” , the Kimchi premium, a differential index between the price of bitcoin on Korean and “Western” exchanges.
In the First Part of the Cripto247 Special we explain in more detail what is the Kimchi Premium, or Kimchi Premium, why Bitcoin prices can be higher in South Korea than in other international exchanges and what is arbitrage , a process to take advantage of a price difference between two or more markets by performing a combination of complementary transactions that capitalize on the price imbalance.
However, South Korea’s capital controls , financial regulations, and anti-money laundering laws make this process difficult.
Capital controls are measures that central banks and government regulatory agencies take to restrict the flow of capital – or money – into and out of a country. These regulations are intended to try to maintain a balance in the country’s accounts. If a significant amount of capital flees a country due to a geopolitical event or an economic upheaval, the result can be devastating for the local economy.
The South Korean government implemented capital controls in 2010 in the wake of the global financial crisis and the European debt crisis. The measures were designed to reduce wild fluctuations or volatility in capital flows that can hurt the economy.
The result is a delay in sending money abroad due to administrative burdens. The amount of money that can leave the country each year is capped and transfers must be approved by regulators.
Even if regulators approve such transfers, the process can take so long that arbitrage opportunities dwindle to almost nonexistent. These capital controls also limit the inflow of cryptocurrencies, which has created a scenario where South Koreans can only use digital currencies in their country.
In this way, South Korean and South Korean companies are limited in their international purchases of BTC . If a South Korean merchant decided to exchange their currency for a foreign currency to buy a bitcoin in a foreign currency, the amount of the transaction would likely be limited or could be completely blocked by regulators if there is a suspicion of money laundering.
It is important to note that determining the trading volume of Bitcoin is not so simple , since there is no centralized exchange that measures the volume of cryptocurrency trading. Although the South Korean government has threatened a complete ban, it has also considered alternatives, such as investors paying taxes on capital gains.
The story of cousin kimchi
Kimchi Premium first appeared on the cryptocurrency market in 2016, according to a report from the University of Calgary, and between the beginning of 2016 and the beginning of 2018, the kimchi premium averaged almost 4.80% and reached almost the 55% in January 2018.
As we know, South Korea is an important market for cryptocurrencies . This popularity could be due to the country’s interest in technology as well as gambling, which may have led to an open mind and early adoption of digital currencies.
Another reason for the interest of South Koreans in crypto assets may have its cause in security and the always latent threat from North Korea and its leader Kim Jong-un, with which its inhabitants coexist.
The popularity of Bitcoin has led, in part, to overpricing for the cryptocurrency in South Korea compared to the price in other countries.
In conclusion, an increase in the premium for kimchi may be an indicator of increased retail investment in Bitcoin by Korean investors.