How to Take Advantage of the Kimchi Premium

kimchi premium bitcoin

The cryptocurrency market has been a wonderful playground for traders. Digital coins like bitcoin can rise or fall well over 10% in a day.

For many cryptos, buying dips and selling hard runs has been a winning strategy.

Take bitcoin, for instance. In 2017, the digital coin had its fair share of dips.

From 8–11 November, bitcoin fell 21%. Buying after such a fall would have given you the chance to make 34% in the next five days.

Similarly, had you bought bitcoin 9 December, when it declined for two days, you could have made 29.7% over the next week.

Of course, you could have done extremely well by simply buying and holding bitcoin.

But there’s another way trades can make double-digit returns in a single day using cryptos.

One of the biggest arbitrages around

You might know that there are various cryptocurrency exchanges all over the world. And depending on investors, prices can differ extremely. Investors in Singapore may value bitcoin higher, giving it a higher price than in the US.

One place this has happened in is South Korea. As reported by Bloomberg:

It’s the kind of market anomaly that savvy traders usually devour in fractions of a second: bitcoin prices in South Korea are 43 percent higher than those in the U.S.

They call it the kimchi premium, after South Korea’s famous national dish — kimchi.

kimchi premium bitcoin

Source: Bloomberg

Why do they value bitcoin so much more in South Korea than in the US?

According to economics professor Ha Tae-hyeong, South Koreans have been drawn to speculative trading because of the lack of other high-yield investment options. Though I’m sure sharing a border with a highly-controlled state might also have something to do with it.

But traders couldn’t care less as to why South Korean’s value bitcoin more. All they care about is the price differential. Theoretically, traders could buy bitcoin in the US and sell it in South Korea for a profit.

This would be a riskless profit (minus costs), at times referred to as ‘arbitrage’. However, it’s the built-in costs that are making this arbitrage so hard to pull off.

Government stands in the way

The South Korean government has put a few roadblocks in their way. Bloomberg continues:

To arbitrage the price gaps between bitcoin venues in Korea and elsewhere, local traders must first exchange their won into a foreign currency, such as the dollar or euro, that’s accepted by overseas cryptocurrency venues.

Korea’s foreign-exchange regulations put a wrench in the process. Local residents and companies moving more than $50,000 out of the country in a single year must submit documents to authorities proving their reasons for the transfers, which may not always be approved. Annual transactions totalling more than $10,000 must be reported to tax authorities.

Another hurdle is the time it takes to transfer bitcoin between exchanges. Imagine you had bought bitcoin in the US for US$15,000 and planned to sell it in South Korea for US$20,000. You’d be looking at a potential profit of more than 30%.

Yet because the transfer is not instantaneous, adverse moves in the price of bitcoin in South Korean could wipe out your potential profit.

But don’t give up hope. There is still a way to grab this free lunch.

There’s still hope

Moonsung Bae, a 36-year-old financial analyst has figured out how to arbitrage the kimchi premium. One of his strategies involves buying ether in Korea, transferring it to an offshore venue, exchanging it for bitcoin, transferring it back to Korea, and then cashing out.

Another option is to arbitrage prices differentials between exchanges in Korea. For example, yesterday bitcoin traded at US$21,751 on Bithumb and $22,674 on Upbit.

Both are South Korean exchanges, eliminating the need to take money out of the country.

Cheers,

Härje Ronngard,

Junior Analyst, Money Morning

PS: Want to find out more about the secret world of bitcoin? Click here.

Harje Ronngard

Harje Ronngard

With an academic background in finance and investments, Harje knows how simple, yet difficult investing can be. He has worked with a range of assets classes, from futures to equities. But he’s found his niche in equity valuation.

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