TL;DR

• South Korea’s cryptocurrency market attracts global attention due to high trading volumes and broad participation. In the first quarter of 2024, the Korean won surpassed the dollar in global cryptocurrency trading volume.
• This has created a phenomenon known as the “Kimchi Premium.” It represents the price difference between global and Korean exchanges and manifests in various forms.
• Kimchi premium is derived from aggressive buying by domestic investors in a limited market environment. It serves as a meaningful indicator for understanding the Korean market.

This report is a collaboration between Tiger Research and Kaiko.
We thank Kaiko for supporting the data analysis. This enabled an in-depth exploration of Korea’s unique crypto market dynamics.

1. Introduction

The South Korean cryptocurrency market has gained global attention due to active investor participation and high trading volumes. Around 7.78 million users, or about 15% of the population, engage with South Korean exchanges. This enthusiasm extends to the global market. In the first quarter of 2024, global trading volume in Korean won (KRW) exceeded that of the U.S. dollar (USD) and continued outperforming other fiat currencies in subsequent quarters.

The Korean market’s enthusiasm for crypto is highlighted by a unique phenomenon: the “Kimchi Premium.” It represents the price difference between local and global exchanges, a distinct feature of the Korean market. Often marked by high volatility, the premium can vary significantly with market conditions. This report examines the causes and forms of the Kimchi Premium to uncover the unique dynamics of South Korea’s cryptocurrency market.

2. Why Does the Kimchi Premium Exist?

The Kimchi Premium exists due to two primary factors: the high engagement of Korean investors in the crypto market and the market inefficiencies stemming from a restricted market environment.

2.1. Korean Investors’ Passion for Crypto

A key factor behind the Kimchi Premium is the active, risk-taking behavior of Korean investors. They show a strong interest in high-risk investments, even in traditional markets. Investments in foreign leveraged ETFs with 3x volatility jumped from $190 million in 2020 to $5.8 billion in 2023. This aggressive approach also impacts the Korean crypto market.

Korean investors’ aggressive investment tendencies are even more evident in the crypto market. Higher price volatility in crypto compared to KOSPI and KOSDAQ creates more profit opportunities. In the first half of 2024, cryptocurrency assets had an average MDD(Maximum Drawdown) of around 70%, while KOSPI and KOSDAQ’s MDD was in the low 10% range. Korean investors show a clear preference for low-market-cap, volatile altcoins, as seen in trading volume data from Coinbase and Upbit.

2.2. Market Inefficiency Due to Restricted Market Environment

Another reason for the kimchi premium is the restricted and structurally inefficient nature of the Korean cryptocurrency market. This inefficiency appears in three main ways:

First, domestic cryptocurrency exchanges in Korea use a decentralized structure. Each exchange runs its own liquidity pool, unlike centralized systems such as Nasdaq or the S&P. This setup disperses liquidity and reduces efficiency on individual exchanges. To improve this, some exchanges link their liquidity pools with others to create better trading environments.

Second reason is the limited access to domestic exchanges. Only citizens who meet specific criteria can use these platforms: they must 1) reside in the country, 2) have a local cell phone, and 3) hold a verified real-name bank account.

Finally, regulatory constraints also impact the market. Although cryptocurrencies aren’t defined under the Foreign Exchange (FX) Act, large trades exploiting the kimchi premium have faced prosecution under this law. Regulators plans to define crypto assets and operators within the FX Act, which would further restrict crypto asset transfers between local and international exchanges.

These limitations on liquidity, access, and regulation reduce arbitrage opportunities and worsen structural inefficiencies.

3. Various Forms of the Kimchi Premium

The two factors above are key drivers of kimchi premium but do not fully capture its uniqueness. The kimchi premium results from a mix of influences. Market structure, regulatory environment, and investment culture each impact the market differently and at various times.

In this report, we examine three types of kimchi premiums. The first is kimchi discounts, where prices are lower than on global exchanges. The second is individual kimchi premiums, which arise from unusual price movements of specific cryptocurrencies. The third is a premium type based on Gaduri Pumping(Fishing Net Pumping), a unique phenomenon in the market.

3.1. Kimchi Discount

Domestic cryptocurrency exchanges often show high price premiums due to active investor participation. However, this isn’t constant. The premium gradually fades since crypto assets can still move between global and local exchanges. Changes in domestic investor sentiment can also turn premiums into discounts.

The recent shift in kimchi premiums from low to discounted levels is due to three main factors. First, the prolonged decline in crypto prices has led investors to sell more to avoid losses, reducing buying interest. Local exchange data reflects this trend, with KRW deposits increasing as average daily trading volumes decline.

The second factor is the recent slight rise in crypto prices after prolonged declines, which may have led to more profit-taking. The premium has also shifted to a discount as the number of Bitcoin, Ethereum, and major altcoin holders on Bithumb decreased. Lastly, it is speculated that domestic market sentiment has cooled due to the implementation of the Virtual Asset User Protection Act.

External factors also play a role in shifting the kimchi premium to a discount. In late January 2021, Bitcoin’s kimchi discount reached around 5% as domestic investors turned their attention to GameStop ($GME) stock. During that week, Korean investors traded $1.58 billion in GameStop shares. This shows how kimchi premium is affected by the “attention economy,” with fluctuations driven by investor interest.

3.2. Individual Kimchi Premium

Kimchi premium represents the price difference between global and local exchanges for major cryptocurrencies like Bitcoin and Ethereum. Most cryptocurrencies stay within a typical range around this baseline premium. However, certain conditions can push some cryptocurrencies much higher, driven by a surge in buying interest. A common example is the initial price spike during an exchange listing, often called a “listing beam.” This initial surge is also seen on global exchanges like Binance, but it tends to be more extreme and volatile in Korea.

A prime example is $AVAIL, listed on Bithumb in July 2024. Shortly after listing, Avail attracted significant attention, with its kimchi premium spiking to about 1,255%.

However, as trading volume stabilized, the premium returned to a typical 3% range. This case illustrates an individual Kimchi Premium, where early trading spikes ease as supply grows.

Kimchi premiums also appear on fiat-backed stablecoins like USDT and USDC. When USDC first listed on Bithumb, it traded at a 165% premium over the KRW-dollar exchange rate due to strong initial buying interest. While this premium fluctuates, it often stays above the KRW-dollar rate with occasional spikes. These price discrepancies may result from automated trading and misunderstandings by retail investors, creating temporary distortions.

3.3. Gaduri Pumping(Fishing Net Pumping) Premium

A Gaduri Pumping premium happens when an exchange temporarily suspends cryptocurrency deposits and withdrawals. This limitation allows certain players to exploit reduced liquidity by artificially driving up prices. Some retail investors also see this as an investment opportunity, further fueling rapid premium increases.

Gaduri Pumping premiums are unique because they aren’t limited to deposit and withdrawal suspensions for network upgrades; they also occur in adverse situations. A notable example is Curve DAO Token ($CRV) in August 2023, when a security vulnerability led to a suspension of deposits and withdrawals, yet a 700% price premium appeared on local exchanges. This pattern frequently recurs during incidents like hacking or other major disruptions.

Some suggest that certain entities use APIs to enable circular trading and street pumping through alias accounts. Evidence continues to grow. The Financial Intelligence Unit (FIU) has uncovered cases where numerous elderly users conducted automated transactions from the same overseas IP address. This activity has persisted despite the Virtual Asset User Protection Act. Recently, similar patterns have emerged in cryptocurrencies like WooNetwork ($WOO), LumiWave ($LWA), and Radiant Capital ($RNDT).

4. Thoughts on Kimchi Premium

Kimchi premium is a unique aspect of the Korean cryptocurrency market, driven by several factors. It represents more than a price difference. Market structure, investor sentiment, and a restricted trading environment all contribute to this phenomenon. While this report highlights the main factors, other elements also play a role. Explaining kimchi premium fully remains challenging, as no single rule or pattern applies.

For example, the relatively stable and low Kimchi premium in the second half of 2024 likely resulted from domestic investors increasing their use of overseas exchanges. In the first half of 2024, the number of days with Kimchi premiums above 5% was about 5.6 times higher than in the second half of 2023. This trend suggests that many investors moved assets offshore to gain from potential price differences. Outbound transfers of KRW 1 million or more to overseas operators, tracked through Travel Rule, reached approximately KRW 52 trillion—more than double the amount in the second half of 2023.

However, these individual factors do not fully explain the kimchi premium. As economist Keynes described, “animal spirits” arise from various uncertainties and irrational behavior among market participants. A recent example illustrates this complexity: the price of the $CARV token on Upbit was lower than on other exchanges, such as Bithumb and Bybit.

How, then, should we view the unique phenomenon of the kimchi premium? Instead of dismissing it as an anomaly, it could be a valuable market indicator. Price premiums in cryptocurrency markets are not exclusive to Korea. They occur in other countries for different reasons based on local market conditions. For example, Coinbase in the U.S. shows a premium due to institutional investor interest. In Turkey, a premium appears as people turn to alternative assets following currency depreciation. Similar patterns are also observed in Japan, Europe, and elsewhere.

This highlights how kimchi premium can serve as an indicator of each region’s unique market environment. South Korea is especially notable due to its restricted trading environment and strong retail investor sentiment. The premium reflects the level of retail interest and capital inflows in the market. It provides valuable insights into the characteristics of the Korean market and may help in predicting cryptocurrency trends. However, speculative trading can sometimes drive kimchi premium, leading to price distortions that may not reflect true market interest.

Disclaimer:

1. This article is reprinted from [Tiger Research]. All copyrights belong to the original author [Jay Jo and Yoon Lee]. If there are objections to this reprint, please contact the Gate Learn team, and they will handle it promptly.
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