[Korean Exclusive News]
Author: Shin Yi Jin, South Korea
The main cause of Kimchi Premium is high local demand + practically banned arbitrage trading. In a normal market, price difference is easily resolved through arbitrage transactions. This should be even simpler for crypto markets where all transactions are performed online. However, foreign transactions in Korean crypto exchanges are banned at the moment and there are various obstacles for Koreans to make transactions interchangeably in both international and local exchange markets (i.e. difficulty in opening foreign bank account, restriction on the amount per transaction, etc)
Although small amount transactions are possible and there are many investors who have experimented them, the problem lies in the high volatility of the market. Since it takes some time for transactions to be complete, the investors are exposed to risks of suffering a loss if rats were to fall in that span of time (cryptocurrencies are different from stocks in that it is very common for fluctuations of 5~10% daily). Statistically there is a 0.5 probability for change in exchange rates during the span of time of transaction process. Thus, this way of resolving the issue of price difference is not favourable.
This article analyses the causes of ‘Kimchi Premium’ in South Korea from two different perspectives: demand and supply.
The Demand Side
- Inflow of capital by speculators
Local speculators power mostly comes from funds from China. Due to the strict regulations and the elimination of crypto exchange markets in China, the funds flew into South Korea which was the best option based on its geographical proximity and the lack of regulations at that time. Nonetheless, the new regulations from 2018 onwards have reduced the amount of KIMP
- Inflow of capital by individual investors
There was a tremendous increase in individual investors in the cryptocurrency market after investors earned a huge sum of money as most coins experienced a price increase in November and December of 2017. Then, the Korean government placed restrictions on crypto deposits and new registrations. Even after the restrictions were removed, there was still a downward trend and due to the lack of new inflows, KIMP was eliminated.
- Inflow of capital from underground
Local capital from underground (individual, companies, underground economy transactions etc.) switched to bitcoin and this resulted in a large sum of capital inflow into the coin market
The Supply Side
- Lack of local miners
As compared to other countries, South Korea experiences a lack of miners and thus there is no proper supply of coins. South Korea does not own any supply chain independently like China and US. Thus, local exchange markets are all suffering from lack of supply of most of the coins. The reason for the lack of miners in South Korea is very simple; it is because of the expensive electricity bill. According to a news article from 15 February 2018 which compared the cost of Bitcoin mining of different countries around the world, South Korea was recorded to be at the top of the list: to have the highest mining cost.
The high rate of dependence on energy is the first-level reason for this but in fact, electricity for agricultural and manufacturing industries are relatively cheaper. Industrial and residential electricity costs are much more expensive and these are used for crypto coin mining.
- Inaccessibility of Korean crypto exchange market for foreigners
There is a limit to how much can be supplied from other countries due to the fact that it is impossible for foreigners to perform transactions in Korean crypto exchange markets. Thus, the Korean crypto exchange markets are experiencing a ‘Galapagos situation’ where there is no self-production nor ways for external supply to come in. It holds a system in which a little shake by the speculators or increase in demand will inevitably cause a price pump.
The KIMP is a huge problem for the Korean government due to risks of foreigners performing transactions – leaving valueless cryptocurrencies in Korea and bringing cash out of the country. It is a huge hindrance to South Korea’s economic development because the funds and capital that are supposed to be invested in the economy are locked in the cryptocurrency world.