what is Kimchi Premium?
when investing in cryptocurrencies, you'll often come across the term kimchi premium. kimchi premium refers to the phenomenon where crypto assets, including Bitcoin, are traded at a higher price on local exchanges than on overseas exchanges.
the expression is a combination of kimchi, which symbolizes Korea, and premium, which means expensive. For example, if Bitcoin is trading for 100 million won on an overseas exchange like Binance, but 130 million won on a local exchange like Upbit or Bithumb, the difference is 30 million won, which is the kimchi premium.
the History and Current Status of Kimchi Premium
the term "Kimchi Premium" first appeared in 2017, when the global bitcoin craze exploded with interest from Korean investors. the difference in Bitcoin prices between local and overseas exchanges became noticeable, and a phrase to describe this phenomenon naturally arose.
the kimchi premium peaked in late 2017 and early 2018, when the price of trading Bitcoin in Korea was sometimes as much as 40 to 50 percent more expensive than overseas, a result of a surge in retail investors jumping into crypto as a new investment vehicle.
today, the situation is not as extreme as it was then, but Bitcoin still trades around 2 to 5 percent higher domestically than overseas. depending on market conditions, the kimchi premium can rise and fall, attracting investors.
why is there a kimchi premium?
the core reason for the kimchi premium is the imbalance between supply and demand. the price of any asset is basically determined by supply and demand. if there are many people who want to buy and not enough to sell, the price will naturally increase.
the same principle applies to the local cryptocurrency market. there are many investors who want to buy Bitcoin, but the supply on local exchanges cannot keep up with the demand, resulting in high prices. This is especially true during periods of surging interest in cryptocurrencies.
the aggressive nature of Korean investors also plays a role in the occurrence of GIMP. they tend to react quickly to new investment opportunities and put their money where their mouth is, which often results in a short-term surge in demand. This surge in demand drives up prices, creating a price differential from overseas.
the unique structure of the crypto market
the cryptocurrency market is structurally prone to price differentials. for example, in the Korean stock market, the price of the same stock is the same regardless of which brokerage firm you use because a centralized organization called the Korea Exchange manages all transactions.
this is not the case with cryptocurrencies. it's a free market where each exchange operates independently without a centralized authority. Local exchanges such as Upbit, Bithumb, and Coinone, and international exchanges such as Binance and Coinbase use their own systems to process transactions.
this structure naturally leads to price differences, as each exchange has different trading volumes and liquidity. in general, exchanges with higher volumes and more active trading tend to have higher prices, with the higher volume on domestic exchanges contributing to the Bitcoin premium.
another factor that makes it difficult to unwind a gimp is that there are restrictions on the movement of funds between countries. In theory, you can buy cheaply abroad and sell expensive domestically to make a profit, but there are practical barriers, such as foreign exchange regulations and remittance procedures.
what investors need to know when gimps occur
if you start investing when the gimps premium is high, you could see real losses if the gimps decrease later. this is because even if the price of Bitcoin itself remains the same, the loss of the premium will reduce the amount you are worth in Korean won.
conversely, if you buy when the GIMP is low or negative, i.e. at an inverse premium, you can make additional profits when the GIMP normalizes later on. This is why many investors keep an eye on the difference between the Upbit and Binance prices to time their trades.
calculating the kimpo premium is simple. simply subtract the domestic exchange price from the international exchange price, divide by the international price, and multiply by 100 to get the percentage. There are sites that show the gimp in real-time, so it's convenient to check.
altcoin premiums exist just like Bitcoin, and sometimes the premium for certain altcoins is bigger than Bitcoin. The more popular the coin is in your country, the higher the premium tends to be.
frequently asked questions
what is the difference between a kimchi premium and an inverse premium?
a kimchi premium is when the domestic price is higher than the international price, while an inverse premium is when the domestic price is lower than the international price. inverse premiums are often seen when domestic investor sentiment is weak or when there is a large sell-off.
is it profitable to buy on an overseas exchange when GIMP is high and move it domestically?
in theory, yes, but there are a number of practical limitations. you need to consider transfer limits due to foreign exchange regulations, the time it takes to transfer coins between exchanges, transfer fees, and the risk of price fluctuations during the transfer. it's not easy to arbitrage, which is one of the reasons why GIMP is here to stay.
when are Kimchi premiums highest?
gIMP typically increases during bull markets, when interest in cryptocurrencies surges. conversely, when the market declines or investor sentiment dampens, GIMP decreases, or an inverse premium occurs.
are domestic investors at a disadvantage because of GIMP?
buying at a high GIMP can be disadvantageous, but not necessarily. If the GIMP holds when you sell, you're not out of luck. However, you should be aware of the higher entry price compared to international investors.
wrapping Up
the kimchi premium is a unique phenomenon in the Korean cryptocurrency market and stems from an imbalance between supply and demand. getting into the habit of checking the GIMP level before making an investment decision will help you time your trades more wisely.
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