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Do you remember the bull rally of the cryptocurrency market including Bitcoin from Q1 2017 to January 2018? Even during that period, there was a brief adjustment period, but the singularity of the Korean market was very remarkable amid a year-long rally at that time. Even though it was the same Bitcoin, it was traded with at least a 40% price premium in Korea throughout the bull market compared to all non-Korean exchanges. Assuming that the price of one Bitcoin was $10,000 at that time, we had to pay at least $14,000 on Korean exchanges. That level of the premium was formed not only for Bitcoin but also for all cryptocurrencies traded on Korean exchanges. Since then, this phenomenon was called "Kimchi Premium", which is a combination of "Kimchi" representing Korea and "Premium".
Now, let's look back at the market in 2020. After the COVID-19 outbreak in March 2020, the cryptocurrency market began to show a gentle upward curve. The slope of this upward curve started to become steeper in the third quarter, then the price level broke through $20,000 in the fourth quarter and replaced the peak, and broke through $30,000 a few days after. This was the Bitcoin Craze indeed. Even at this very moment, the price has surpassed $35,000.
Is “Kimchi Premium” Still Valid?
We must first understand the reason why Bitcoin had the "super" premium in 2017. In general, the reason for a premium comes from the demand far exceeding the supply. In other words, there are plenty of people who want to buy, but if there is no one who sells, a premium is added to the price. In this case, in order to control the premium formed in one market, people who trade the same product in another market try to sell their products in the 'overpriced' market, because you can earn much higher profits. This is called arbitrage in the marketplace.
In the cryptocurrency market, when a premium starts to be added to an exchange or a medium of exchange, many sellers flock to sell in that market to realize profits from it. . In doing this, the premium subsidies and converges to the average price of the entire market. However, the case is a bit different in the cryptocurrency market. There are still many inconveniences to accept cryptocurrencies as payment methods and currencies. In the end, you have to redeem your cryptocurrencies into the currency that can be used in your country and region in order to eventually be free from the volatility of the cryptocurrency; we call it "profit realization". Although cryptocurrencies have no borders, the medium to realize profits for Korean traders are limited to KRW. After redemption, you can transfer the KRW internationally to your USD account for use, but there are also many restrictions. First of all, you need to have your bank account in Korea or a collaborator to lend it (FYI, it is illegal in Korea), and sending a large amount of cash will be restricted by the Global Anti-Money Laundering Regulation (AML). For these reasons, in 2017, there was not enough supply for arbitrage, which was insufficient to eliminate the premium, and demand grew even further due to the price surge. “Kimchi Premium” eventually disappeared after the cryptocurrency price crash in 2018, and for a while, even a reverse premium had formed in the Korean cryptocurrency market for a while.
For 3 years until the arrival of a new Bitcoin bull market in 2020, Korea has alternately experienced the “Kimchi Premium” and the reverse premium, but the extreme “Kimchi Premium” like 2017 had not been formed. Even in the bull market in the second half of 2020, the reverse premium market had been maintained, and only when prices plunged, we could see a glimpse of the “Kimchi premium”.
I think this is due to the characteristics of Korean investors. As you all know, the main drivers of the market upturn are not individuals who are trembling in the Fear Of Missing Out (FOMO) like in 2017. The rise in prices due to institutional buying is creating a more transparent and reasonable bull market.
However, after the start of the new year in 2021, the “Kimchi Premium” began to form in the Korean market again. In both bullish and bearish markets, the New Year's market continues with an average of 4-6% premium. This is a sign that individuals are beginning to enter the market, in addition to institutions. Now that institutions' FOMO for Bitcoin has begun, signals for the long-term market are focused on "LONG”. The direction of the so-called “Kimchi Premium” that is being formed in the Korean market can be used as an indicator to evaluate individuals' FOMO.
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