The Bank of Korea has warned that significant price differences between South Korean exchanges and those abroad, or the “Kimchi Premium,” may emerge in the coming years.
Kimchi May Strike Back
According to local outlet No Cut News, South Korea’s central bank cautioned officials of another “Kimchi Premium”-like situation if regulations and crypto trading frameworks are not soon introduced.
At its peak, the Kimchi Premium caused a 40 percent difference in the prices of Bitcoin (BTC) between South Korea’s local exchanges and those abroad.
While BTC boasts the highest premium among all cryptocurrencies, a slew of altcoins traded over 30 percent above global cryptocurrency markets, creating ample opportunities for arbitrage trading and spot profits.
In January 2018, crypto price tracker CoinMarketCap removed South Korean exchanges from its market cap index, citing “extreme divergence in prices” compared to other markets.
This morning we excluded some Korean exchanges in price calculations due to the extreme divergence in prices from the rest of the world and limited arbitrage opportunity. We are working on better tools to provide users with the averages that are most relevant to them.
— CoinMarketCap (@CoinMarketCap) January 8, 2018
From July 2017 to May 2018, cryptocurrencies in South Korea were, on average, 5 percent more than global markets, with the average rate peaking at 48 percent in January.
‘Overheated’ Trading Market
Kim Dong-sup of BoK’s payment systems research team pointed out the Kimchi Premium represents an “overheated domestic” trading market in Soth Korea, fueled by crypto-crazed investors and millennials looking at alternative investment options.
The official believes such fallacies can lead to losses in local forex markets as well as a possible infusion of illegally obtained funds into Korean crypto exchanges.
He added that authorities must continue to monitor the crypto trading market due to the absence of legislation, in addition to protecting retail investors who invest their life savings in cryptocurrencies “on a false hope of a price increase.”
With the aforementioned in mind, Korean authorities are increasing their footprint in the cryptocurrency market. The country has banned citizens from investing in ICOs, although the move is reportedly being reconsidered.
The South Korean market commands one of the largest’s demographics interested in cryptocurrencies and related activities, ranking behind the U.S. and Japan in this regard.
Cover Photo by Ping Onganankun on Unsplash