The ‘kimchi premium,’ an indicator representing the spread between the bitcoin prices on South Korean exchanges compared to foreign trading platforms, has collapsed in a matter of hours.
The metric had soared to 23% on Tuesday, the highest since February 2018, signaling a retail frenzy in the South Korean BTC market. However, the premium took a turn to the downside a few hours ago, plummeting by almost 10% in just five hours.
Larry Cermak, director of research at the Block, shared the news on his Twitter page, noting that the kimchi premium was seriously collapsing in real-time.
Bitcoin prices started trading near $66K levels in South Korea on April 5, leading to speculation across the crypto sphere that the Kimchi Premium had returned. The next day, a single BTC was trading on the Korbit exchange for $69,371— a whopping 18% premium over the going rate on other global trading venues.
What the Falling Premium Means For BTC Prices
The causes of the disparity between bitcoin prices in South Korea and other locations ultimately stem from trading limitations placed on crypto exchanges in the Asian nation.
A spike in the indicator has been historically observed when BTC prices are topping. The Korean metric last peaked during the 2017 bull run when the world saw a rising demand for bitcoin. That spike took the wind out of the bull run and BTC prices proceeded to drop by over 49% one month after the indicator peaked.
BTC earlier this week managed to temporarily draw the highest Kimchi premium in three years before the metric started tumbling. According to one analyst, however, the market is unlikely to see any notable price drops following the metric’s collapse.
“The Korean market contributed 7.9% of the worldwide crypto trading volume in 2017. Now it accounts for less than 2%. Hence, an eventual collapse of the premium is unlikely to have a significant impact on the broader market,” asserted Ki-Young Ju, CEO of CryptoQuant.
Ju’s prediction seems to be coming true, as the BTC price is holding above the $57 level despite the premium collapsing over the past few hours.
The Kimchi Premium And Arbitrage Trading
As the Korean indicator came tumbling down earlier today, Larry Cermak wondered whether some traders had figured out how to “arb” the premium, a task that is quite challenging.
Ideally, crypto traders would seek to execute a classic arbitrage strategy by procuring BTC at western exchanges and offloading the coins on Korean exchanges for a profit.
However, strategy isn’t easy to execute because South Korean exchanges mainly provide KRW fiat trading pairs and do not usually offer crypto trading pairs in BTC or Tether (USDT).
The local exchanges also don’t accept foreign clients due to stringent local restrictions imposed by Korean financial watchdogs.