Bitcoin Arbitrage Markets Are Evaporating (2017 versus 2018)
The bitcoin arbitrage opportunity was every Bitcoin enthusiasts best-kept secret until earlier this week. Unfortunately, this is because the opportunity almost completely diminished. Arbitraging bitcoin in different currencies was a guaranteed way to net a daily return until the price of bitcoin collapsed.
What is an Arbitrage?
An arbitrage is literally the simultaneous buying and selling of an asset (token or coin in the crypto world) at the exact same time on two different exchanges. The price difference between how much you buy and sell for is the profit yielded. For example, if bitcoin (BTC) was being traded on Coinbase for $10,000, but it was being traded on Binance for $9,500. It would make sense to buy BTC on Binance and sell it on Coinbase. Each transaction for one entire BTC would yield $500. $500 on a $10,000 investment is a five percent return. A five percent daily return is astronomical over the long run. However, in the crypto world five percent arbitrages existed all over the place because exchanges are decentralized.
When you send a buy/sell order into any of the broker websites for stocks it gets paired against all other purchase orders on other exchanges. You are not solely trading amongst the individuals on that specific platform. For crypto, this is the opposite. If you place a buy order on site A, but on site B someone is willing to sell for the price you stated, the buy order and sell order will not align and automatically fill. Someone on your specific site has to wish to buy or sell at your stated price for the order to go through. This can result in large arbitrages between different marketplaces.
The crypto space for a long time has been known for these large percentage arbitrages between different exchanges. When demand is higher in one part of the world, or their fiat currency is stronger, the coin being purchased or sold in that region can lead to a significant percentage gain using trading arbitrage. South Korea, until January 31, was known for having some of the best arbitrage pricing around.
South Korea and Arbitrage Trading
The fastest decline in crypto prices have taken place in South Korea. Which is actually fairly surprising as they are finally allowed to begin trading as of January 31. However, this is likely the dip that occurs prior to all major bull rallies, finalizing our bear raid for the prior month. With prices in South Korea for BTC and other cryptocurrencies falling at a rate even greater than when compared to international markets. Bitcoin used to trade at a 51 percent premium on Korean exchanges. However, the most recent crash has sent prices of BTC along with altcoins back in line with those of international markets across the world. This was the first time prices have been similar across the different world markets for BTC. South Koreans have grown accustomed to paying a premium for BTC.
The South Koreans have a nickname for this Premium they pay on BTC, the “Kimchi Premium.” Having such a high Premium and arbitrage opportunity was not only dumbfounding but also enticing to the South Korean people. So much so that they named this “Premium” after their staple dish, Kimchi. This clearly demonstrates the change in investor sentiment in what had previously been one of the worlds most exciting markets for crypto. This is another reason why many of the Korean-oriented coins have also taken an unfortunate beating. However, the King is confident the grass is greener on the other side. The King’s follow-up article will highlight why February has many positive changes in store for the entire crypto market and a nice rebound!
Well, how did the arbitrage opportunity evaporate? BTC has dropped more than 60 percent on the Korean exchanges after the nation’s regulations took several steps over the prior two months to regulate trading in the country. What was originally thought to be a ban turned out to be positive legislation allowing traders to deposit $20,000 weekly, while having to use their real names for trading accounts. This type of legislation should be praised and expected. This was not how the market reacted. The Kimchi Premium began shrinking rapidly since January 12 when the FUD attacks came full force out of South Korea. Now that legislation has been enacted the greater issue is the $20,000 amounts impede individuals looking to move large amounts of crypto due to the country’s anti-money laundering laws.
On February 1, bitcoin was trading at approximately $8,450 in South Korea while it was being traded for $8,605 on GDAX/Coinbase. Although there is a minor price difference, it is minuscule when investors consider that the Kimchi Premium had led to five to 35 percent price differences depending on which market you purchased BTC on. At the beginning of January when the Kimchi Premium truly peaked there was a $7,500 difference between the price of BTC in South Korea and the international average. To put this into perspective if you purchased one bitcoin and had a South Korean trading account, you could transfer yourself that same BTC, and it would be worth almost $7,500 more based on the value of the South Korean Won and their rate against the BTC. You would have to have access to a South Korean trading account, but for a 30 percent arbitrage opportunity, one could easily make friends with an individual in South Korea to do this with all day and make 15 percent each! Unfortunately, this opportunity no longer exists.
The Arbitrage Opportunity is Temporarily Gone
Arbitrage exists where there is the most turmoil. South Korea is no longer having turmoil regarding their exchanges, so the arbitrage opportunity disappeared. When South Korea was worried about banning crypto entirely the highest Kimchi Premium existed. This was not coincidental. When Zimbabwe had a major uprising in 2017 the price of bitcoin was 50 percent higher on local exchanges and within the country than on international markets. When individuals stop trusting their governments the value of cryptocurrency skyrockets. Currently, the populations of the world have faith in governments that if they were people, would not be given loans at a bank. Yet, because they are governments in trillions of dollars in debt, other governments and banks continue to provide liquidity.
The King believes fiat is no more trustworthy than cryptocurrencies (the ones that are not scams) because there no longer is any true value backing the dollars, yen, won, or pesos of the world. The arbitrage play had been a hidden gem for big investors with multiple BTC on many foreign exchanges, and unfortunately for them, it has evaporated. However, the world is full of turmoil and whether the Kimchi Premium arises again, the Hamburger Fee (U.S.), or the Samosa Tax (India) the world has not seen the end of arbitrage investing. The positive news is the turmoil has subsided in South Korea; the negative news is it took a great arbitrage opportunity with it.
To read the King’s prior articles, to find out where to purchase his favorite ICOs, or to get in contact directly with the King, you can on Twitter (@JbtheCryptoKing) or Reddit (ICO updates and Daily Reports).