South Korea: “Kimchi Premium” Causes Digital Assets to Trade at 600 Percent Premium
Throughout this week, many tokens including 0x (ZRX), Ethos (BQX), ICON (ICX), and Aeternity (AE) have been traded in South Korea with 300 to 600 percent premium rates.
As of August 1, 2018, Ethos on Bithumb, a major crypto exchange in the local market of South Korea, is being traded at $5.82, up 582 percent from its global average price at $0.84.
Reasons Behind the Premium
In late 2017, when the price of bitcoin and ether, the native cryptocurrency of Ethereum, surpassed $19,500 and $1,500 respectively in the global market, the two cryptocurrencies were traded in South Korea with a 30 percent premium. Bitcoin and ether surpassed $25,000 and $2,000 in South Korea, as local investors drove up the price of major digital assets in a market that lacked volume and liquidity.
In the second quarter of 2018, a few months after the crypto market suffered the third worst correction in its history, the so-called “Kimchi Premium” had completely disappeared from the cryptocurrency exchange market of South Korea, and local financial authorities from the Financial Services Commission (FSC) expressed their optimism towards the stabilization of the crypto exchange market.
“The government’s practical policies led the Kimchi Premium to disappear in South Korea. However, at its peak, the Kimchi Premium in the local cryptocurrency exchange market reached 50 percent, due to an unusual spike in demand and speculation. As of current, the price of cryptocurrencies is nearly identical to other markets, demonstrating stability in the South Korean cryptocurrency market,” said FSC vice chairman Kim Yong-bum.
However, in July 2018, premiums reappeared, and major tokens started to display abnormal behavior and price movements. The price of some tokens spiked up 300 to 600 percent from their average price across the U.S. and Japanese crypto markets, and the volume of these tokens surged in the local South Korean market.
While many investors believed this to be a positive short-term movement for the cryptocurrency sector, these abnormal behaviors were solely caused by Bithumb, due to its controversial decision to disable withdrawals and deposits indefinitely after its hacking attack in June, 2018.
For over a month, Bithumb has disabled deposits and withdrawals on its trading platform, disallowing users to bring out capital from the exchange and bring in new money onto the platform. As a result, the lack of liquidity on Bithumb led the prices of both major cryptocurrencies and tokens to surge up by astronomical margins.
The inflated volume and price of tokens listed on Bithumb should not be taken into consideration by cryptocurrency data providers such as CoinMarketCap, as investors cannot take advantage of the premium rates and traded based on the prices listed on the platform.
Other trading platforms in South Korea including UPbit, Korbit, and Coinone, which account for nearly 80 percent of the local cryptocurrency market share, have not demonstrated premium rates on their platforms since late 2017.
Bithumb Could be Under Scrutiny
As BTCManager reported in July 2018, the government of South Korea is currently speeding up the process of passing the country’s first cryptocurrency and blockchain legislation that will recognize crypto exchanges as regulated financial institutions and adopt the blockchain sector as a legitimate industry.
If passed, the legislation would also place crypto exchanges under the direct authority and control of the FSC, which will require exchanges to implement strict KYC, AML, internal management systems, and security measures to protect investors.
Given that the local financial authorities have utilized most of their resources in successfully eliminating the “Kimchi Premium,” and Bithumb single-handedly brought it back throughout the past month, analysts expect Bithumb to face scrutiny by regulators.