While in global markets bitcoin (BTC) is sold at prices around 58,000 USD, in the markets of South Korea cryptocurrency is traded at a price of 66,000 USD, which in English is called the Kimchi effect or “Kimchi Premium”.
The Kimchi effect is the difference in the price that bitcoin (BTC) and other cryptocurrencies have in South Korean markets compared to stock exchanges in other parts of the world.
Currently, for example, the price of BTC is 77 million Korean won (KRV), which is equivalent to 68,200 dollars, on the Bithumb stock exchange, according to TradingView. On Corbit, the second South Korean stock exchange, BTC trades 76 million KRV, which corresponds to 66,000 US dollars. Meanwhile, the global average price of BTC is $ 58,000, according to the cryptocurrency calculator CryptoNoticias.
As for ether (ETH), the cryptocurrency of Ethereum, it is traded on Korean stock exchanges with a little more than 2,400 US dollars, according to TradingView, when its global average price is 2,100 US dollars, according to CoinMarketCap.
The Kimchi effect was formally studied in 2018 by researchers at the University of Calgary, located in Canada, in connection with the phenomenon in question between 2016 and 2018, where the price of BTC differed by almost 5% on South Korean stock exchanges.
Although this phenomenon could be interpreted as perhaps an increase in demand for BTC in South Korea, the study attributed the Kimchi effect in part to the additional costs that Koreans have to pay when acquiring bitcoin due to taxes and regulations. The study claims this BTC tends to trade more expensively in countries with fewer financial freedoms, where friction would be created.
Even though South Korea ranks 24th out of 178 countries with economic freedomsAccording to the index of economic freedom of the Heritage Foundation, new restrictions were recently approved for exchange offices in that country, according to specialized media.
As of March 25, all cryptocurrency exchanges in South Korea had to register with the Financial Intelligence Unit (FIU) of the Financial Services Commission (FSC) of that country. This bureaucratic process is largely motivated by money laundering risks, taking into account the authorities, and could create bureaucratic obstacles to South Korean exchanges.
One of the affected stock exchanges is OKEk, which said that it will stop working in South Korea by April 7, 2021, fleeing from these regulations that will disable business in the country, as reported by CryptoNoticias.
Can you use the Kimchi effect? Probably not
While some traders might want to take advantage of the Kimchi effect, arbitrage between the rest of the world (cheaper) and South Korean (more expensive) markets, this would not be so easy becauseSouth Korean exchanges are banned from providing services to foreign clients.
Also, the obstacle for South Korean traders lies in the fact that other exchange houses in the world do not accept Korean wine (BLOOD). However, if a South Korean user finds a way to buy cheaper bitcoins abroad and sell them on the local market, he could certainly make a profitable trade.
It should be borne in mind that the user would be subject to the KIC policies of the stock exchange on which he operates, and probably implies the fulfillment of his tax obligations.