The Kimchi Premium, a Deep Bitcoin Indicator

The Kimchi Premium, or kimp, refers to the phenomenon in which Bitcoin prices in the Korean market are higher or lower than in the global market. It functions as an indicator of the temperature difference between Korean and global markets.

In past bull markets, Korean prices tended to form noticeably higher than overseas prices.

Alongside this, a convergence in the price gap between domestic and overseas markets is also being observed.

Unlike Samsung Electronics stock, Bitcoin has no central institution that sets its price. Each exchange merely provides a venue for trading, and prices are determined entirely by real-time supply and demand.

Accordingly, each exchange forms Bitcoin prices through its own independent order book, which is the fundamental cause of regional price differences.

Just as apple prices differ by region, Bitcoin prices diverge across exchanges because of supply-demand imbalances in each independent market. It is much like an apple box costing 50,000 won at a market in Daegu but 55,000 won in Seoul.

This characteristic of separated markets is reflected in Bitcoin price formation as well, producing price differences among exchanges.

In the Bitcoin market, arbitrage trading to capture price differences is active. For example, if a Bitcoin costs 100 million won overseas and 110 million won in Korea, one can buy overseas, sell in Korea, and earn a 10% gain.

However, this arbitrage faces limits. Bitcoin moves freely, but the movement of fiat currency is restricted by foreign exchange regulations and the like. As a result, in January 2018 the kimp reached as high as 55%.

Bitcoin itself moves freely, but the fiat currencies used to trade it are subject to national controls such as foreign exchange regulation, real-name accounts, anti-money laundering (AML), and the Travel Rule.

These financial regulations constrain capital flows between overseas and domestic markets, and this is the main cause of the kimp.

The Kimchi Premium arises from two main factors combined. The first is the structural constraint of the Korean financial market, such as foreign exchange controls. These institutional differences provide openings for price gaps between overseas and domestic markets.

The second is the strong buying sentiment and demand of Korean investors. Limited Bitcoin supply relative to demand tends to push Korean prices above overseas levels.

Together these produce the distinctive price phenomenon of the Korean Bitcoin market.

In this context, the kimp can be interpreted as a 'thermometer' of Korean investors rather than merely a price gap.

Such a high kimp reflects, on top of Bitcoin's own price, a 'FOMO' (Fear Of Missing Out) cost, the psychology of participating recklessly for fear of being left behind, built into the price.

Recently the opposite phenomenon, the 'reverse premium,' has also appeared. This means that when Bitcoin trades at 100 million won overseas, it trades at 99.5 million or 99 million won in Korea. Korean prices fall below overseas prices.

This reverse-premium phenomenon can be interpreted as an indicator that buying demand in the Korean market has weakened relative to buying demand in the global market.

In addition, growth in derivatives markets is accelerating this globalization.

This means the relative influence of the Korean market on overall Bitcoin price formation is gradually declining.

In the past, the Korean market moved separately from the global market by 5%, 10%, and sometimes even 20%, but recently both the kimp and the reverse premium have tended to stay close to 0%. This means Korean Bitcoin prices often move quite closely alongside global Bitcoin prices.

This pattern shows that the Korean market is increasingly reacting to and synchronizing with global price movements.

First, real-time access to information has improved, reducing information asymmetry between domestic and overseas markets. Second, as the market has become more specialized, the number of professional traders and arbitrageurs has grown, quickly closing price gaps.

Third, the global Bitcoin market itself has grown so large that the influence of any particular country or regional market has relatively diminished.

It is merely a temporary gap that arises when the Korean price fails to reflect global price changes immediately.

Therefore, the presence or the high or low level of the kimp does not necessarily mean Bitcoin is undervalued or overvalued.

A reverse premium may favor buyers, but the cause of selling pressure should be checked carefully.

The healthiest and most objective market environment is when the kimp stays near 0%, matching global prices. This provides a comfortable and rational investment environment.

Conversely, if the kimp stays near 0% during a rising market, it suggests the market may be shifting toward institution-led trading, unlike in the past. If the reverse premium widens, it can be read as a signal that investment sentiment within the Korean market is weaker than globally.

The Kimchi Premium has arisen from cross-border financial regulation and national foreign exchange systems, but recently, as institutional investors have entered and global liquidity has expanded, the price gap is gradually narrowing. This can be interpreted as the process by which Bitcoin, as a 'true global asset,' is converging on a single integrated price.

As Bitcoin comes to be recognized as one value across a wider market, price deviations driven by the factors of any particular country are expected to shrink.

When buying Bitcoin, it is important to check the Kimchi Premium together with the price itself. If the kimp is excessively high, you may be paying a premium for the Korean market, so it may be wise to hold off on buying and watch market conditions. Conversely, when a reverse premium appears, you should identify its cause before judging whether to enter for the long term.

Ultimately, investors should weigh the structural maturity of the market and investment sentiment behind the price when making careful investment decisions.