what is a premium?

the phenomenon of Bitcoin trading more expensive on local exchanges than overseas is known as the "kimchi premium". it's a combination of "kimchi," which symbolizes Korea, and "premium," which means high price. For example, a Bitcoin that trades for 100 million won on an overseas exchange costs 130 million won on a local exchange, a 30% difference. during the 2017-2018 Bitcoin mania, the price in Korea was as much as 40-50% higher than overseas. Recently, it's not as big as it used to be, but it's still around 2-5% more expensive.

what causes this?

the main reason this happens is that domestic demand greatly outstrips supply. Even though many retail investors want to buy Bitcoin in Korean won, there is only a limited amount of it available on exchanges. it's like having different prices in different supermarkets for the same product. while the domestic stock market is managed by stock exchanges and the price is the same across all brokerages, cryptocurrency exchanges are free markets that operate independently, so the price varies from exchange to exchange. for example, if there are many pending orders to buy Bitcoin on Upbit and Bithumb, the domestic price may spike and become more expensive than overseas. Also, fluctuations in the exchange rate of the Korean won to the dollar have an impact. in the past, Korea's closed financial environment made it difficult to trade overseas, resulting in a supply and demand imbalance that was exacerbated by the exchange rate.

another factor is the difference in liquidity between exchanges. for example, if deposits and withdrawals on a domestic exchange are temporarily suspended due to coin network maintenance or security checks, there may be a shortage of coins on a particular exchange. when this happens, domestic buyers rush in, causing the domestic price to spike. conversely, if the domestic price plummets, a "reverse kimchi premium" appears, where the domestic price is cheaper than overseas. in fact, domestic prices often trade cheaper than overseas prices when political and economic issues or changes in investor sentiment cause a sharp drop.

how to calculate

to calculate this number, we compare the price in local currency to the price in foreign dollars and the exchange rate. for example, if Bitcoin is trading for 67 million won on Upbit, but the price on Binance overseas is $50,000 and the exchange rate is 1,200 won, the calculation looks like this

  • overseas price to KRW: 50,000 (USD) × 1,200 (KRW/dollar) = 60,000,000 KRW

  • premium = (Domestic price ÷ Conversion price - 1) × 100 = (67,000,000 ÷ 60,000,000 - 1) × 100 ≈ 11.7

in this example, it comes out to about 11.7%. with this simple expression, you can calculate the price difference between each exchange as a percentage. comparing domestic and international quotes typically reveals this difference, which can help investors understand market trends.

inverse premium

while it's common for the domestic market price to be higher than overseas, there are times when the opposite is true: when the domestic price is lower than the overseas price, this is known as an "inverse premium." For example, if Bitcoin is priced at KRW 90 million on a domestic exchange and the overseas price is KRW 91 million, the inverse premium is about -1.1%. recently, this "inverted price" has often been seen as overseas trading volumes have surged while domestic trading volumes have declined. this phenomenon and the inverted price fluctuates depending on market conditions and supply and demand, and is a warning sign for investors about the difference between domestic and foreign prices.

frequently asked questions

  • Q. what is this phenomenon? A: It refers to the phenomenon where the price of a cryptocurrency on a domestic exchange is higher than overseas. for example, when the price of Upbit is higher than the price of Binance at the same time, it is said to be at a premium.

  • Q. Why does this happen? A: This is because the buying demand from domestic investors is higher than the supply. Since Korea has a limited number of coins that can be traded in Korean won, and it is difficult to use overseas exchanges, the price rises when domestic demand spikes. Exchange rate fluctuations and liquidity differences between exchanges also play a role.

  • Q. how do I calculate? A: It's calculated by comparing the price of the Korean won to the price of the foreign dollar and the exchange rate. for example, you can calculate the premium by converting the foreign coin price to KRW and then comparing it to the domestic price.

  • Q. do altcoins have premiums? A: Yes, a similar phenomenon can occur not only with Bitcoin, but also with major altcoins like Ethereum and Ripple. if a particular coin is in high demand in the fiat market, it may command a premium.

bottom line

one-line summary: the kimchi premium is a price differential created by high demand and low supply in the Korean cryptocurrency market.

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