Arbitrage is a fascinating practice that has been around for hundreds of years. This method allows investors and traders to profit from informational inefficiencies by identifying the different prices for the same tradable asset. Naturally, this practice is harmful to the respective exchange markets since the exchange platforms incur losses as a result.
Traditional markets have taken appropriate measures to eliminate such practices from their sectors, but the crypto market is still relatively young and still presents price difference phenomena in several sectors.
One of the most prominent examples is the Kimchi premium that exists in Korea. In this article, we will discuss the nature of Kimchi and how retail traders can profit from its unique offerings.
Exploring the Origin of Kimchi
Named after delicious Korean food, the Kimchi premium was developed by South Korean traders to symbolise the unique arbitrage possibilities in this market. The Kimchi premium chance was initially made accessible in 2015 when traders realised that Bitcoin and other cryptocurrencies sold at considerably higher prices on South Korean exchanges.
This significant price disparity results from the stringent ways the South Korean government monitors money flow into and out of the country’s economy.
Historical data shows that the price of BTC in the Korean cryptocurrency market is always growing. However, because other top cryptocurrencies are more in demand in the Korean market, the price variation isn’t solely linked to BTC.
Ethereum has recently demonstrated excellent premiums in the Korean market, demonstrating that BTC is not the only player in this space.
Essential Prerequisites
Simply put, the rules and regulations of South Korea effectively cut off the nation’s economy from the rest of the world. The government closely monitors the local markets to ensure that domestic monies stay inside South Korea’s borders and that investors are kept off foreign exchanges. South Korea has the tightest regulations despite other countries’ similar trade restrictions on their internal markets.
Consequently, the Korean government created a separate domestic commercial market. Due to its lack of integration into global markets, Korea’s supply and demand for tradable assets differ. Therefore, the Korean market offers one of the last great opportunities to participate in substantial arbitrage in trading.
Understanding Arbitration
The technique of identifying a price differential across exchange markets and profiting by buying cheap and selling high is known as crypto arbitrage. Let’s say, for example, that trader A finds out that the value of Ethereum is ten XRP in one market and 12 XRP in another.
To turn a profit, Trader A has to purchase Ethereum in the first market and sell it immediately in the second. If all goes as planned, trader A will profit from the difference between the two deals and no losses.
This type of practice is naturally almost non-existent in other trading venues since the entire point is to eliminate market inefficiencies. Naturally, arbitrage leads to undesired instances of exploiting the technical or informational vacuums in different markets.
As a result, this practice transforms the trading process into an entirely different sector, where the mission is to identify informational gaps.
Most jurisdictions and economies are against this practice since it disrupts the normal course of business and generates losses for exchange platforms. Thus, numerous countries and international bodies have implemented safeguards to prevent such activities perpetually.
However, Korea still stands strong as a unique opportunity to reap profits from price variations in the virtual currency niche.
Important Factors to Consider
When approaching this intricate situation, there are several elements to consider. First, the entire process has a lot of technical and logistical complexity. Because the rules governing the movement of funds are enforced to the highest degree possible, accessing the market is exceedingly difficult. To strengthen its defences against such operations, Korea has implemented several regulations about money laundering and unlawful transactions.
Consequently, the most challenging part of this procedure is figuring out which connection channels are appropriate and trustworthy for doing business with. It is also not a good idea to perform this task by hand. The price of Kimchi varies from hour to hour.
Hence, to avoid suffering significant losses, automated trading bots and analytical tools will assist you in determining the ideal transaction windows. Precise arbitrage is significantly more straightforward to carry out with mechanical support. After all, high-volume trading is necessary for arbitrage, and if done manually, this may get rather dangerous.
Final Takeaways
The practice of cryptocurrency arbitrage is vanishing. Government organisations and the biggest cryptocurrency exchanges work together to eradicate market price disparities. However, South Korea may be an interesting exception to this trend because of its unique political and economic conditions.
Even if kimchi premiums are challenging, cryptocurrency traders may still profit greatly. It will be interesting to see if this odd phenomenon spreads to the rest of the arbitrage market or completely vanishes once the regulations are set.
