The Korean peninsula is home to a rugged landscape which lends picturesque scenery to the backdrop of urban sprawl in the south and presumed vast countryside in the north. There is a successful democracy on one end and a successful dictatorship on the other. They mainly share a history that lingers further and further away in its fixed position in the past and a language that diverges weekly from the point at which the two countries separated. The only thing they really agree on, and one of the most iconic symbols of the Koreas, is kimchi.
Love it or hate it, as many western folks do, kimchi is the national food of both Koreas. Koreans eat it with almost every single meal barring those purchased at western-style restaurants. Many Koreans claim that it gives them immunity to chronic ailments including those associated with old age. Some of the longest living people in the world reside in South Korea.
Kimchi’s importance to the Korean people across the peninsula and the world cannot be understated. It stands to reason, therefore, that the primary sustaining factor in the wild speculation of the 2017 Bitcoin Bubble was the Kimchi Premium. Here we will see exactly what the Kimchi Premium was and how it came to be.
We have already seen that South Korea accounted for the single largest spot trading market in 2017. That distinction carried over for some time into following years but to a severely mitigated effect due to government restrictions. The fact that about a third of Korean office workers were trading cryptos to some degree should tell the whole story but here it will be laid out in full to encompass the entire picture.
Not everyone is aware of the work environment at South Korean offices and the culture that is widely cultivated there. If I were to describe it all in one word, I would choose: draconian. The larger the company, the more draconian it is – everything scales up. Workers who wish to keep their position, since very few private companies offer guaranteed employment unlike in Japan, must basically do whatever their superiors demand of them. Superiors include those ranking higher than them and those colleagues who are at the same level but are older. Demands can be as mundane as fetching a coffee or clocking into work for them or can be as frustrating as joining them for daily after-work drinks which often turns into early morning street pinball where you offer up breakfast for the diligent pigeons.
Men who have a family at home are expected to leave the household responsibilities to the wife so that they can cultivate and maintain strong relationships with their coworkers whom they may not even like. Nobody can leave the office until the boss has finished doing whatever they have to do, which is what often leads to “[I’m hungry let’s all go out for dinner.]” by the time the boss hangs it up at 8 or 10pm. Refusing to go out is all but impossible; requesting to duck out chips away at the boss’s trust in you until you are weeded out for someone more loyal. Certainly, there are a handful of people waiting to breathe a sigh of relief within every company when someone gets fired for their insubordinate premature departure because it means a promotion for them.
Those who fall out of line are ridiculed; one of the negative aspects of a society with mandatory military service for men. So, what did this mean, exactly, for the crypto traders out there? If the boss was trading cryptocurrency, he was likely to tell his subordinates to invest in the same thing as him. Starting with the boss, the investment pool at a company would trickle down all the way to the front desk girls and mail clerks. “[Hey, subordinate, I invested in XRP a week ago, but it still hasn’t mooned. You need to put some money into Upbit and buy XRP too.]”
Imagine that line of request going out hundreds of times across Seoul in a matter of a couple weeks. Suddenly a third of all office workers would be investing in something they don’t really understand but know that it will make them money somehow.
This is perhaps the main reason South Korea ranks third behind Mexico and Costa Rica in the OECD’s hours worked by country per capita. What’s somewhat misleading is that it’s not that everyone is ‘working’ at their air conditioned desk during the hours that they are clocked in since that would be impossible, it’s that they are not allowed to leave. The standard desk jockey doesn’t have that much to do for 10+ hours every day, so they find ways to entertain themselves while peeking over at the boss as the evening hours crawl by. In 2017, South Korean office workers largely chose to spend that time trading cryptos, especially XRP.
The second major contributing factor to the Kimchi Premium was that individuals not residing in South Korea had a hard time establishing an account at Korean exchanges. Furthermore, those exchanges often would only accept KRW as a fiat onramp, thereby self-restricting the user base to some degree. The effect this had was to inflate a bubble within a bubble; a closed ecosystem. Users would deposit KRW, buy their cryptos, wait for moon, liquidate, then start it all over again with a much larger stack of KRW.
Trade volume increased steadily through all of 2017 until a rapid increase in November. On November 11th, trade volume for QTUM on Bithumb was about $59.1 million. On November 12th, Bithumb’s reported trade volume on QTUM alone jumped 517.1%, up to about $305.79 million in a single day when they became the largest QTUM exchange.
Those numbers are enough to make anyone in the investing space take notice. It was then that Bithumb solidified itself as one of the premier spot trading platforms in the industry before Binance really made it big since Coinbase was relatively difficult to utilize with only a small fraction of the fanfare.
Why, then, weren’t people from all over the world flocking to Bithumb to create accounts and start their trading? Hundreds of thousands of people had accounts on exchanges based in far flung places around the world; however South Korea’s exchanges still presented a challenge for those looking to lock down an account mainly because of the language barrier. Korean companies are notorious for their stubborn refusal to bend to the international winds of commerce that blow through most other places. The same could be said about China, too, but that’s for a completely different reason.
To be fair, Bithumb was still allowing new accounts to be created by anyone freely. If you could pass the relatively easy KYC process and navigate through the app which at the time was just a browser, you would be on your way to trading. Users were always presented with the Korean language version of the site first as there was no way to set a different default language on early versions of the app. Korean exchanges then couldn’t possibly care less about the non-Korean users who wished to trade on their platform. It was evident by the lack of adequate customer service in English or in some cases any English language option at all.
The lack of English on their platform isn’t necessarily a criticism since they were simply catering to their main user base, but Bithumb was ranked the very top exchange by trade volume at multiple points throughout 2017. It doesn’t stand to reason that they would maintain such a prohibitive stance toward international users for so long. Since then, Bithumb has opened exchanges friendly to non-Korean traders and have maintained a high standing in the volume rankings among global exchanges.
That said, it only made the closed economy for Korean traders expand further through the latter half of 2017.
Conspiring Factors
Here we had two main factors conspiring to make the Kimchi Premium become something crypto traders may well talk about until the day they end their self-destructive behavior and stop trading. First, there was the work culture of Korean offices. There workers were and still are in many cases required to stay very late with little to do other than wait for their boss to finish his work. With so much free time, many took to trading cryptocurrency and forcing their subordinates to do the same. Second, there was difficulty traders faced trying to create exchange accounts at Bithumb, Upbit, CoinOne, and the other big Korean exchanges. In addition to that second factor, it should be noted that Korean traders generally had little interest in making accounts on non-Korean exchanges due to the language barrier. A perfect storm was rising overhead.
People are smart. We have created solutions on solutions on solutions to life’s biggest challenges. So much so, that we are starting to whittle away at the tiny details like burrs in the shoes of wayward travelers. We use tools to open coconuts and walnuts which animals struggle to taste. We can catch a million fish at a time where a bear must wait for hours to catch enough for her family.
Before the Kimchi Premium really took off – that is, before there was a 50%+ premium on XRP and a 40%+ premium on Bitcoin in South Korea, there was still the slight problem for traders to somehow gain access to the country’s markets. The solution traders came up with was simple and extremely profitable: arbitrage.
Arbitrage is the simultaneous buying and selling of securities, currency, or commodities in different markets or in derivative forms in order to take advantage of differing prices for the same asset. It provides traders with the ability to find and sell assets at a favorable price point regardless of the national borders that confine them. In the digital age, it was as easy as picking up a phone and executing a trade with a broker. In the information age with cryptocurrency, it became as easy as manually making a few clicks and waiting anywhere from a few seconds to a few hours to see the completion of the trade along every step toward its completion.
According to Korean capital law which has been highly sensitive to capital flight for decades, arbitraging capital with someone else’s money is strictly prohibited and is punishable by jailtime and hefty fines on top of deportation for foreigners. Using your own money had its own challenges since individuals were limited to a maximum of 10 million KRW deposits from personal overseas accounts per week. A single BTC managed to stay above that price point for nearly 2 months straight. Assuming an individual was performing arbitrage on a regular basis as their main source of income, they would surpass that 10 million KRW in a day. So, the ‘simple’ solution that traders envisioned would last into eternity presented yet another dilemma that they would have to come to terms with in order to make the money as easy as possible.
Traders first contacted everyone they knew who resembled in any small way a Korean. The logical first step is to cast the net out there and see what gets caught. Most narrowed down their search of personal contacts to zero leads. They then took to the internets – more specifically, Reddit. In doing research for this book so many threads there resurfaced that now seem like a distant faraway memory, more like nostalgia, than just the past few years. Frankly, those threads put smiles on the faces of many who lived that life at how outlandish and opportunistic these Redditors were and still are.
From the thread dated January 10th, 2018, “Looking for Arbitrage partner? Use this Thread instead of Spamming this Board with Ads”, commenters came from many corners of the world.
jeyThaswan
Hello everyone! I’m a Canadian looking for more Korean arbitrage partners. I have already successfully completed two transactions so I have references available upon request. Looking forward to connecting!
40x15y
Hello
I am looking for a Korean partner to do arbitrage with. I am based in Manila, Philippines.
I plan to do continuous trading with you. We can start at 0.05btc and work our way to 1btc in 20 cycles, while alternating who first sends money or btc to equalize both our risks.
maglev24
I’m an American looking for arbitrage partners. Like everyone else, willing to send over a small amount, then harness the power of exponential returns. I am willing to pay a commission to anyone who signs up or refers someone to work with me.
puffpuffnpass
Hi guys I’m from Hong Kong, looking for arbitrage partners. I have already traded with 4 Koreans and all we continue to cycle twice a week meeting in the airport,flying to each other, earning the spread happily.
The most poignant and ironic comment is the first one:
iXbrian
FYI Arbitrage using someone elses money is illegal and considered illegal foreign exchange under Korean Law. (example: someone sends you coins, you sell on koresn exchange then wire the money back out of korea)
Arbitrage using your own personal funds is okay.
Be careful!
Assuredly the requests go on for days from this thread and others between November and January. They weren’t confined to Reddit alone, however. Facebook groups like the one under Crypto of Korea were plagued by opportunists looking to strike it rich on South Korea’s Kimchi Premium.
Tangential Effects of Arbitrage
At first, the Crypto of Korea Facebook group was open to all. The link was posted there and on other crypto-related groups and fanbases like XRP and ICON. Likely the admins were none too pleased about it but it created some nice traffic on their pages as well so they may have tolerated it for that alone. More than a few members of the Crypto of Korea group were poached from those pages. Member numbers exploded almost as quickly as the original chatroom until every day people were asking about arbitrage.
Crypto of Korea the Facebook group required increased privacy so questions about whether new members planned on talking about arbitrage and hinted that they should not were posed. One of the questions was clear, “Are you going to discuss arbitrage?” Of course, many respondents answered that they had every intention of inquiring about arbitrage partners since they could ‘make both you and me rich’.
It should go without saying that arbitrage creates an unsettling conflict of interests for taxmen around the world who want to keep close tabs on the amount of their national currency each person wants to send overseas in something called capital flight. South Korea especially feared capital flight as they have a history of migrant workers sending their earnings to China.
The rampant arbitraging or ‘arbing’ as we learned to refer to it in Crypto of Korea since we had multiple confirmations that authorities were watching the chat, made the Kimchi Premium a bona fide ponzi scheme. The trade volume on exchanges has always been subject to scrutiny over its authenticity but in late 2017, it was nearly impossible to determine genuine vs. wash trading volume. Breaking down the exponential growth of volume on Korean exchanges shouldn’t be to hard. Let’s say the Kimchi Premium on Bitcoin was a conservative 20% on average between September and January. If you deposited $4,688.15 onto a Korean exchange on September 1st, 2017, you would have enough for 1 bitcoin. But obviously you’re not going to buy the bitcoin on that exchange. Instead you put all your fiat into XRP and send it to your dad’s Poloniex account and buy 1.2 bitcoins, which you immediately liquidate.
Then, you would have to send that $5,625.78 in fiat back to your Korean bank account. No red flag would be waved on that transaction. Then you take that fiat and deposit it right back into your exchange account, take a full position in XRP, send it to Dad, sell for BTC, liquidate, and send that $6,750.94 to your bank account. Assuming you did all this within 2 days, you would be flagged for suspicious activity by the bank.
Now, assuming the American bank account you sent from was in your name, you may get a few free passes. Therefore, in just a couple theoretical days, you could have earned over $2,000 by doing little to no work. That’s not just the American dream, that’s the human dream. Bear in mind that the Kimchi Premium was not necessarily that high at the time, but it was definitely higher than 20% on more than just XRP and BTC in the latter half of 2017. Easy money is never as easy as it seems. There were people who had their earnings frozen in Korean accounts and left the country to avoid legal action in 2018.
When Coinmarketcap removed Korean exchanges from their price calculations, XRP’s price per coin dropped some 30% and market cap dwindled by $20 billion instantly. CMC made the move to stop including Korean exchanges in their calculations because of the ridiculous premium on cryptos there. It was the right move that opened up a veritable can of worms to traders who were under the impression that ‘everything was fine’ in an investing landscape where magic Internet money gained more headlines than the President of the United States.
It is admittedly hard imagine that the profitability of arbitraging cryptocurrency from South Korea can be understated enough. With that, one cannot understate how obnoxious it was. As mentioned before, the Crypto of Korea Facebook group required greater privacy backstops after memebers found out in the chatroom that Korean authorities had become keenly aware of the activity there. Put money in, send BTC out. That was the name of the game. Cryptocurrency is not legal currency in South Korea and cannot be treated or even called as such. Making overseas remittances with a valued fungible (theoretically) asset sure sounds like currency to Korean authorities.
When the 2017 Bitcoin Bubble burst and prices started falling in unison, the Kimchi Premium fell as well. No coincidence, really. As Bitcoin became less profitable over all and harder for users to arbitrage, trade volume diminished tremendously. The show needed to go on, though, so exchanges kept up the charade of a healthy market with impossible trade volumes, and still do. More on that in a later chapter.
The reason arbitrage is illegal in all but specific cases is to prevent money laundering. When coupled with cryptocurrency it’s extremely difficult to prevent it. Money laundering is done by common crooks, sure, but the less romantic side of it is perpetrated by sinister people who traffic humans and encourage slavery. The rules put in place to prevent arbitrage go deeper than just the government trying to take its piece. Those safety measures are meant to protect everyone.
Although arbitrage via cryptocurrency usually just started off as a means for people to cheaply and efficiently remit money to their home bank accounts, it became something more spectacle and more suspicious. Paul Graham put it best when he said, “When people discover a way to skirt ordinary checks and balances in the service f a good cause, it will immediately be adopted by others using it for less good causes.”
Seeing how office workers had time and money to burn at the office and how people could easily remit funds across borders with just a few clicks, it’s easy to see how these factors conspired to create a Kimchi Premium. Not to mention the fact that South Korea was effectively a closed ecosystem where money went in but largely did not come out. It was the most ideal arrangement for an unnatural albeit organic premium on the prices of cryptocurrencies traded at Korean exchanges.
The Kimchi Premium remains a meme to this day. People mostly refer to it as the ‘gimp’ and traders schedule trades around the percentage of gimp the market bears at any time. Following the Bitcoin Bubble burst, the gimp was negative for quite a long time as funds exited the ecosystem and authorities cracked down on the apparent malfeasance. Needless to say, the Kimchi Premium was one of the most dynamic and interesting aspects unique to Korea that late 2017 featured as a reason to be in South Korea.
