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Crypto arbitrage

Chinese investors enjoy bitcoin arbitrage gains on Kimchi Premium

By Apr 13, 2021 (Gmt+09:00)

Chinese investors enjoy bitcoin arbitrage gains on Kimchi Premium

Chinese investors trading in digital assets such as bitcoin are reaping decent arbitrage gains in South Korea as the so-called Kimchi Premium has returned amid resumed interest in cryptocurrencies.

According to the banking industry on Apr. 13, the demand for foreign currency exchange from the won to the yuan to send back to China has significantly increased in the past 10 days.

Industry data showed yuan transfers from Korea’s five major banks, including Kookmin Bank and Shihan Bank, totaled $72.57 million in the first nine days of April, an eightfold increase from $9.07 million for the whole of March.

A local bank saw such transactions rise ninefold to $9.1 million in the same period.

Industry watchers said the sudden surge in exchange from the won to the yuan and transfers to China largely derives from increased bitcoin trade by Chinese investors operating in Korea, taking advantage of the spread between the bitcoin price on South Korean crypto exchanges and Western exchanges.

RESURFACED PREMIUM

The Kimchi Premium created when bitcoin trades higher in Korea than other major markets, such as the US, is reappearing as the domestic virtual asset market heats up.

The premium, which first appeared in 2016, rose to as high as almost 55% in January 2018 and collapsed soon after, dealing a blow to cryptocurrency investors. However, such a premium resurfaced last month, hovering around 6%, and has since climbed to more than 20% on Apr. 6.

Another Korean bank said Chinese residents sent $5.8 million worth of yuan to China on Apr. 7 and $6 million worth the following day, compared to the $2.5 million worth for the whole of March.

“At one of our branches, Chinese people are queueing to send their money to China. Such a request used to be very rare at the branch,” said a local bank official.

He said some Chinese customers wanted to transfer up to $50,000 at a time, the ceiling for sending a foreign currency without having to present supplementary documents.

Bithumb, South Korea's largest cryptocurrency exchange
Bithumb, South Korea's largest cryptocurrency exchange

ARBITRAGE ON HIGHER PREMIUMS

In Daerim-dong, western Seoul, as well as Incheon and Bucheon cities in Gyeonggi Province, where Chinese expatriates are heavily populated, people prefer privately owned foreign exchange counters over local banks because such shops charge lower exchange fees. But these days, such private exchange shops charge even higher fees than banks as demand has increased.

A private foreign exchange shop owner in Bucheon said people can exchange one million won into 5,450 yuan when they transfer, compared to 5,787 yuan for the same amount at Hana Bank.

Banking industry officials said an increasing number of Chinese investors in Korea are seeking to profit by trading the price differences that exist on different crypto exchanges – a process called arbitrage.

They often buy bitcoin at a lower price on overseas exchanges like Binance and resell it at a higher price on Korean crypto exchanges such as Bithumb and UPbit, taking advantage of the Kimchi Premium that reflects heated demand for virtual coins among Korean investors.

Earlier this week, the price of bitcoin on UPbit was 77.86 million won, compared to 67.92 million won on Binance. A successful arbitrage trade can typically create a windfall of some 10 million won, according to one cryptocurrency trader.

The premium is a popular bitcoin market indicator because a rising premium signals a retail frenzy in South Korea historically observed when prices are heading toward a peak.

Write to Jin-Woo Park and Dae-Hun Kim at jwp@hankyung.com

In-Soo Nam edited this article.

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