Kimchi premium collapses: Short-term top signal or a reset for Bitcoin?

The so-called Kimchi premium, which measures the premium of the Bitcoin (BTC) price in South Korea’s cryptocurrency exchange market, has plummeted.

The premium declined from 22% to 15% within a matter of hours on April 7, and it is continuing to drop across major South Korean exchanges.

A big pullback in South Korea’s Bitcoin market

As CryptoQuant CEO Ki Young Ju noted, the price of Bitcoin fell particularly hard on South Korean exchanges.

As the price of Bitcoin dropped, the Kimchi premium fell in tandem. But, since BTC’s price fell significantly harder on South Korean exchanges, the premium plunged quickly within a matter of hours.

There are two possible reasons why the premium dropped in the manner that it did.

First, traders from outside of South Korea might have found a way to successfully arbitrage the premium. One potential way this could happen is if traders from other Asian markets coordinate with whales in South Korea to sell BTC and withdraw on the same day.

Second, altcoins that were increasingly gaining momentum throughout the week severely corrected. As the capital from the altcoin market exited, traders might have also sold BTC and Ether (ETH), bringing down the large-cap cryptocurrencies.

Ju said:

“It seems someone finally figured out how to arbitrage this Kimchi premium opportunity. The trading volume in 30min time frame on @upbitglobal, the largest Korean exchange, was bigger than @Binance’s. This drop seems related to Kimchi pullback. One evidence of arbitrage: @BithumbOfficial, one of the largest exchanges in Korea, $BTC inflow mean has been increasing while all exchanges’ is decreasing. It seems some whales are depositing BTC to Korean exchanges.”

XRP, as an example, was consistently one of the most popular cryptocurrencies in the South Korean market throughout the past week.

As Cointelegraph reported, XRP broke out against Bitcoin, rising above $1 for the first time in over three years.

But, as altcoins like XRP fell, it is possible that the market sentiment around Bitcoin and Ether also worsened in the Asian market, bringing down the premium.

Is this a top signal?

When the Kimchi premium fell substantially in 2017, the price of Bitcoin plummeted by more than 50% within several days.

This time around, the price of Bitcoin dropped by 5% to $56,000 and started to recover fairly quickly thereafter. 

The probability of the cryptocurrency market recovering in the short term remains high because there were large liquidations in the past 48 hours.

For example, a single Stellar Lumen (XLM) trade resulted in a liquidation worth $84 million. Given that well over $1 billion was liquidated in the last 24 hours, the crypto derivatives market is likely to reset.

The funding rate of Bitcoin across major futures exchanges was around 0.15% before the drop. This is 15-fold higher than the default 0.01%, indicating that the derivatives market was extremely overheated.

Though, as the chart above shows, the funding rates remain at relatively high levels, which suggests that the price may see more downside in the short term.