Cryptocurrencies have no borders, but exchanges do.
- Author: Victor Ramirez, Coin Metrics
- Translator: Luffy, Foresight News
Key Points:
- During a brief period of political turmoil in South Korea, the "Kimchi Premium" phenomenon has resurfaced. At its peak, the trading price of Bitcoin reached nearly $115,000.
- Cryptocurrency trading exhibits strong regional differences in exchanges and assets.
- Since the beginning of this year, there has been a significant increase in on-chain activity of legacy altcoins, particularly those primarily traded in Asia and becoming targets of U.S. SEC enforcement actions.
Table of Contents
ToggleIntroduction
In a broad sense, cryptocurrencies are considered a borderless, 24/7 market. While the underlying cryptocurrency technology is indeed independent of one's geographic location, each market is highly sensitive to regional patterns, regulatory frameworks, and the preferences of local residents.
In this week's "Network State," we will use the South Korean market as an example to explore the regional characteristics and geographic features of cryptocurrency trading activity. By utilizing time zone data, we can observe the localization trends of various cryptocurrency exchanges and assets. Finally, we will provide the latest updates on the on-chain activity of various Altcoins.
Capital Controls Causing Kimchi Premium
The "Kimchi Premium" is an interesting case study of a specific regional market behavior. The Kimchi Premium refers to the difference between the trading price of cryptocurrencies in the South Korean market and the "reference" global price. The Kimchi Premium is primarily due to the strong demand for crypto assets in the closed market environment and the reduced efficiency of these markets due to the difficulty of international arbitrage, resulting from years of strict regulation.
While this may present obvious arbitrage opportunities, local regulations make it difficult for foreign individuals and institutional investors to profit from it. Capital controls on the Korean won restrict the flow of fiat currency in and out of Korean exchanges. By law, only Korean nationals or foreign residents with resident certificates can trade through Korean exchanges. At the same time, Korean exchanges face stricter regulations compared to international exchanges. For Koreans to trade cryptocurrencies on foreign exchanges, they must first purchase them from domestic exchanges and then transfer them out.
Finally, the banking channels make the response to any arbitrage opportunities very slow. Transferring funds from banks to exchanges can take several hours, sometimes even a day, by which time the arbitrage opportunity may have disappeared.
The Kimchi Premium has been well-documented in the history of cryptocurrencies, gaining attention since the end of 2017.
During the peak of the 2017-2018 bull market, the Kimchi Premium persisted. At the time, the market was thinly traded, leading to large price differences. Notably, FTX's sister trading company, Alameda Research, began exploiting this regulatory arbitrage as early as 2017 and became one of the largest cryptocurrency trading firms at the peak.
During the 2021 bull market, we have again observed the persistence of the Kimchi Premium, though to a lesser degree and with lower frequency compared to 2017. The Korean exchange Upbit's Korean won - Bitcoin market has experienced frequent volatility, with a discount of up to 12.5% during the May 2021 flash crash.
As the market has stabilized over time, the Kimchi Premium has largely disappeared, with some exceptions. The Kimchi Premium even pushed Bitcoin prices in some Korean markets above $100,000, two weeks earlier than the overall global market's breakthrough of $100,000. On December 3rd, South Korean President Yoon Seok-yeol declared a state of emergency, and the Kimchi Premium has since resurfaced. According to Coin Metrics' 1-minute reference pricing, the premium reached as high as 20%, with Bitcoin prices approaching $115,000.
While the "Kimchi Premium" phenomenon is now widely known, the strict capital controls make it difficult for foreign investors to participate in the Korean market. This leads to the market being susceptible to liquidity shocks, resulting in price instability.
Cryptocurrency trading exhibits strong regional characteristics
Regionality of cryptocurrency exchanges
Although the blockchain itself does not require permission, cryptocurrency exchanges are still the necessary intermediaries for the vast majority of market participants. The cryptocurrency market is global, but each exchange must comply with local regulations to serve users in a particular country. Given the varying degrees of regulation around the world, cryptocurrency exchange trading activity is concentrated in a few geographic regions. Few exchanges truly operate in a borderless manner.
We can leverage this knowledge about local legal constraints, as well as known user preferences in specific regions and indicators derived from market data, to understand the distribution of trading activity around the world. The chart below shows the share of spot trading volume for specific exchanges during peak hours in different time zones.
Each row represents an exchange, and each column represents the spot trading volume of that exchange during peak hours (9 AM to 5 PM) in a given time zone. The value in each cell is the comparison of the exchange's average trading volume in the given time zone to its overall average hourly trading volume. The last column is the average hourly trading volume for each exchange. For example, Binance's trading volume is 12.1% less than its $802 million average during the East Asia time zone, but 19.4% higher during the European time zone.
As expected, we see the trading volume indices of Korean exchanges Bithumb and Upbit, as well as Japanese exchanges Bitbank and Bitflyer, skew towards the East Asia time zone. Upbit only serves markets in East Asia, such as Korea and Singapore. In fact, it is illegal for anyone outside of East Asia to trade on Upbit. Assuming trading activity from non-East Asian Upbit users is negligible, we can take the activity outside of the East Asia time zone as a baseline for non-peak trading activity.
It is difficult to distinguish regional activity between the European and US time zones due to their overlap, but there are still clear patterns in the trading activity. Kraken is a US exchange, but its trading activity is slightly higher during the EU time zone than the US time zone.
Overall, we see most exchanges are heavily skewed towards US trading hours. Coinbase, Gemini, and Crypto.com have the strongest preference for US trading time at 36.1%, 57.3%, and 37.1% respectively. Interestingly, Bullish, which is not legal in the US, still exhibits a strong preference for the US Eastern time zone (38.6%).
Regionality of asset trading
We can apply the same methodology to the trading volume of assets across all exchanges. Similar to the exchange segmentation, most asset trading activity still occurs during the EU/US time zones. Bitcoin, Ethereum, and USDC indices are particularly skewed towards the US time zone.
Compared to other cryptocurrencies, Ripple, Tron, Stellar, and Cardano perform better during the East Asia time zone. Koreans have shown a strong interest in XRP, while Tether on Tron is the most widely used stablecoin in Asia.
Time zone analysis is clearly limited by longitude, so we cannot rely on it alone. We also need to rely on known user preferences. Bitso's Crypto Landscape in Latam and Stablecoins: The Emerging Market Story show that Latin American residents have a strong preference for stablecoins, especially Tether, which provides an attractive and stable alternative to inflationary currencies. On the other hand, Tether's solvency is under scrutiny by US regulators, although it remains compliant and still serves US users. While we see USDT activity concentrated during US time zones, its trading volume may be more from South America than North America.
We can go even further and directly look at the transfer value of assets on-chain.
The results in the table are consistent with what we learned in our previous article, where we saw different time zone preferences for on-chain activity of certain assets. The on-chain transfer value of Bitcoin, Ethereum, and USDC is skewed towards the EU/US time zones, which is consistent with the trading volume.
Tether's on-chain activity is slightly different from its off-chain activity. USDT on-chain activity has a pronounced peak of +46.4% during the EU time zone, while the exchange off-chain activity is +17.8%. During the US time zone, Tether exhibits a +15.5% deviation in exchange trading, but a -5.6% deviation in on-chain activity.
This is consistent with the regional differences in stablecoin preferences we observed in our From East to West: the Global Pulse of Stablecoin Transactions article.
On-chain activity: A frenzy for legacy Altcoins
Legacy Altcoins from 2017 and 2021 have seen significant price increases in recent weeks. XRP, TRX, ADA, and XLM have performed quite well, but do the price increases correspond to increased on-chain activity?
We examined the on-chain metrics for these chains and made comparisons across different networks. Since different blockchains account for transactions differently, we standardized the on-chain metrics using percentage growth rates from the beginning of 2024.
Overall, the network activity of several chains is increasing. Ripple (XRP) has seen the largest increase in activity when measuring transaction count and active addresses. We also see increases in transaction volume for Cardano (ADA) and Tron (TRX). This suggests there are some notable similarities between the assets with the largest price and on-chain activity increases:
As we saw above, these tokens have a strong regional preference for East Asia compared to Bitcoin and Ethereum. Many of them are currently classified as securities by the US Securities and Exchange Commission (SEC).
Traders may be seeking a comprehensive tolerant policy towards cryptocurrencies from the Trump administration, and Paul Atkins, who was recently appointed as the chairman of the U.S. Securities and Exchange Commission, is believed to have a "friendly" attitude towards cryptocurrencies. Of course, the cryptocurrency industry also considered Gensler to be friendly when he was initially appointed.
Conclusion
In this article, we have highlighted the different performances of the cryptocurrency market in different parts of the world. Local regulations (such as the regulations we have seen in South Korea) strictly control the flow of capital in the market, leading to price distortions. Time zone analysis can elucidate how the market expresses preferences for certain trading channels or assets in specific regions. Overall, the preferences displayed by global market participants constitute the global cryptocurrency economy. Understanding the subtle differences in each market around the world will help guide the continued adoption of cryptocurrencies globally.
This article is authorized to be republished from Foresight News
