Bitcoin Microstructure and the Kimchi Premium

Abstract

Between January 2016 and January 2020, bitcoin were on average 2.27% more expensive in Korea than in the United States, a fact commonly referred to as the Kimchi premium. We argue that capital controls amplify frictions from the microstructure of the bitcoin network that limit the ability of arbitrageurs to take advantage of price differences. We find that the bitcoin premia are positively related to transaction costs and volatilities of the bitcoin price and the premium, in line with the idea that the costs and the associated price risk during the transaction period make trades less attractive for arbitrageurs, and hence allow prices to diverge. A cross country comparison shows that bitcoin tend to trade at higher prices in countries with lower financial freedom.

Keywords: Bitcoin, Limits to Arbitrage, Cryptocurrencies, Fintech