Coin Metrics: World Crypto Trading Map

Author: Victor Ramirez Source: coinmetrics Translation: Shan Ouba, Golden Finance

Key Points:

• During South Korea’s brief period of political unrest, the “Kimchi premium” phenomenon, a colloquial name for the misalignment of prices between the Korean market and the global market, reappeared. As a result, Bitcoin traded at nearly $115,000.

• Cryptocurrency trading shows strong seasonal markets and on-chain activity across exchanges and assets.

• Since the beginning of the year, on-chain activity has grown significantly, especially for currencies that are primarily traded in Asia and have been the target of enforcement actions by the U.S. Securities and Exchange Commission.

Introduction

Broadly speaking, cryptocurrency is touted as a borderless, 24/7/365 market. While it is true that the underlying technology is agnostic to where you are in the world, individual markets are sensitive to seasonal patterns, idiosyncrasies of regulatory regimes, and various human preferences around the world.

In this article we will explore seasonal and geographic patterns in cryptocurrency trading activity. We will use the Korean market as an example. Using time zone data, we can observe localized impacts across multiple cryptocurrency exchanges and assets. Finally, we will provide an update on on-chain activity across various altcoins.

Capital Controls Lead to Kimchi Premium

An interesting case study is to study peculiar market behavior occurring in a specific region, which is widely referred to as the “Kimchi Premium”. The Kimchi Premium refers to the difference between the price of a digital asset traded in the Korean market and the global “reference” price. The kimchi premium is primarily due to the high demand for crypto assets in a closed market environment, and the fact that years of strict regulation have made these markets less efficient due to difficulties in international arbitrage.

While this may represent an obvious carry trade, local regulations make it difficult for foreigners 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 a resident registration card can trade through Korean exchanges. Meanwhile, foreign exchange exchanges in South Korea face stricter regulations than domestic exchanges. For Koreans to trade cryptocurrencies on foreign exchange exchanges, they must first purchase them from domestic exchanges and then transfer them out to foreign exchange exchanges. Together, these restrictions limit the paths that capital can take to flow through the system.

Finally, banking channels make it slow to react to any arbitrage opportunities. Transferring funds from banks to exchanges can take several hours, sometimes up to a day, at which point arbitrage opportunities disappear.

The kimchi premium is well documented in the history of cryptocurrency and began to gain traction in late 2017.

Source: Coin Metrics Market Data

In 2017-2018 The kimchi premium persisted at the peak of the 2017 bull run. Market volume was very thin at the time, resulting in wide spreads. Notably, FTX’s sister trading firm, Alameda Research, began taking advantage of this regulatory arbitrage in 2017 and became one of the largest cryptocurrency trading firms at its peak.

Source: Coin Metrics Market Data

In 2021 During the bull run of 2020, we were again able to observe the persistence of the kimchi premium, albeit to a lesser extent and with less frequency. The Korean exchange Upbit’s won-bitcoin market was volatile, ultimately trading at a 12.5% ​​discount in a flash crash in May 2021.

Source: Coin Metrics Market Data

While the “Kimchi premium” phenomenon is now well known, strict capital controls make it difficult for overseas investors to participate in the South Korean market. This leaves the market vulnerable to liquidity shocks, which can trigger price instability.

Cryptocurrency Trading Shows Strong Seasonal Behavior

Seasonality of Cryptocurrency Exchanges

Despite the fact that blockchains themselves are permissionless, cryptocurrency exchanges are still necessary intermediaries for the vast majority of market participants. Although the cryptocurrency market is global, each exchange must comply with local regulations to serve users in a certain country. Given the varying levels of regulation around the world, it is common for cryptocurrency exchanges to have trading activity concentrated in a few geographic regions. Few exchanges are truly borderless.

We can use this knowledge of local legal restrictions, along with known user preferences in a particular region and metrics derived from market data to understand how trading activity is distributed around the world. The following chart shows the share of trading activity for a particular exchange in different time zones.

Each row represents an exchange, and each column represents the spot trading volume of that exchange during the peak hours of a certain time zone: 9am to 5pm. The value of each cell is the ratio of the exchange's average volume to its average hourly volume in a given time zone. The last column is the average hourly volume for each exchange. For example, Binance traded 12.1% less volume during the East Asian session than its average of $802 million, but saw 19.4% more volume during the European session.

Source: Coin Metrics Market Data

As expected, we see Korean exchanges Bithumb and Upbit As well as Japanese exchanges Bitbank and Bitflyer, the volume index tends towards the East Asian hours. Upbit is only available in East Asian markets such as South Korea and Singapore. In fact, it is illegal for anyone in the United States to trade on Upbit. Assuming that trading activity from Upbit users outside of East Asia is negligible, we can use trading activity occurring outside of the East Asian hours as a benchmark for off-peak trading activity.

Due to the overlapping time zones of Europe and the United States, it is difficult to distinguish activity in specific regions, but there are still clear observable patterns in trading activity. Despite being a US exchange, Kraken has slightly more activity in the EU hours than the US hours.

Overall, we do still see an over-reliance on US trading hours for most exchanges. Coinbase, Gemini, and Crypto.com have the largest preference for US trading hours, at 36.1%, 57.3%, and 37.1%, respectively. Interestingly, Bullish is not legal in the United States, but shows a strong preference for US/Eastern time (38.6%).

Seasonality of asset transactions