Why Crypto Draws South Korea Like Iron to Magnets

  • South Korea was the third largest cryptocurrency market in the world at press time.
  • Contrary to “digital gold” narratives in the West, much of the growth is driven by cryptocurrency trading.

Bitcoin [BTC] and other cryptocurrencies are not considered legal tender or financial assets in South Korea at the time of this writing, but the market has grown significantly in recent years. As a result, investors and analysts have started to pay close attention to the performance of cryptos in the East Asian economic powerhouse.

Ignas, a popular crypto and DeFi analyst, recently published a blog post in which he shared his views on the South Korean crypto industry and why Koreans have been drawn to these virtual assets like a magnet.

Crypto Miracle on the Han River

Based on the findings of a previously published market report, Ignas pointed out that South Korea was the world’s third-largest cryptocurrency market in the second half of 2022, with over 8% of the total market share. .

Source: Xangle

The crypto boom first hit the country in 2017 and South Korea quickly became one of the biggest markets for BTC and Ethereum [ETH]. The spread was dramatic, and people of all classes and ages began actively discussing and trading cryptocurrencies.

In line with global trends, popularity exploded with the historic 2021 bull market in which Bitcoin and other top assets hit all-time highs.

This was backed up by a report published on the data aggregation site Statista. According to the same, daily trading volumes in 2021 increased 12 times compared to the previous year and even exceeded the value of shares traded on the exchange.

But why cryptos?

In the blog post, Ignas highlighted the “fast-paced” Korean lifestyle mentality behind the growing use of cryptos. From the creation of infrastructure to the adoption of technologies, everything happened at breakneck speed, transforming one of the poorest countries into one of the richest in a very short time. The desire to get rich quick is thus anchored in the story.

However, economic growth has slowed considerably over the past decade, bringing with it problems of endemic youth unemployment. In 2020, the unemployment rate ranged from 7.5% to 11%, continuing a similar trend in 2021, according to TradingEconomics.com.

Source: TradingEconomics.com

With other investments like stocks, casino games, horse racing being limited and often unprofitable for a large part, the focus has shifted to cryptos to get rich ‘quick’. Based on personal experiences, Ignas said that Koreans see crypto exchanges as a way to get rich quick.

Contrary to the “digital gold” narratives prevalent in the West, the growth of the South Korean market is largely based on cryptocurrency trading. Other sectors like the crypto asset management market are underdeveloped.

The strange case of Kimchi Premium

The blog post drew attention to a period when BTC was trading at a big premium on local exchanges, almost 40% higher than that of US-based trading platforms.

Historically, South Korean exchanges have seen a higher price of popular tokens compared to foreign exchanges. This phenomenon is called Kimchi Premium and is driven by high demand for cryptos in the country.

While this may be conducive to arbitrage trading, South Korea’s strict capital controls, which restrict the flow of money that can leave the country, have made it unprofitable. To compensate for this, Korean investors regularly engage in schemes such as pump and dump. The anomaly was pointed out a while ago by the CEO of the blockchain analytics firm CryptoQuant.

It is therefore not surprising to see a sudden increase in trading volume for certain assets in South Korea. Earlier in the year, Ripple crypto focused on payments [XRP] clocked very high volumes on Upbit. At one point, the share of XRP overtook cryptos with higher market caps like BTC and ETH.

Regulation tightens the grip

Due to the meteoric rise in crypto trading, the South Korean government has started regulating the overheated market. Along with various new regulations, the directive to register all crypto trading platforms with the financial regulator introduced in 2o21, forced many players to toe the line, with many ending up shutting down their operations.

At the time of this publication, Upbit and Bithumb were the two largest exchanges in the country. According to Coingecko, Upbit was the second-largest exchange by trading volume in the world over the past 24 hours, with trades worth more than $3 billion settled on the platform.

Reluctance towards DeFi

Ignas said that despite the popularity of cryptos, Koreans have yet to familiarize themselves with decentralized finance (DeFi). One of the reasons given for the low adoption was a greater reliance on centralized financial entities. As a result, the notions of self-care do not find enough takers.

Apart from that, the relatively complicated processes such as wallet setup, key protection, and overwhelming UI/UX experience prove to be a big deal for Koreans.

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