Bitcoin Plunges Amid South Korea’s Martial Law

Bitcoin experienced a sharp decline on Upbit, South Korea’s largest cryptocurrency exchange, on Tuesday as President Yoon Suk Yeol declared martial law in response to what he described as “anti-state behavior” by the country’s main opposition party. The announcement, made during a late-night televised address, led to heightened market volatility and disruptions across South Korea’s crypto trading platforms.

Priced in South Korean won, Bitcoin fell to a low of ₩88,266,000 ($61,600) on Upbit—33% below its value just 30 minutes earlier. While the price partially recovered to around ₩127,000,000 ($88,600) by the time of writing, the dip highlighted a pronounced liquidity crunch in the country’s centralized exchanges.

Market Disruptions and the Reverse Kimchi Premium

Bitcoin’s Discounted Price

The drop on Upbit resulted in Bitcoin trading at an 8% discount compared to global averages, where it held steady at $95,900 with a 1% daily decline. This discrepancy reflects what analysts call a reverse “Kimchi Premium,” a phenomenon where Bitcoin and other cryptocurrencies often trade at inflated prices on South Korean platforms due to capital controls and localized demand.

Juan Leon, Senior Investment Strategist at Bitwise, explained the discount as a result of “idiosyncratic situations in a locality” creating temporary liquidity constraints, despite Bitcoin’s decentralized nature.

Ripple (XRP) Sees Similar Decline

Ripple-linked XRP also faced significant price volatility on Upbit, dropping 52% to ₩1,623 ($1.13) before recovering to ₩3,400 ($2.37). This represented a 6.3% discount compared to global trading prices, which sat at $2.52 on Tuesday. XRP trading volume surged on Upbit, accounting for $6.5 billion of the platform’s $23 billion in total daily trades.

Trading Volumes Soar

Upbit and Bithumb Activity

The announcement of martial law spurred a flurry of trading activity among South Korean retail investors. Upbit’s trading volume rose by 32% to $23 billion, while Bithumb, another major exchange, saw a 20% increase to $4.6 billion. XRP was a key driver of this activity, with $1.4 billion worth of trades recorded on Bithumb alone.

The Resurgence of the Kimchi Premium

South Korea’s strict capital controls have historically made arbitrage opportunities difficult to exploit, leading to the emergence of the Kimchi Premium. Named after the country’s popular dish, the premium has allowed Bitcoin to trade at inflated prices in South Korea compared to global averages.

However, Tuesday’s events flipped the dynamic, creating an inverse Kimchi Premium as Bitcoin and XRP traded at notable discounts. In March 2024, the Kimchi Premium ran as high as 10% for Bitcoin, though it once reached a record 54% in 2018.

Broader Implications

Impact on the South Korean Economy

The South Korean won also felt the effects of the political upheaval, falling nearly 3% against the U.S. dollar following Yoon’s announcement, according to Google Finance.

Liquidity Risks in Centralized Exchanges

The incident highlights the vulnerabilities of centralized crypto exchanges during periods of heightened geopolitical and economic uncertainty. Despite Bitcoin’s decentralized nature, localized disruptions can lead to significant price divergences, liquidity shortages, and increased volatility.

Bitcoin’s dramatic drop on South Korean exchanges underscores the unique dynamics of the crypto market in localized contexts. As President Yoon’s declaration of martial law creates economic and political ripples, the inverse Kimchi Premium and liquidity challenges reveal the complexities of trading in a tightly controlled environment.

While Bitcoin’s global price remains relatively stable, the events in South Korea serve as a stark reminder of how regional developments can disrupt even decentralized markets.