Isolationary regulation, a double-edged sword

Isolationary regulation, a double-edged sword

Political turmoil in South Korea sparked a brief market panic last Tuesday after the president declared martial law, drawing global attention. The unrest led to a flash crash in cryptocurrencies on South Korean exchanges.

The BTC-KRW pair on both UpBit and Bithumb dropped sharply, with UpBit seeing the most significant impact, as the pair fell 30% to 89 million Korean Won (around $63k in dollar terms).

Looking at cumulative volume delta, which measures net buying and selling activity, we can see that net buying eventually outweighed selling for BTC-KRW as prices stabilised.

While the crash caused BTC prices to briefly drop 30% on UpBit, it had an even greater impact on XRP-KRW prices. The price of XRP on UpBit fell 54% during the crash and remained below pre-martial law levels on Wednesday, as buying pressure intensified on Tuesday evening, according to our tick trade data.

South Korean crypto exchanges account for roughly 11% of the total BTC, ETH, XRP, and DOGE trade volume, yet this event had little to no impact. Why? Regulations.

The price crash was contained due to strict regulations, which also contributed to its severity. South Korea’s regulatory framework restricts cross-border transfers and limits the use of its crypto exchanges to residents, leading to price discrepancies. Over the years, BTC has often traded at a premium or discount on UpBit and Bithumb, known as the “Kimchi premium.”

While such price dislocations would typically be arbitraged in other markets, the regulatory cap on demand within Korean crypto markets led to extreme price discrepancies, which ultimately prevented wider contagion.

Data points

Pricing BTC as it cracks $100k.

Bitcoin set a new record high above $100k last Thursday and has since whipsawed on either side of this level amid heightened volatility in the markets. While market participants rejoiced over the significant rise, the move highlighted some inefficiencies still present in the largely nascent crypto space, particularly market fragmentation.

With liquidity spread across multiple venues that never close, determining a single price for BTC can be challenging. This was evident on Thursday, as the digital asset set new records with prices rising faster on some venues.

Due to this fragmentation, traditional pricing models like VWAP often fail to capture the nuances of the market, especially during periods of heightened volatility.

Incoming regulations in the European Union also emphasize the importance of accurate pricing. At Kaiko, our pricing methodology takes this into account, providing accuracy in the burgeoning digital asset space. As shown below, VWAP was inefficient at pricing BTC-EUR pairs on December 5, with significant dislocations from the market throughout the rally.

ETH matches yearly high above $4k.

Another interesting development following BTC’s rise to six figures was ETH matching its highest price level of the year so far. The second-largest cryptocurrency by market cap has been somewhat of a laggard in the recent crypto market rally.

Despite briefly outperforming BTC after the US election, ETH has yet to test its 2021 highs of around $5k. However, it traded consistently around the $4k level at the end of last week, suggesting that prices could be poised to test new ranges.

The rise in ETH’s price coincides with renewed interest in ETH ETFs, which saw record inflows last week. Institutional investors appear to be warming to the asset and are looking ahead for gains in 2025. ETH could be a major beneficiary of the changing of the guard at the SEC, and this may also be driving increased demand.

Q4 Exchange Ranking Results

Crypto.com claimed the top spot in our latest exchange ranking, a first for the platform. The exchange achieved strong scores in Liquidity (90.9), which helped propel it to number one. It also performed well in Governance and Security; however, it remains a AA-rated exchange, not AAA-rated.

Elsewhere, Bitget debuted at ninth in our ranking and UpBit soared to fifth—up four places since the third quarter. Bitget scored well on Security and Governance in its maiden ranking. Meanwhile UpBit did well on Governance and Technology during the quarter, which helped propel the exchange higher.