Despread Research: Understanding Korean CEX and Investor Behavior through Data

Original Title: DI - 01: Korean CEX

Author: Bulmat, Do Dive

Compiled by: Deep Tide TechFlow

Introduction

This article focuses on centralized exchanges (CEX) in South Korea as the subject of exploration. According to a survey by the Korea Financial Intelligence Unit (KoFIU), the number of cryptocurrency investors in South Korea is expected to reach approximately 6 million in the first half of 2023, a staggering figure that accounts for over 10% of the total population. Most of these investors primarily engage in investment activities centered around centralized exchanges, making the influence of CEX quite significant in the South Korean crypto market.

In the following sections, we will examine data from South Korean centralized exchanges and explore the characteristics and trends of South Korean investors. This analysis is mainly based on data from the four major exchanges: Upbit, Bithumb, Coinone, and Korbit. Some analyses are based on data from the third week of October (14th to 20th).

Increase in Trading Volume Share of Korean Exchanges Despite Overall Decline

• Declining Trading Volume Trend: Since peaking in March of this year, the overall trading volume of centralized exchanges (CEX) has shown a declining trend. During this period, market volatility also decreased, with Bitcoin's price remaining relatively stable in the range of $27K to $28K over the six months from the end of March to the end of September, without significant fluctuations.

• Relative Strength of Korean Exchanges: Korean exchanges have also not escaped this shrinking trend. After peaking at $45 billion in February, trading volume sharply declined to $23 billion in May. However, it then showed an upward trend, reaching $37 billion in July, with a larger increase compared to Binance, the world's largest cryptocurrency exchange.

• Comparison of Korean Exchanges with International Exchanges: Compared to Binance, the trading volume of the four major Korean exchanges is about 10% of Binance's this year. Compared to Coinbase during the same period, their trading volume is higher, indicating that Korean exchanges hold an important position in the international market.

• Market Share Growth Trend: Additionally, the market share of the four major Korean exchanges has been steadily increasing. Compared to Binance's trading volume, it increased from 7% in March to 16% in September. This can be understood as an increase in the influence of domestic exchanges.

Upbit's Monopoly

• Upbit Far Ahead: In February of this year, Upbit recorded its highest trading volume at $36 billion, accounting for about 80% of the South Korean cryptocurrency trading market, maintaining its dominant position. Although its market share briefly dropped to 70% in August, it quickly rebounded to 80% the following month, stabilizing its market share.

• Market Share of Bithumb, Coinone, and Korbit: Bithumb, as the second-largest player in the market, maintains a strong position, accounting for 15% to 20% of the total trading volume of the four major exchanges. On the other hand, Coinone's market share ranges between 3% and 5%, while Korbit's share is less than 1%.

• Strong Reaction in Korea to Ripple Ruling: Compared to the previous month, Binance's trading volume in July did not show significant volatility, but Korean exchanges had explosive reactions to news related to Ripple. The trading volume of the four major Korean exchanges was recorded at $27 billion in June and increased to $37 billion in July, a 37% increase from the previous month. This was mainly due to news of Ripple's partial victory in its lawsuit against the SEC, which led to an 80% increase in XRP's price and a sharp increase in trading volume on July 13.

Bithumb's Zero Fee Policy

• Initial Reaction to Zero Fee Policy: Bithumb, South Korea's second-largest exchange, implemented a 0% fee policy on October 4. This policy initially had a positive effect, with Bithumb's trading volume increasing and its market share exceeding 20%.

• Decline in Market Share: However, the impact of the free policy did not last long, and Bithumb's market share declined back to levels prior to the implementation of the policy.

• Sustainability of Zero Fee Policy: Although Bithumb's free policy initially effectively increased market share, there remains uncertainty about whether the exchange can sustain growth in the long term. This also indicates that South Korean investors do not choose exchanges solely based on the presence or absence of fees. Additionally, there are concerns about the sustainability of this policy as it eliminates the main source of revenue for the exchange.

Coinbase vs. Upbit

• High-Risk, High-Return Investment Style: Although the trading volume of BTC and ETH constitutes a small proportion of Upbit's total trading volume, these two cryptocurrencies account for a significant share of trading volume on Coinbase, a representative cryptocurrency exchange in the U.S. Most individual investors on Upbit show a strong interest in small-cap coins with high profit potential and tend to accept the high risks associated with them. This is considered one of the reasons for the high proportion of small-cap trading in the South Korean market.

• Institutional Investor-Centric Trading: Unlike Upbit, Coinbase's trading volume is primarily driven by institutional investors. According to Coinbase's Q2 shareholder letter, institutional investors account for about 85% of Coinbase's total trading volume. They tend to pursue stability in their investment portfolios, which is why trading in the highest market cap cryptocurrencies, BTC and ETH, occupies a relatively high proportion.

Characteristics of the South Korean Market

• Preferred Cryptocurrencies Among South Korean Investors: The chart above shows which cryptocurrencies are of primary concern to South Korean investors. By analyzing the data of the most actively traded cryptocurrencies in South Korea compared to the global market last week, we found that Loom Network ($LOOM) had the highest trading volume with a 62% market share, ranking first. It was followed by eCash ($XEC) at 55% and Flow ($FLOW) at 43%. Stacks ($STX) and Bitcoin SV ($BSV) also made the list, with 37% and 34%, respectively.

• Surge of $LOOM and Mysterious Dynamics: In the third week of October, Loom Network ($LOOM) was the most actively traded cryptocurrency in South Korea compared to the global market. This indicates that South Korean investors are actively trading this asset compared to global investors. Starting from September 15, the token price began to rise inexplicably and surged nearly 10 times within just a month, reaching 686 KRW. However, it started to plummet sharply from October 15, and at the time of writing this report, it was around 140 KRW. Due to this extreme price volatility, Loom Network briefly entered the top 100 by global market capitalization.

• Impact of Deposit and Withdrawal Policies of Exchanges: Changes in the deposit and withdrawal policies of South Korean exchanges can directly affect prices and trading volumes. Specifically, on October 14, $FLOW saw significant increases in both price and trading volume compared to the previous day when deposits and withdrawals were temporarily suspended. This phenomenon, known as the "가두리 (Gaduri)" effect, occurs when the suspension of deposits and withdrawals makes arbitrage trading with overseas exchanges impossible.

• Cryptocurrencies Under Continuous Attention: Although some cryptocurrencies, such as Loom Network and Flow, received temporary attention, cases like Stacks and eCash have sustained interest on South Korean exchanges, unaffected by temporary events. These cases are worth noting as they continue to be traded in the South Korean market, independent of global trends.

In-Depth Analysis of Upbit Investors

• "Kimchi Coins" Primarily Traded on Upbit: Among the cryptocurrencies traded on Upbit, Steem Dollars ($SBD), Moss Coin ($MOC), and Hippocrat ($HPO) account for 100% of the trading volume and are exclusively traded on Upbit. Additionally, cryptocurrencies like Sentinel Protocol ($UPP), Aha Token ($AHT), and Groestlcoin ($GRS) are primarily traded on Upbit and are referred to as "Kimchi Coins" because they do not receive much attention in the global market. These coins are mainly traded by South Korean investors and have formed their own market on the Upbit platform.

• Relatively Poor Performance of Mainstream Coins: Dominant cryptocurrencies in the global market, such as Bitcoin (BTC), Ethereum (ETH), and Polygon (MATIC), have substantial trading volumes worldwide. However, their trading volumes on Upbit are surprisingly low. This phenomenon indicates that Upbit has unique characteristics compared to the global market and reflects differences in investor preferences and investment strategies across regions. However, it should be noted that Upbit's total trading volume is relatively low compared to global giants like Binance, so the low trading volume of these major cryptocurrencies should also be taken into account.

• Global Trends vs. Regional Market Diversity: As mentioned above, the South Korean market shows its uniqueness compared to the global market, which may also apply to other regions. This suggests that global cryptocurrency projects need to establish and implement customized go-to-market (GTM) strategies tailored to the characteristics of each region.

Analysis of Upbit's Deposit and Withdrawal Networks

• Upbit Users Prefer Using the Tron Network: The chart above shows the proportion of transactions for deposits and withdrawals on the Ethereum and Tron networks by Upbit users over the past week. From the data, the number of transactions on the Tron network is five times that of Ethereum.

• Low-Fee Tron Network is Popular: Compared to Ethereum, Upbit users tend to actively use the Tron network for deposits and withdrawals. This is because transaction fees on the Ethereum network are relatively high, while the Tron network offers low fees and fast transaction processing speeds. According to Coinmetrics data, the number of USDT transactions through the Tron network can reach 2 million daily, while Ethereum has only about 100,000 transactions, indicating that Tron has a clear advantage in simple fund transfer transactions globally. This phenomenon is also evident in the deposit and withdrawal trends of Upbit users and South Korean investors.

• Role as a Fiat Currency Exchange: In addition to the reasons mentioned above, considering that the Ethereum network has the highest Total Value Locked (TVL) and the most on-chain protocols, it can be interpreted that South Korean investors use deposit and withdrawal services more for transferring funds between overseas centralized exchanges and South Korean exchanges rather than utilizing on-chain products. There may be various reasons behind this investor preference, but two main ones could be:

1. Characteristics of South Korean Investors: Upbit users and South Korean investors primarily use exchanges for cryptocurrency trading, and they utilize cryptocurrency deposit and withdrawal services to access products offered by overseas exchanges that are not available on South Korean centralized exchanges, such as futures markets and margin trading.

2. Differences in Convenience of On-Chain Deposit and Withdrawal Services: Users wishing to deposit and withdraw to on-chain environments may prefer to withdraw to on-chain after sending funds to overseas exchanges, possibly due to insufficient services provided by South Korean centralized exchanges, which may include a lack of USD-denominated stablecoins and insufficient diversity in withdrawal networks.