Bitcoin ETF Approval and Beyond: A Statistical Analysis of Evolving Crypto Market Dynamics and Emerging Arbitrage Opportunities

Researcher

Divy Patel

Faculty Advisor

Prof. Zhenyu Cui

Overview

This study investigates how the spot Bitcoin ETF approval reshaped crypto market dynamics, focusing on Bitcoin (BTC) and Ethereum (ETH). Using rank-based structural break analysis and a Multivariate GARCH-BEKK model, it finds that markets anticipated regulatory approval, showing short-term decoupling but stronger long-term correlation between BTC and ETH.

Key Findings

1. Structural Breaks

• A major break occurred on October 23 2023, triggered by the DTCC listing of BlackRock’s Bitcoin Trust and the closure of Grayscale’s SEC case—months before the January 2024 ETF approval.
• This date marks a behavioral regime shift in crypto trading activity.

2. Statistical Results

• Post-break returns show higher mean, lower kurtosis, and smoother volatility.
• Jump volatility (sudden spikes) dropped significantly for BTC and ETH, indicating a more mature and liquid market.
• BTC-ETH correlations became more unstable, occasionally dipping below 0.7, suggesting short-term dislocations.

3. Volatility Dynamics

• Short-term spillovers weakened (less immediate reaction to each other’s shocks).
• Long-term volatility linkages strengthened, implying deeper structural interdependence.

4. Arbitrage Opportunities

• A pairs-trading strategy based on regression-error spreads and Hurst-exponent filtering showed:
  • Sharpe ratio rising from -2.6 (pre-break) to 7.0 (post-break).
  • Return on capital improving from -6.7% to +25%.
• The approach remains feasible for retail traders using daily data.

Conclusion

The ETF anticipation period, not the approval itself, caused the major structural shift. Crypto markets now exhibit lower jump risk, higher long-term co-movement, and new arbitrage windows. Future work will integrate momentum overlays to enhance trading robustness.

Significance

This research links regulatory milestones to quantifiable market evolution, demonstrating how structural breaks and volatility modeling can uncover profitable strategies and signal the growing institutional maturity of crypto markets.