Research Reveals the Impact of Politically-Connected Meme Coins on the Crypto Assets Market

Recently, a study titled "From Zero to Hero: The Spillover Effects of Meme Coins in the Crypto Assets Market" was published in Economics Letters. This study analyzes the event of a well-known political figure issuing a Meme coin, revealing the heterogeneous spillover effects driven by market sentiment and fundamentals. Political signals amplify speculative dynamics, highlighting the increasingly important role of political factors in shaping the Crypto Assets market and investor behavior.

Introduction

Political dynamics are increasingly influencing financial markets, and the Crypto Assets market has become a significant arena where politics and finance intersect. The 2024 U.S. elections further highlight this relationship, as a certain Republican candidate unprecedentedly turns to support digital assets. He claims to make the U.S. the "crypto capital of the world" and places Crypto Assets at the core of his economic agenda, leading the market to expect a more favorable policy stance during his term.

These are expected to be realized on January 18, 2025, when the political figure issued their official Meme coin on the Solana blockchain. Within 24 hours, the coin's price skyrocketed by 900%, with a trading volume reaching 18 billion USD, and its market capitalization exceeding that of the then-largest Meme coin DOGE by 4 billion USD.

The next day, the issuance of the Meme coin associated with the First Lady further boosted market speculation. These events are not only speculative in nature but also constitute a significant exogenous shock, the impact of which goes beyond financial speculation, sending signals for broader regulatory and political agendas.

This study aims to examine how this event serves as both a political signal and a financial event affecting the Crypto Assets market. The research focuses on three key questions:

• How does the release of this Meme coin affect the returns and volatility of major Crypto Assets?

• Did this event trigger a financial contagion effect within the Crypto Assets market?

• Does this impact have heterogeneity, manifested in different responses from various Crypto Assets based on their technological foundation, use cases, or speculative appeal?

To answer these questions, the research adopts the Baba-Engle-Kraft-Kroner ( BEKK ) multivariate generalized autoregressive conditional heteroskedasticity ( MGARCH ) model, which is particularly suitable for analyzing the dynamic relationship between volatility and correlation over time.

The study selected the top ten crypto assets by market capitalization for empirical analysis and found that after the release of the Meme coin, there was a significant volatility spillover effect among the crypto assets, indicating the presence of financial contagion in the market. The event triggered a major shift in market dynamics, with Solana and Chainlink recording the largest gains due to their infrastructure and strategic ties. Meanwhile, mainstream crypto assets like Bitcoin and Ethereum demonstrated strong resilience, with their cumulative abnormal returns (CARs) and variance stabilizing in the later stages of the event. In contrast, other Meme coins like Dogecoin and Shiba Inu experienced depreciation, as funds likely shifted towards newly issued Meme coins.

Indeed, the issuance of this Meme coin occurred in an environment of high political polarization in the United States, and the brand itself is closely tied to strong political sentiments, which heightened investor sensitivity and exacerbated market reactions. For some investors, the endorsement by this political figure symbolizes a unique speculative opportunity, giving rise to a strong "herding effect"; while others, due to its controversial image, are aware of the political and regulatory risks and take a more cautious stance. This polarization explains the observed high volatility and differentiated market responses — from enthusiasm for anticipated political support to skepticism about reputation and political uncertainty.

In recent years, the contagion effects in the Crypto Assets market have increasingly drawn attention due to their significant implications for financial stability, risk management, and portfolio diversification. Existing studies primarily focus on spillovers between Crypto Assets themselves or between Crypto Assets and traditional financial assets, revealing patterns of connectivity, contagion risk, and volatility transmission. However, most of these studies concentrate on financial or technological triggers, such as market crashes, liquidity constraints, or blockchain innovations. Political signals, especially the contagion mechanisms related to politically connected tokens, remain a research gap.

This study is the first to analyze the impact of politically connected tokens on the Crypto Assets market. It expands the understanding of how political narratives influence decentralized financial markets. Additionally, unlike previous studies that have focused on negative shocks, this research focuses on the impact of positive shocks driven by political signals on the market. Notably, there is evidence that positive shocks have a greater impact on the volatility of Crypto Assets than negative shocks. Ultimately, this study provides important references for academia, practitioners, and policymakers, revealing the heterogeneity of market responses to politically connected tokens and emphasizing how asset characteristics affect the dynamics of financial contagion.

Data and Methods

2.1 Data and Sample Selection

This study uses proprietary data of closing mid-prices per minute, covering the most representative 10 out of the top 20 crypto assets by market capitalization: Bitcoin ( BTC ), Ethereum ( ETH ), Ripple ( XRP ), Solana ( SOL ), Dogecoin ( DOGE ), Chainlink ( LINK ), Avalanche ( AVAX ), Shiba Inu ( SHIB ), Polkadot ( DOT ), and Litecoin ( LTC ). The data comes from a US centralized exchange and is obtained from the LSEG Tick History database.

The dataset contains 20,160 observations, covering the time period from January 11, 2025, to January 25, 2025, including a symmetrical time frame around the release of the Meme coin on January 18, 2025, to facilitate comparative analysis before and after the event.

According to the practices in existing literature, the study uses the following formula to calculate the returns on Crypto Assets:

Yield = ln(Pt ∕ Pt−1)

Among them, Pt represents the price of the digital asset at time t.

The event time is defined as January 18, 2025, Coordinated Universal Time ( UTC ) at 2:44 AM, which is the first official announcement of the new Meme coin release. Calculate the cumulative abnormal returns to assess the information cascading effect. Calculate the average benchmark returns of each Crypto Asset from January 1, 2025, to January 10, 2025, to represent a relatively stable sample period. Then, subtract this benchmark from the actual returns during the sample period to obtain the excess returns over the market benchmark, and derive CARs through accumulation.

( 2.2 Method

Using the BEKK-MGARCH model to analyze the impact of the launch of Meme coin on the Crypto Assets market. Assume that the logarithmic returns follow a normal distribution with a mean of zero and a conditional covariance matrix of Ht, the model is set as follows:

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H represents the unconditional covariance matrix. The parameter matrix satisfies a, b > 0, and a + b < 1, to ensure the stability and positive definiteness of the model. Subsequently, the contagion effect test is conducted. Considering the potential Type I error issues that may arise when using high-frequency data, a stricter significance level of α = 0.001 is adopted.

Result

) 3.1 Volatility Overflow Effect

Preliminary analysis results reveal the interrelationships between Crypto Assets, which are estimated through the BEKK-MGARCH model. In the covariance structure, the interconnection between assets significantly strengthens in the post-event phase. This finding supports the hypothesis that "events triggered volatility spillover effects." Similarly, the volatility of stable logarithmic returns increases, reflecting a rise in market instability and an acceleration in adjustment speed. All Crypto Assets experienced sharp fluctuations in returns during this event, further emphasizing the systemic impact of this event.

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The estimation results of dynamic conditional covariance indicate that this event indeed triggered financial contagion and volatility spillover effects in the Crypto Assets market. Most covariance coefficients in the later stages of the events are significant at the 0.001 level, particularly among assets such as ETH, SOL, and LINK, where the covariance significantly increased, showing stronger interdependence and higher market integration. In contrast, while SHIB and DOT also reached a significant level of 0.01, their impact is weaker. Additionally, some assets like LTC and XRP experienced a decrease in covariance after the event, indicating that the spillover effects are not uniformly distributed across all assets. Overall, the results highlight the structural impact of this Meme coin issuance event on the entire Crypto Assets market.

3.2 Information Cascading Effect

The analysis of the cumulative abnormal returns ### CARs ### further reveals the information cascading effects triggered by the issuance of Meme coins. The results indicate that this event has a significant structural impact on market dynamics, manifested as asset-specific response paths and increased volatility.

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In the pre-event phase, most Crypto Assets experienced positive returns, potentially driven by speculative expectations or the market's optimistic attitude towards the possibility of that political figure being elected. This indicates that, even in the absence of conclusive information, investors have shown significant speculative buying behavior, a phenomenon that aligns with the widely documented "fear of missing out" characteristic in the Crypto Assets market.

In the stage following the event, three key dynamics are particularly prominent:

• SOL has performed exceptionally well, surpassing all other assets, which is likely related to its direct technological relationship as a Meme coin supporting the blockchain.

• LINK has also performed strongly, possibly related to its association with the large American technology company Oracle.

• Bitcoin, Ethereum, Ripple, Litecoin and other mature Crypto Assets have stabilized gradually after a moderate rise, reflecting their market resilience and relative insulation from cascading speculative effects.

At the same time, DOGE and other Meme coins like SHIB appear particularly weak, showing a clear asset substitution effect, where speculative funds are shifting from old Meme coins to newly issued tokens. Although AVAX and DOT have solid technical foundations, they have also not been immune to this trend of capital transfer, showing signs of value loss.

This exogenous shock disrupted the market co-movement pattern prior to the event. Before the event occurred, there was a high degree of synchronized volatility among the various assets; however, after the event, the CARs of different assets experienced significant divergence, ranging from +20% for Solana to -20% for Dogecoin and Shiba Inu.

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These results reveal that asset-specific narratives, technical relevance, and investors' subjective perceptions can significantly amplify the differential responses in returns between assets during major information shocks.

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Conclusion

This study examines the impact of cryptocurrency issuance related to political figures on the crypto market, focusing on the volatility spillover effect and information cascade effect.

Research results indicate that the market's response to this event shows significant heterogeneity. For example, SOL has benefited significantly due to its direct technical association with Meme coins. Additionally, assets that share the same underlying blockchain infrastructure have also gained a boost by riding the "coattails" of this event.

At the same time, mainstream Crypto Assets such as Bitcoin and Ethereum demonstrate stronger stability due to their core position in the market, playing a similar anchoring role in this incident and stabilizing the overall market structure. This indicates that investor sentiment is no longer solely dependent on the fundamental technical factors, but is also significantly influenced by geopolitical and policy narratives, especially when these narratives are issued by highly symbolic leaders.

In summary, this article reveals the high sensitivity of the Crypto Assets market to external events, as well as its tendency to be driven by speculative behavior. As digital assets increasingly intertwine with political and economic issues, continuous monitoring of this interaction is crucial for understanding the market.