From Zero to Hero: The Spillover Effect of Meme Coins in the Crypto Assets Market

A recent study published in Economics Letters analyzed the impact of Trump issuing Meme coins on the Crypto Assets market. The research revealed a heterogeneous volatility spillover effect driven by market sentiment and fundamentals, highlighting the 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 an important area where politics and finance intersect. The 2024 U.S. presidential election further highlights this relationship, as Republican candidate Trump has unprecedentedly turned to support digital assets. He claims he will make the U.S. the "Crypto Assets capital of the world" and place Crypto Assets at the core of his economic agenda.

On January 18, 2025, Trump issued his official Meme coin ($TRUMP) on the Solana blockchain. Within 24 hours, the price of $TRUMP skyrocketed by 900%, with a trading volume reaching 18 billion USD and a market cap surpassing the then-largest Meme coin DOGE by 4 billion USD. The next day, the issuance of the Meme coin $MELANIA, associated with the First Lady, further fueled market speculation. These events not only had speculative properties but also constituted a significant exogenous shock, the effects of which extended beyond financial speculation, signaling a broader regulatory and political agenda.

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:

1. How does the release of $TRUMP affect the returns and volatility of major Crypto Assets?

2. Did this event trigger a financial contagion effect in the Crypto Assets market?

3. Does this impact exhibit heterogeneity, manifested as different Crypto Assets responding differently based on their technological foundations, use cases, or speculative appeal?

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

Research shows that after the release of the Trump Meme coin, there was a significant volatility spillover effect among 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 highest gains due to their infrastructure and strategic connections. Mainstream crypto assets like Bitcoin and Ethereum displayed strong resilience, with their cumulative abnormal returns ( CARs ) and variance stabilizing in the later stages of the event. In contrast, other Meme coins such as Dogecoin and Shiba Inu experienced depreciation, with funds likely shifting towards $TRUMP.

The issuance of $TRUMP occurred in an environment of high political polarization in the United States, and the Trump brand itself is closely associated with strong political sentiments, which heightened investor sensitivity and intensified market reactions. For some investors, Trump's endorsement symbolizes a unique speculative opportunity, giving rise to a strong "herding effect"; while others, aware of the political and regulatory risks due to his controversial image, adopted a more cautious stance. This polarization explains the observed high volatility and differentiated market responses—from enthusiasm for expected political support to skepticism about reputation and political uncertainty.

This study is the first paper analyzing 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 mainly focused on negative shocks, this research concentrates on the effects of positive shocks driven by political signals on the market. The findings provide important references for academia, practitioners, and policymakers, revealing the heterogeneity of market responses to politically connected tokens and emphasizing how asset characteristics influence financial contagion dynamics.

Data and Methods

Data and Sample Selection

The study used proprietary data on closing mid-prices per minute, covering the 10 most representative Crypto Assets among the top 20 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 certain exchange, which is a widely used centralized trading platform in the United States.

The dataset contains 20,160 observations, with a time interval from January 11, 2025, to January 25, 2025, covering a symmetrical period of one week before and after the official release of Trump's Meme coin on January 18, 2025.

The formula for calculating Crypto Assets yield is as follows:

Yield = ln(Pt / Pt-1)

Here, 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. This point marks the official release of the new U.S. president's Meme coin. The study calculates cumulative abnormal returns to assess the information cascade effect.

( method

The study uses the BEKK-MGARCH model to analyze the impact of the launch of Trump's Meme coin on the Crypto Assets market. It is assumed that the log 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, the study adopts a stricter significance level of α=0.001.

Result

) Volatility Spillover Effect

The results show that the interconnection between crypto assets significantly increased after the event, supporting the hypothesis that "the event triggered a volatility spillover effect." The returns of various crypto assets experienced drastic fluctuations during this event, further emphasizing the systemic impact of this incident.

The dynamic conditional covariance results estimated by the BEKK-MGARCH model indicate that the event indeed triggered financial contagion and volatility spillover effects in the Crypto Assets market. The covariance coefficients in the later stages of most events are significant at the 0.001 level, especially between assets such as ETH, SOL, and LINK, where the covariance significantly increased, showing stronger interconnectivity and a higher degree of market integration. In contrast, although SHIB and DOT also reached a significant level of 0.01, their impact was weaker. Additionally, some assets like LTC and XRP experienced a decline in covariance after the event, indicating that the spillover effects are not uniformly distributed across all assets.

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information cascading effect

The study reveals the information cascade effect triggered by the issuance of Trump's Meme coin through the analysis of cumulative abnormal returns ### CARs ###. The results indicate that this event has a significant structural impact on market dynamics, manifested as asset-specific reaction paths and increased volatility.

In the pre-event phase, most Crypto Assets experienced positive returns, possibly driven by speculative expectations or the market's optimistic attitude towards Trump's potential election as the 47th President of the United States. This indicates that even in the absence of conclusive information, investors have shown significant speculative buying behavior.

In the phase after the event occurs, three key dynamics are particularly prominent:

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

2. LINK has also performed strongly, which may be related to its association with large tech companies in the United States.

3. Mature Crypto Assets such as Bitcoin, Ethereum, Ripple, and Litecoin have gradually stabilized after experiencing moderate rises, reflecting their market resilience and relative insulation from the effects of cascading speculation.

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

The issuance of the Trump Meme coin has broken the pre-event market co-movement pattern due to this external shock. Before the event, there was a high level of coordinated volatility among various assets; however, after the event, the CARs of different assets showed 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, technological relevance, and investors' subjective perceptions can significantly amplify the differential responses of assets' returns during major information shocks.

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Conclusion

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

Research results indicate that the market's response to this event exhibits significant heterogeneity. For instance, due to its direct technical association with Trump Meme coin, SOL has benefited significantly. Additionally, assets sharing the same underlying blockchain infrastructure have also been boosted by riding the "coattails" of this event.

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

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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 becomes particularly important for understanding the impact on market stability.

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