Research on the Impact of Politically Connected Tokens on the Crypto Assets Market

Recently, a study titled "From Zero to Hero: The Spillover Effect of Meme Coins in the Crypto Assets Market" was published in Economics Letters. This study analyzes the event of a political figure issuing a Meme coin, revealing the heterogeneous volatility 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 prominent arena at the intersection of politics and finance. The 2024 U.S. presidential election further highlights this relationship, as a Republican candidate has unprecedentedly shifted to support digital assets. He claims he will make the U.S. the "crypto capital of the world" and place crypto assets at the core of his economic agenda, leading the market to anticipate a more favorable policy stance during his term.

These are expected to be achieved on January 18, 2025, and the candidate issued its official Meme coin on the Solana blockchain. Within 24 hours, the price of the coin skyrocketed by 900%, with a trading volume reaching $18 billion, and its market value surpassing that of the largest Meme coin at the time by $4 billion.

The next day, the issuance of the Meme Token associated with the First Lady further fueled market speculation. These events are not only speculative in nature but also represent a significant exogenous shock, with impacts that extend beyond the realm of 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 that impacts the Crypto Assets market. The research focuses on three key questions:

1. How does the release of this Meme Token affect the returns and volatility of major Crypto Assets?

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

3. Does this impact exhibit heterogeneity, manifesting as different responses from various crypto assets based on their technological foundations, uses, or speculative appeal?

To address these questions, this article 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 ranked Crypto Assets by market capitalization for empirical analysis, finding that after the release of the Meme Token, 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 largest gains due to their infrastructure and strategic connections. In contrast, mainstream Crypto Assets like Bitcoin and Ethereum showed strong resilience, with their cumulative abnormal returns (CARs) and variance stabilizing in the later stages of the event. Conversely, other Meme Tokens such as Dogecoin and Shiba Inu experienced depreciation, likely as funds shifted to newly issued Meme Tokens.

Indeed, the issuance of this Meme Token occurred in a highly politically polarized environment in the United States, with the related brand itself closely tied to strong political sentiments, thereby increasing investor sensitivity and exacerbating market reactions. For some investors, this endorsement symbolizes a unique speculative opportunity, giving rise to a strong "herding effect"; while other investors, due to its controversial image, are aware of political and regulatory risks and adopt a more cautious stance. This polarization explains the observed high volatility and differentiated market responses—from enthusiasm for anticipated political support to skepticism regarding reputation and political uncertainty.

This study is the first paper analyzing the impact of politically affiliated Tokens on the Crypto Assets market. It expands the understanding of how political narratives influence decentralized financial markets. Furthermore, unlike previous research that mainly focused on negative shocks, this study concentrates on the impact of positive shocks driven by political signals on the market. Notably, there is evidence suggesting that positive shocks have an even greater effect on the volatility of Crypto Assets than negative shocks. Ultimately, this research provides important references for academia, practitioners, and policymakers, revealing the heterogeneity of market responses to politically affiliated tokens and emphasizing how asset characteristics influence financial contagion dynamics.

Data and Methods

2.1 Data and Sample Selection

This study uses proprietary data of the close mid-price ( close mid-price ) per minute, covering the 10 most representative cryptocurrencies among the top 20 by market capitalization: Bitcoin ( Bitcoin, BTC ), Ethereum ( Ethereum, ETH ), Ripple ( Ripple, XRP ), Solana ( SOL ), Dogecoin ( Dogecoin, DOGE ), Chainlink ( LINK ), Avalanche ( AVAX ), Shiba Inu ( Shiba Inu, SHIB ), Polkadot ( DOT ), and Litecoin ( Litecoin, LTC ). The data comes from a US centralized trading platform widely used in previous research, with specific data obtained from the LSEG Tick History database.

This dataset contains a total of 20,160 observations, covering the time period from January 11, 2025, to January 25, 2025, encompassing a symmetrical time frame of one week before and after the release of the Meme Token on January 18, 2025, allowing for comparative analysis before and after the event.

Following the practices of existing literature, this study uses the following formula to calculate the returns of Crypto Assets:

Yield = ln(Pt / Pt-1)

Where 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 marks the official release of the new U.S. President's Meme coin. Cumulative abnormal returns are calculated to assess the information cascading effect. This article calculates the average benchmark return for each Crypto Asset from January 1, 2025, to January 10, 2025, to represent a relatively stable early sample. Then, the benchmark is subtracted from the actual returns during the sample period to derive the excess returns over the market benchmark, which are then accumulated to derive CARs.

( 2.2 Method

Use the BEKK-MGARCH model to analyze the impact of the launch of this 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:

[Model formula omitted]

Among them, 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 infection effect test is conducted. Considering the potential Type I error issues that may arise when using high-frequency data, this paper adopts a stricter significance level of α = 0.001.

Result

) 3.1 Volatility Spillover Effect

The preliminary analysis results reveal the interrelationships between Crypto Assets, which are estimated through the BEKK-MGARCH model. In the covariance structure, the interdependence between assets significantly increases in the post-event phase. This finding supports the hypothesis that "events triggered volatility spillover effects." Similarly, the volatility of stable logarithmic returns increases during the same period, reflecting a phenomenon of rising market instability and accelerated adjustment pace. All right panels of the images show that the returns of each Crypto Asset experienced significant fluctuations during this event, further emphasizing the systemic impact of this event.

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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. Most of the covariance coefficients in the later stages of the events are significant at the 0.001 significance level, especially among assets such as ETH, SOL, and LINK, where the covariance significantly increases, showing stronger interconnection and a higher degree of market integration. In contrast, although SHIB and DOT also reached a significance level of 0.01, the impact is weaker. Additionally, some assets like LTC and XRP saw 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.

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3.2 information cascading effect

Based on the confirmed heterogeneity effects among Crypto Assets, the analysis of cumulative abnormal returns ### CARs ### further reveals the information cascade effect triggered by the issuance of this Meme coin. The results indicate that the 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 optimism regarding a particular candidate's potential election as President of the United States. This indicates that even in the absence of conclusive information, investors have exhibited significant speculative buying behavior, a phenomenon that aligns with the widely documented "fear of missing out" characteristic in the crypto assets market.

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 that supports this Meme Token.

2. LINK has also performed strongly, possibly due to its association with the large American tech company Oracle.

3. Mature crypto assets such as Bitcoin, Ethereum, Ripple, and Litecoin have gradually stabilized after experiencing a moderate increase, reflecting their market resilience and relative insulation from cascading speculative impacts.

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

The issuance of this Meme coin has broken the market co-movement pattern before the event due to this exogenous 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 drastic 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 asset returns in the event of major information shocks.

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Conclusion

This study examines the impact of the issuance of crypto assets related to political figures (, such as the President of the United States ), on the crypto market, with a focus on analyzing the volatility spillover effect and information cascade effect.

Research results indicate that there is significant heterogeneity in the market's reaction to this event. For example, SOL benefited significantly due to its direct technical association with the Meme coin. Additionally, assets sharing the same underlying blockchain infrastructure were also boosted by hitching a ride on this event's "tailwind."

At the same time, mainstream crypto assets such as 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 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, it becomes particularly important to continuously monitor this interaction to understand its impact on market stability.

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