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

Recently, Economics Letters published an article titled "From Zero to Hero: The Spillover Effects of Meme Coins in the Crypto Assets Market." This study analyzes an event where a political figure issued a Meme Coin, revealing the heterogeneous volatility spillover effects driven by market sentiment and fundamentals. Political signals amplified 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 cryptocurrency market has become a significant arena where politics and finance intersect. The 2024 U.S. election further highlights this relationship, as a Republican candidate has unprecedentedly turned to support digital assets. He claims he will make the U.S. the "crypto capital of the world" and place cryptocurrencies 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 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 surged by 900%, with a trading volume reaching 18 billion USD, surpassing the then-largest Meme coin DOGE by 4 billion USD in market capitalization.

The next day, the issuance of the Meme coin associated with his family further boosted market speculation. These events not only have a speculative nature but also constitute a significant exogenous shock, with impacts that extend beyond the realm of 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. This paper focuses on three key issues:

• 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 exhibit heterogeneity, manifested in different Crypto Assets responding differently 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.

This article selects the top ten cryptocurrencies by market capitalization for empirical research and finds that after the release of this Meme coin, there is 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 cryptocurrencies like Bitcoin and Ethereum showed strong resilience, with their cumulative abnormal returns (CARs) and variance tending to stabilize in the later stages of the event. Conversely, other Meme coins such as Dogecoin and Shiba Inu experienced devaluation, and funds likely shifted towards the newly issued Meme coins.

Indeed, the issuance of this Meme Token occurred in an environment of high political polarization in the United States, with the associated brand closely linked 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 the political and regulatory risks and take a more cautious stance. This polarization explains the observed high volatility and differentiated market reactions—from enthusiasm for expected political support to skepticism regarding reputation and political uncertainty.

In recent years, the contagion effect in the crypto assets market has increasingly attracted attention due to its significant implications for financial stability, risk management, and portfolio diversification. Existing research has mainly focused on spillovers between cryptocurrencies or spillovers between cryptocurrencies and traditional financial assets, revealing patterns of connectivity, contagion risk, and volatility transmission. However, most of these studies concentrate on financial or technical triggers, such as market crashes, liquidity constraints, or blockchain innovations. Political signals, especially 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 finance markets. Furthermore, unlike previous research that often focused on negative shocks ( such as Bitcoin price crashes, the Terra-Luna collapse, the FTX bankruptcy, or the Silicon Valley Bank failure ), this study focuses on the impact of positive shocks driven by political signals on the market. Notably, there is evidence that positive shocks have an even 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 financial contagion dynamics.

Data and Methods

2.1 Data and Sample Selection

This study uses proprietary data on the close mid-price of (close mid-price) every minute, covering the ten most representative crypto assets 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 centralized trading platform in the United States, which has been 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 period of one week before and after the release of the Meme coin on January 18, 2025, which allows for comparative analysis before and after the event.

According to existing literature, this study uses the following formula to calculate Crypto Assets returns:

Yield = ln (P t ∕P t−1)

Among them, P t 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 official Meme Token release. Cumulative abnormal returns are calculated to assess the information cascade effect. This article calculates the average benchmark returns of each Crypto Asset from January 1, 2025, to January 10, 2025, to represent a relatively stable preliminary sample. Then, the benchmark is subtracted from the actual returns during the sample period to obtain the excess returns over the market benchmark, and CARs are derived through accumulation.

( 2.2 Method

Using 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:

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, an 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

This section's charts provide preliminary analysis results to reveal the interrelationships among Crypto Assets, which are estimated through the BEKK-MGARCH model. In the covariance structure shown in Figure 1###b###, the interconnections among assets significantly strengthen in the post-event phase. This finding supports the hypothesis that "events triggered volatility spillover effects." Similarly, Figure 1(a) shows an increase in the volatility of stationary log returns over the same period, reflecting the phenomenon of rising market instability and accelerated adjustment speed. All right-side 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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Table 1 presents the dynamic conditional covariance estimated through the BEKK-MGARCH model, along with the corresponding t-test statistics to verify the existence of contagion effects. The results indicate that the event did indeed trigger 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 significance level, especially among assets like ETH, SOL, and LINK, where the covariance significantly increases, demonstrating stronger linkage and higher market integration. In contrast, although SHIB and DOT also reached a significance level of 0.01, their 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, this section further reveals the information cascading effect triggered by the issuance of the 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 response paths and increased volatility.

Figure 2 shows the CARs of the analyzed Crypto Assets during the sample period. In the pre-event phase, most coins experienced positive returns, possibly driven by speculative expectations or the market's optimistic outlook regarding the potential election of this political figure as the 47th President of the United States. This indicates that, even in the absence of concrete information, investors have exhibited clear speculative buying behavior, a phenomenon that aligns with the widely recorded characteristic of "fear of missing out" in the Crypto Assets market.

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In the phase following the event, three key dynamics stand out prominently:

• SOL has performed excellently, surpassing all other assets, which is likely related to its direct technological relationship as the blockchain that carries this Meme coin.

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

• 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 cascading speculative impacts.

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. Despite AVAX and DOT having a solid technical foundation, they have not been immune to this trend of capital transfer, showing signs of value loss.

Figure 3 further clarifies how the issuance of this Meme coin, as an exogenous shock, broke the pre-event market co-movement pattern. Before the event, there was a high degree of co-volatility among various assets; however, after the event, the CARs of different assets showed sharp divergence, ranging from +20% for Solana to -20% for Dogecoin and Shiba Inu.

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The results of this section reveal that asset-specific narratives, technological relevance, and investors' subjective perceptions can significantly amplify the differential responses of asset returns during major information shocks.

Conclusion

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

Research results indicate that the market's reaction to this event exhibits significant heterogeneity. For example, due to its direct technical association with the Meme coin, SOL has benefited significantly. Additionally, assets sharing the same underlying blockchain infrastructure have also received a boost by riding on the "coattails" of this event.

At the same time, mainstream Crypto Assets such as Bitcoin and Ethereum show performance due to their core position in the market.