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

Recently, a study on the spillover effects of Meme coins was published in Economics Letters. The 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 important role of political factors in shaping the Crypto Assets market and investor behavior.

Introduction

The impact of political dynamics on financial markets is becoming increasingly significant, 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 a Republican candidate has shifted to support digital assets, claiming to make the U.S. the “crypto asset capital” and placing crypto assets at the core of their economic agenda. The market thus anticipates that more friendly policies will be introduced in the future.

These expectations will be fulfilled on January 18, 2025. The candidate issued the official Meme coin on the Solana blockchain. Within 24 hours, the coin's price skyrocketed by 900%, with a trading volume of 18 billion USD and a market capitalization exceeding 4 billion USD, surpassing the largest Meme coin at that time.

The next day, the issuance of Meme coins related to the candidates' families further fueled market speculation. These events not only have a speculative nature but also constitute a significant exogenous shock, with impacts that extend beyond financial speculation, sending signals of 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 this Meme coin affect the returns and volatility of major Crypto Assets?
2. Did this event trigger a financial contagion effect within the Crypto Assets market?
3. Does this impact exhibit heterogeneity, manifested in different responses from various Crypto Assets based on their technological foundations, purposes, or speculative appeal?

The study uses the BEKK-MGARCH model to analyze the dynamic relationship between volatility and correlation, selecting the top ten cryptocurrencies by market capitalization for empirical research. The results show that after the release of Meme coins, 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. Mainstream cryptocurrencies such as Bitcoin and Ethereum demonstrated strong resilience, while other Meme coins experienced depreciation.

This event occurred in a highly politically polarized environment and was closely related to strong political emotions, which heightened investor sensitivity and exacerbated market reactions. For some investors, this symbolizes a unique speculative opportunity; while others recognize the political and regulatory risks and adopt a more cautious stance. This polarization explains the observed high volatility and differentiated market responses.

This study is the first paper to analyze the impact of politically connected Tokens on the Crypto Assets market, expanding the understanding of how political narratives influence decentralized financial markets. Unlike previous research that has largely focused on negative shocks, this study focuses on the impact of positive shocks driven by political signals on the market. The research results provide important references for academics, practitioners, and policymakers, revealing the heterogeneous market responses of politically connected Tokens and emphasizing how asset characteristics influence financial contagion dynamics.

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Data and Methods

2.1 Data and Sample Selection

The study used the minute closing mid-price data of the 10 most representative Crypto Assets among the top 20 by market capitalization, including Bitcoin, Ethereum, Ripple, Solana, Dogecoin, Chainlink, Avalanche, Shiba Inu, Polkadot, and Litecoin. The data comes from a centralized trading platform in the United States, covering the time period from January 11 to January 25, 2025, encompassing a symmetrical time frame one week before and after the release of the Meme coin.

The formula for yield calculation is:

Yield = ln(Pt / Pt-1)

Where Pt represents the digital asset price at time t.

The event time is defined as January 18, 2025, at 2:44 AM UTC, which is the point at which the official release of the new U.S. President's official Meme coin was first formally announced. The study calculated the cumulative abnormal returns (CARs) to assess the information cascading effect.

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2.2 Method

The study uses the BEKK-MGARCH model to analyze the impact of the launch of Meme Token on the Crypto Assets market. The model assumes that the log returns follow a normal distribution with a mean of zero and a conditional covariance matrix of Ht. Subsequently, an infection effect test is conducted, using a stricter significance level of α=0.001.

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Result

3.1 Volatility Overflow Effect

Research results show that the interconnection between crypto assets significantly strengthens after events occur, supporting the hypothesis that “events trigger volatility spillover effects.” The increase in the amplitude of returns reflects a rise in market instability and a faster adjustment speed.

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 significance level, especially among assets such as ETH, SOL, and LINK, where the covariance significantly increases, demonstrating stronger interconnectivity and a higher degree of market integration. Although SHIB and DOT also reached a significance level of 0.01, their impact is relatively weak. In contrast, the covariance of LTC and XRP decreased after the event, indicating that the spillover effects are not evenly distributed among all assets.

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3.2 information cascading effect

The cumulative abnormal returns ( CARs ) analysis reveals the information cascading effect triggered by the issuance of Meme coins. The study found that:

1. Before the event, most Crypto Assets experienced positive returns, possibly driven by speculative expectations.

2. After the event, three key dynamics emerged:

   • SOL has performed exceptionally well, surpassing all other assets, possibly due to its role as a Meme coin on the blockchain.
   • LINK has shown strong performance, which may be related to its association with a large technology company.
   • Mature Crypto Assets such as Bitcoin and Ethereum have gradually stabilized after experiencing moderate increases, reflecting market resilience.

3. DOGE and other Meme coins like SHIB are showing weakness, indicating an asset substitution effect.

4. Despite AVAX and DOT having a solid technical foundation, they have not been spared from the trend of capital migration.

Research results indicate that asset-specific narratives, technological relevance, and investors' subjective perception can significantly amplify the differential response of asset returns during major information shocks.

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Conclusion

Research shows that the market's reaction to this event exhibits significant heterogeneity. Assets directly related to Meme coins benefited significantly, while assets sharing the same underlying blockchain infrastructure also received a boost. Mainstream crypto assets demonstrated stronger stability due to their core market position, playing a anchoring role during the event.

This indicates that investor sentiment is influenced not only by fundamental technical factors but also significantly by geopolitical and policy narratives, especially when these narratives are conveyed by highly symbolic leaders.

Research has revealed 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 become increasingly intertwined with political and economic issues, continuous monitoring of this interaction is particularly important for understanding the impact on market stability.

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