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

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

Research Background and Purpose

As the impact of political dynamics on financial markets becomes increasingly significant, the crypto assets market has emerged as an important area where politics and finance intersect. The 2024 U.S. presidential election further highlights this relationship, as Republican candidates indicate that they will place crypto assets at the center of their economic agenda, raising market expectations for more favorable policies in the future.

On January 18, 2025, this political figure issued an official Meme Token on the Solana blockchain. Within 24 hours, the price of the Token surged by 900%, with a trading volume reaching 18 billion USD and a market capitalization exceeding 4 billion USD more than the then-largest Meme Token, DOGE. The next day, the issuance of another Meme Token related to his family further fueled market speculation. These events not only had speculative nature but also constituted a significant exogenous shock, with impacts extending beyond financial speculation, sending broader signals regarding regulation and political agendas.

This study aims to examine how this event acts 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 new Meme coins 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 have heterogeneity, manifested as different Crypto Assets responding differently based on their technological foundations, use cases, or speculative appeal?

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Research Methodology

This study 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, including Bitcoin ( BTC ), Ethereum ( ETH ), Ripple ( XRP ), Solana ( SOL ), Dogecoin ( DOGE ), Chainlink ( LINK ), Avalanche ( AVAX ), Shiba Inu ( SHIB ), Polkadot ( DOT ), and Litecoin ( LTC ).

The data source is a well-known trading platform, with a time range from January 11, 2025, to January 25, 2025, covering a symmetrical time period around the release of the new Meme coin on January 18, 2025. The study calculates the crypto assets returns using the closing mid-price every minute and calculates the cumulative abnormal returns (CARs) based on the average returns from January 1 to January 10, 2025.

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Research Results

( Volatility Spillover Effect

Research has found that after the release of the new Meme coin, there is a significant volatility spillover effect among crypto assets, indicating the presence of financial contagion in the market. The event has triggered a major shift in market dynamics:

• Solana and Chainlink recorded the largest increase due to their infrastructure and strategic connections.
• Bitcoin and mainstream Crypto Assets such as Ethereum have shown strong resilience, with their cumulative abnormal returns ) CARs ( and variance tending to stabilize in the later stages of the event.
• Other Meme coins such as Dogecoin and Shiba Inu have depreciated, and funds are likely shifting towards new Meme coins.

Research results show that the covariance between most assets significantly increases after the event, especially between ETH, SOL, and LINK. This indicates an increase in market integration and enhanced connectivity. However, the impact of SHIB and DOT is relatively weak, while the covariance of LTC and XRP decreases after the event, indicating that the spillover effect is not evenly distributed.

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) information cascading effect

Through the accumulation of abnormal returns ### CARs ( analysis, research further reveals the information cascading effect triggered by the issuance of new Meme coins:

1. In the pre-event phase, most Crypto Assets experienced positive returns, possibly driven by speculative expectations.

2. After the event:

   • SOL has performed the best, which is related to its role as a new Meme coin supporting blockchain technology.
   • LINK has also performed strongly, which may be related to its association with a large technology company.
   • Mature Crypto Assets such as Bitcoin, Ethereum, Ripple, and Litecoin have stabilized gradually after a moderate rise, demonstrating market resilience.
   • DOGE and other Meme coins like SHIB are performing weakly, showing a clear asset substitution effect.
   • Despite AVAX and DOT having a solid technical foundation, they have not escaped the trend of capital transfer.

Research results indicate that asset-specific narratives, technological relevance, and investors' subjective perceptions can significantly amplify the differential responses of asset returns 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 analysis of volatility spillover effects and information cascading effects. The research found that:

1. The market's reaction to this event shows significant heterogeneity. For example, SOL benefits significantly due to its direct technological relevance.

2. Mainstream Crypto Assets such as Bitcoin and Ethereum demonstrate stronger stability, playing a anchoring role in the event.

3. Investor sentiment is not only influenced by fundamental technical factors but is also significantly affected by geopolitical and policy narratives.

4. The Crypto Assets market is highly sensitive to external events and is easily driven by speculative behavior.

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As digital assets increasingly intertwine with political and economic issues, continuously monitoring this interaction becomes particularly important for understanding its impact on market stability. This research provides important references for academia, 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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