The Response of the Crypto Assets Market to Politically Connected Tokens: From Zero to Hero

Recently, a study on the reaction of the cryptocurrency market to politically affiliated tokens has garnered widespread attention. The research analyzed 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 increasing role of political factors in shaping the cryptocurrency market and investor behavior.

Introduction

Political dynamics are increasingly influencing financial markets, and the Crypto Assets market has become a significant arena where politics and finance intersect. The 2024 U.S. presidential election further highlights this relationship, with a certain Republican candidate unprecedentedly turning to support digital assets. He claims to make the U.S. the "crypto capital of the earth" and places Crypto Assets at the core of his economic agenda, leading the market to anticipate a more friendly policy stance during his term.

These are expected to be realized on January 18, 2025, when the candidate issued its official Meme Token on the Solana blockchain. Within 24 hours, the price of the Token skyrocketed by 900%, with a trading volume reaching 18 billion USD, surpassing the market capitalization of the largest Meme Token at that time by more than 4 billion USD. The next day, the issuance of the Meme Token associated with the First Lady further fueled market speculation. These events not only had speculative nature but also constituted a significant exogenous shock, whose impact went beyond financial speculation, signaling broader regulatory and political agenda.

This study 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, manifesting as different reactions from various Crypto Assets based on their technological foundations, uses, or speculative appeal?

To answer these questions, this paper adopts 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 has found that after the release of the 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 ties. In contrast, mainstream crypto assets such as 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 like Dogecoin and Shiba Inu experienced depreciation, with funds likely shifting 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, and the brand associated with it is closely tied to strong political sentiments, which increases investor sensitivity and exacerbates 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, become aware of the political and regulatory risks and adopt a more cautious stance. This polarization explains the observed high volatility and differentiated market reactions—from enthusiasm for expected political support to skepticism about reputation and political uncertainty.

This study is the first to analyze 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 studies that focused primarily on negative shocks, this research focuses on the impact of positive shocks driven by political signals on the market. Ultimately, this study provides important references for academia, practitioners, and policymakers, revealing the market response heterogeneity of politically affiliated tokens and emphasizing how asset characteristics affect financial contagion dynamics.

Data and Methods

Data and Sample Selection

This study uses proprietary data of closing mid-prices per minute, covering the most representative 10 out of the top 20 crypto assets 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 is sourced from a centralized trading platform in the United States, obtained from the LSEG Tick History database.

The dataset contains a total of 20,160 observations, with a time range from January 11, 2025, to January 25, 2025, covering a symmetric time period of one week before and after the release of the Meme coin on January 18, 2025, (, to facilitate comparative analysis before and after the event.

According to the practices of existing literature, this study uses the following formula to calculate the Crypto Assets return rate:

Yield = ln)Pt ∕Pt−1(

Where Pt represents the price of digital assets 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. Cumulative abnormal returns are calculated to assess information cascade effects. This article calculates the average benchmark returns for each Crypto Asset from January 1, 2025, to January 10, 2025, to represent a relatively stable pre-sample. Then, the benchmark is subtracted from the actual returns during the sample period to derive excess returns above the market benchmark, which are aggregated to obtain CARs.

) method

Use the BEKK-MGARCH model to analyze the impact of the launch of the Meme coin on the Crypto Assets market. Assume 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:

rt|It−1 ~ N###0,Ht(

Ht = H + A′rt−1r′t−1A + B′Ht−1B

Among them,

H = unconditional covariance matrix A,B = N × N parameter matrix rt = N × 1 return vector

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

) 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 interconnection between assets significantly strengthens in the phase after the event occurs. This finding supports the hypothesis that "the event triggered a volatility spillover effect." Similarly, the volatility of the stationary log returns increases, reflecting the phenomenon of rising market instability and accelerated adjustment speed. The returns of various Crypto Assets experienced dramatic fluctuations during this event, further emphasizing the systemic impact of this incident.

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The dynamic conditional covariance results estimated by the BEKK-MGARCH model indicate that the event did indeed trigger financial contagion and volatility spillover effects in the Crypto Assets market. Most covariance coefficients in the later stages of the events are significant at the 0.001 level, especially among assets like ETH, SOL, and LINK, where the covariance significantly increases, showing stronger interconnection and higher levels of market integration. In contrast, while SHIB and DOT also reached a significance level of 0.01, their impact is weaker. Additionally, some assets like LTC and XRP experienced a decline in covariance after the event, indicating that the spillover effects are not evenly distributed among 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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information cascading effect

The analysis of the 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 response paths and heightened volatility.

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In the pre-event phase, most crypto assets experienced positive gains, possibly driven by speculative expectations or the market's optimistic attitude towards a certain candidate potentially being elected as the 47th President of the United States. This indicates that, even in the absence of concrete information, investors have shown evident speculative buying behavior, a phenomenon that aligns with the widely recorded "fear of missing out" characteristic in the crypto assets market.

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

• SOL has performed excellently, surpassing all other assets, which is likely related to its direct technical relationship as the blockchain supporting the 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 increases, reflecting their market resilience and relative insulation from the impact of cascading speculation.

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

The issuance of this Meme coin has disrupted the market co-movement pattern before the event due to this exogenous shock. Before the event occurred, there was a high degree of co-movement among the assets; however, after the event, the CARs of different assets exhibited significant divergence, ranging from +20% for Solana to -20% for Dogecoin and Shiba Inu.

These results reveal that asset-specific narratives, technological relevance, and investor subjective perceptions can significantly amplify the differential response of asset returns in the event of 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 the information cascade effect.

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

At the same time, mainstream crypto assets such as Bitcoin and Ethereum demonstrate stronger stability due to their core position in the market, serving a similar anchoring function in this event, 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, continuous monitoring of this interaction is particularly important for understanding the impact on market stability.

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