Analysis of the Impact of Politically Linked Crypto Assets on the Market

Recently, the journal Economics Letters published a research article titled "From Zero to Hero: The Spillover Effect of Meme Coins in the Crypto Assets Market." 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 increasingly important role of political factors in shaping the crypto assets market and investor behavior.

Research Background and Objectives

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 certain candidate expressed support for digital assets and promised to make the U.S. the "global capital of Crypto Assets." This statement has raised market expectations that friendlier policies will be implemented during their administration.

On January 18, 2025, the candidate issued an official meme coin on a certain blockchain. Within 24 hours, the price of the coin skyrocketed by 900%, with a trading volume reaching $18 billion, and a market cap exceeding $4 billion, surpassing the then-largest meme coin. The next day, the issuance of the meme coin related to his family further fueled market speculation. These events were not only speculative in nature but also constituted a significant exogenous shock, with impacts that extended beyond financial speculation, releasing broader regulatory and political signals.

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This study aims to examine how this event acts as both a political signal and a financial event that simultaneously affects the Crypto Assets market, focusing primarily on three issues:

1. How does the release of this meme coin affect the earnings 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, manifesting in different responses from various Crypto Assets based on their technological foundations, uses, or speculative appeal?

Research Methodology

The study employs 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 top ten crypto assets by market capitalization were selected for empirical research, using proprietary data on minute-by-minute closing mid-prices, with a time span from January 11 to January 25, 2025, covering a symmetrical time period one week before and after the release of the meme coin.

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Main Findings

1. Volatility spillover effect:
   • The interconnection between crypto assets significantly increased after the event, supporting the hypothesis of "event-driven volatility spillover effects."
   • The covariance between most asset pairs significantly increases after the event, especially among certain mainstream Crypto Assets.
   • Some assets such as Litecoin and Ripple have a decrease in covariance after the event, indicating that the spillover effect is not uniformly distributed.

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2. Information Cascading Effect:
   • Events have a significant structural impact on market dynamics, manifested as asset-specific response paths and increased volatility.
   • A certain blockchain platform performs excellently, likely due to its direct technical relationship as a meme coin carrying the blockchain.
   • Some mature Crypto Assets have gradually stabilized after experiencing a moderate rise, reflecting their market resilience.
   • Other meme coins are showing weakness, displaying a clear asset substitution effect.

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3. Heterogeneous Reaction:
   • The asset-specific narratives, technological relevance, and investors' subjective perceptions significantly amplify the differential responses in asset returns when significant information shocks occur.
   • Before the event, various assets exhibited high correlated volatility, while after the event, the cumulative abnormal returns of different assets showed significant divergence.

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Conclusion

Research shows that the issuance of Crypto Assets related to political figures has a significant impact on the market, manifested as volatility spillover effects and information cascading effects. The market response exhibits clear heterogeneity, with assets that have a strong technological correlation benefiting significantly, while mainstream Crypto Assets demonstrate greater stability.

These findings reveal 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, it becomes particularly important to continuously monitor the impact of this interaction on understanding market stability.

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