How Political Signals Impact the Crypto Assets Market: A Case Study of the TrumpMemecoin Incident

A recent study published in Economics Letters analyzed the impact of the Trump Memecoin event on the Cryptocurrency market. The study revealed heterogeneous volatility spillover effects driven by market sentiment and fundamentals, highlighting the significant role of political factors in shaping the Cryptocurrency market and investor behavior.

Research Background and Objectives

As the 2024 US presidential election approaches, the relationship between politics and the cryptocurrency market is becoming increasingly close. On January 18, 2025, Trump issued the official Memecoin($TRUMP) on the Solana blockchain. Within 24 hours, the price of $TRUMP skyrocketed by 900%, with a trading volume of 18 billion US dollars, surpassing the market value of the then largest Memecoin, DOGE, which was 4 billion US dollars. The issuance of $MELANIA the next day further fueled market speculation.

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

1. The release of $TRUMP's impact on the returns and volatility of major Cryptocurrency
2. Did the event trigger financial contagion effects within the market?
3. Do different Crypto Assets exhibit heterogeneous responses due to their technological foundations, use cases, or speculative appeal?

Research Methods

The study employs the Baba-Engle-Kraft-Kroner(BEKK) multivariate generalized autoregressive conditional heteroskedasticity(MGARCH) model to analyze the top ten market capitalization Crypto Assets. The data covers the mid-price of the closing minute from January 11th to January 25th in 2025, spanning one week before and after the event.

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Main Findings

1. The volatility spillover effect is significant, indicating the presence of financial contagion in the market.

2. Solana and Chainlink recorded the largest gains due to infrastructure and strategic partnerships.

3. Bitcoin and other mainstream cryptocurrencies such as Ethereum have shown strong resilience, accumulating abnormal returns (CARs) with variance tending to stabilize.

4. Other Memecoins such as Dogecoin and Shiba Inu have depreciated, funds may flow to $TRUMP.

5. The market's response is highly differentiated, reflecting investors' different attitudes towards the Trump brand.

6. The event has triggered a positive impact, and the fluctuation effect on Crypto Assets may be higher than the negative impact.

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Research Significance

This study is the first to analyze the impact of politically connected coins on the Cryptocurrency market, expanding understanding of how political narratives affect decentralized financial markets. The research results provide important references for academia, practitioners, and policymakers, revealing the market response heterogeneity of politically connected coins and emphasizing how asset characteristics influence financial contagion dynamics.

Detailed Analysis Results

Volatility spill-over effect

Analysis of the BEKK-MGARCH model shows that the interdependence of encryption assets after the event has significantly increased, supporting the hypothesis of volatility spillover effects. The covariance between most assets has increased significantly after the event, especially for ETH, SOL, and LINK. SHIB and DOT have weaker impacts, while the covariance of LTC and XRP has decreased, indicating uneven distribution of spillover effects.

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Information Cascade Effect

Accumulated abnormal returns (CARs) analysis reveals the following key dynamics:

1. SOL performs the best, possibly due to its direct technical relationship as the blockchain that carries $TRUMP.

2. LINK is performing strongly, possibly related to its association with Oracle.

3. Mature Cryptocurrencies such as Bitcoin, Ethereum, Ripple, Litecoin, etc. have experienced a mild rise and tend to stabilize.

4. DOGE and SHIB, among other Memecoins, have shown weak performance, indicating asset substitution effects.

5. Although AVAX and DOT have solid technical foundations, they have not been able to avoid capital outflows.

The event has broken the previous market co-movement pattern, and the CARs of different assets have shown a sharp differentiation, ranging from +20% for Solana to -20% for Dogecoin and Shiba Inu.

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Conclusion

Research shows that the issuance of Cryptocurrency related to political figures has a significant and heterogeneous impact on the market. Directly related assets such as SOL( benefit significantly, while mainstream encryption assets stabilize the market. Investor sentiment is influenced not only by technical factors, but also increasingly by geopolitical and policy narratives.

This highlights the high sensitivity of the cryptocurrency market to external events and its susceptibility to speculative drivers. As digital assets become increasingly intertwined with political and economic issues, continuous monitoring of this interaction is crucial for understanding market stability.

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