From Zero to Hero: The Spillover Effect of Meme Coins in the Crypto Assets Market

Recently, a study on the impact of Meme coins on the Crypto Assets market has attracted widespread attention. The study analyzes an incident involving a well-known political figure issuing a Meme coin, revealing the heterogeneous volatility spillover effects driven by market sentiment and fundamentals, as well as the increasingly 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 emerged as an important area where politics and finance intersect. The 2024 U.S. presidential election has further highlighted this relationship, with a Republican candidate stating that they will make the U.S. the "Crypto Assets capital of the world" and placing Crypto Assets at the center of their economic agenda, sparking market expectations for more favorable policy positions.

These were confirmed on January 18, 2025, when the candidate issued an official Meme coin on the Solana blockchain. Within 24 hours, the coin's price surged by 900%, with a trading volume of 18 billion USD and a market capitalization exceeding 4 billion USD, surpassing the largest Meme coin at the time. The next day, the issuance of another Meme coin related to their family further fueled market speculation. These events were not only speculative in nature but also constituted a significant exogenous shock, with impacts extending beyond financial speculation, sending signals for broader regulatory and political agendas.

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

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 within the Crypto Assets market?
3. Does this impact exhibit heterogeneity, manifesting as different Crypto Assets responding differently based on their technological foundations, uses, or speculative appeal?

To answer these questions, this paper employs the Baba-Engle-Kraft-Kroner (BEKK) multivariate generalized autoregressive conditional heteroskedasticity (MGARCH) model to analyze the dynamic relationship between volatility and correlation.

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, with Solana and Chainlink recording the largest gains due to their infrastructure and strategic associations. Mainstream crypto assets like Bitcoin and Ethereum have shown strong resilience, with their cumulative abnormal returns (CARs) and variances stabilizing in the later stages of the event. In contrast, other Meme coins such as Dogecoin and Shiba Inu have depreciated, and funds have likely shifted towards the newly issued Meme coins.

This event occurred in a highly politically polarized environment, increasing investors' sensitivity and exacerbating market reactions. For some investors, the new Meme coin symbolizes a unique speculative opportunity, giving rise to a strong "herding effect"; while others have taken a more cautious stance due to potential political and regulatory risks. 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 often focused on negative shocks, this study focuses on the positive shocks driven by political signals and their impact on the market. The findings provide important references for academia, practitioners, and policymakers, revealing the heterogeneity of market responses to politically connected tokens and emphasizing how asset characteristics affect financial contagion dynamics.

Data and Methods

2.1 Data and Sample Selection

The research used the minute closing median price data of the top 10 crypto assets by market capitalization, 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 comes from a certain centralized trading platform in the United States, covering the time period from January 11, 2025, to January 25, 2025, encompassing a symmetrical time frame around the release of the new Meme coin (January 18, 2025).

The formula for calculating yield is:

Yield = ln(Pt / Pt-1)

Among them, Pt represents the price of digital assets at time t.

The event time is defined as January 18, 2025, at 2:44 AM Coordinated Universal Time (UTC), which is the point when the new Meme coin was officially announced for the first time. Cumulative Abnormal Returns (CARs) are used to assess the information cascade effect, with the benchmark return based on the average return from January 1, 2025, to January 10, 2025.

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2.2 Method

The study uses the BEKK-MGARCH model to analyze the impact of the launch of new Meme coins 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. To avoid Type I errors that may arise from high-frequency data, a stricter significance level of α=0.001 is used for the contagion effect test.

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Result

3.1 Volatility Spillover Effect

The analysis results show that the interconnectivity between Crypto Assets significantly increased after the event, supporting the hypothesis that "the event triggered a volatility spillover effect." The returns of each Crypto Asset experienced significant fluctuations during the event, highlighting the systemic impact of this event.

The estimation results of the BEKK-MGARCH model indicate that the event indeed triggered financial contagion and volatility spillover effects in the Crypto Assets market. The covariance between most asset pairs significantly increased after the event, especially among ETH, SOL, and LINK. In contrast, the effects on SHIB and DOT were weaker, while the covariance of LTC and XRP actually decreased after the event, indicating that the spillover effects are not evenly distributed.

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3.2 Information Cascading Effect

Cumulative Abnormal Returns (CARs) analysis reveals the information cascading effect triggered by the issuance of new Meme coins. Before the event, most Crypto Assets experienced positive returns, possibly driven by speculative expectations. After the event, three key dynamics emerged:

1. SOL has performed exceptionally well, possibly related to its role as a new Meme coin supporting the blockchain.
2. LINK has shown strong performance, possibly due to its association with a large technology company.
3. Mature Crypto Assets such as Bitcoin and Ethereum have stabilized gradually after a moderate increase, demonstrating market resilience.

At the same time, DOGE and other Meme coins like SHIB have shown weakness, reflecting an asset substitution effect. Although AVAX and DOT have a technical foundation, they have also not been spared from the trend of capital transfer.

Research findings 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 reveals the impact of political figures' related cryptocurrency issuances on the crypto market, finding significant heterogeneity in market responses. SOL benefits significantly due to direct technical associations, and assets sharing the same underlying blockchain also receive a boost. Major assets like Bitcoin and Ethereum exhibit stronger stability, serving as market anchors.

Research indicates that investor sentiment is no longer solely dependent on technical factors, but is also significantly influenced by geopolitical and policy narratives. The Crypto Assets market is highly sensitive to external events and is easily driven by speculative behavior. As digital assets increasingly intertwine with political and economic issues, continuous monitoring of this interaction is crucial for understanding market stability.

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