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

Recently, the "Economist Daily" published a research article analyzing the impact of a certain political figure's issuance of Meme coins on the Crypto Assets market. The study revealed the heterogeneous volatility spillover effects driven jointly by market sentiment and fundamentals, with political signals amplifying speculative dynamics, highlighting the important role of political factors in shaping the Crypto Assets market and investor behavior.

Introduction

The impact of political dynamics on financial markets is increasing day by day, 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 Republican candidate has unprecedentedly turned to support digital assets. He claims to transform the U.S. into the "global capital of Crypto Assets" and places Crypto Assets at the core of the economic agenda, leading the market to expect friendlier policy positions during his administration.

These expectations were realized on January 18, 2025, when the candidate issued the official Meme coin on the Solana blockchain. Within 24 hours, the price of the coin skyrocketed by 900%, with a trading volume of 18 billion USD and a market cap exceeding the largest Meme coin at the time, DOGE, by 4 billion USD.

The next day, the issuance of another Meme coin related to his family further fueled the market speculation frenzy. These events are not only speculative in nature but also constitute a significant exogenous shock, the impact of which extends beyond financial speculation, conveying broader signals of regulatory and political agendas.

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

• How does the release of new Meme coins affect the returns and volatility of major Crypto Assets?
• Did this event trigger a financial contagion effect in the Crypto Assets market?
• Does this impact exhibit heterogeneity, manifested as different Crypto Assets reacting differently based on their technological foundations, uses, or speculative appeal?

To answer these questions, this article employs the BEKK-MGARCH model, which is particularly suitable for analyzing the dynamic relationship between volatility and correlation.

The research selects the top ten crypto assets by market capitalization for empirical analysis and finds that after the release of a new 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 seeing the largest increases due to their infrastructure and strategic connections. Mainstream crypto assets like Bitcoin and Ethereum exhibited strong resilience, with cumulative abnormal returns and variances stabilizing in the later stages of the event. In contrast, other Meme coins like Dogecoin and Shiba Inu experienced devaluation, suggesting that funds may have shifted towards the new Meme coin.

Indeed, the issuance of the new Meme coin occurs in a highly polarized political environment in the United States, with the associated brand closely linked to strong political sentiments, thereby increasing investor sensitivity and exacerbating market reactions. For some investors, this symbolizes a unique speculative opportunity, giving rise to a strong "herding effect"; while other investors become aware of political and regulatory risks due to its controversial nature, adopting a more cautious stance. This polarization explains the observed high volatility and differentiated market reactions.

In recent years, the contagion effect in the Crypto Assets market has received increasing attention due to its significant implications for financial stability, risk management, and portfolio diversification. Existing research mainly focuses on the spillover between Crypto Assets themselves, or the spillover between Crypto Assets and traditional financial assets, revealing patterns of connectivity, contagion risk, and volatility transmission. However, most of these studies concentrate on financial or technical triggers, such as market crashes, liquidity constraints, or blockchain innovations. Political signals, especially the contagion mechanisms related to politically connected tokens, remain a research gap.

This study is the first to analyze the impact of politically connected tokens on the Crypto Assets market. It expands the understanding of how political narratives influence decentralized financial markets. Additionally, unlike previous research that often focuses on negative shocks, this study concentrates on the impact of positive shocks driven by political signals on the market. Notably, there is evidence suggesting that positive shocks may have an even greater impact on the volatility of Crypto Assets than negative shocks. Ultimately, this study provides important references for academia, practitioners, and policymakers, revealing the heterogeneity of market responses to politically connected tokens and emphasizing how asset characteristics influence 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 among 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 U.S. centralized exchange, obtained from the LSEG Tick History database.

The dataset contains 20,160 observations, covering the time period from January 11 to January 25, 2025, including the release of the new Meme coin ( on January 18, 2025, and the symmetrical time frame of one week before and after, facilitating comparative analysis before and after the event.

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

Return = ln)Pt / Pt-1(

Where Pt represents the price of the digital asset at time t.

The event time is defined as January 18, 2025, at 2:44 AM UTC, which marks the first official announcement of the new Meme coin release. Cumulative abnormal returns are calculated to evaluate the information cascading effect. The average benchmark return for each Crypto Asset is calculated from the returns from January 1 to January 10, 2025, serving as a relatively stable sample period. The excess return on the market benchmark is derived by subtracting this benchmark from the actual returns during the sample period, and CARs are obtained through accumulation.

) method

Using the BEKK-MGARCH model to analyze the impact of the new Meme coin launch on the Crypto Assets market. Assuming 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|Ft-1 ~ N###0,Ht(

Ht = C'C + A'εt-1ε't-1A + B'Ht-1B

Among them,

C is a lower triangular matrix A and B are n x n parameter matrices

H represents the unconditional covariance matrix. The parameter matrix satisfies a, b > 0, and a + b < 1, to ensure the stability and positive definiteness of the model. Subsequently, the contagion 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

Preliminary analysis results reveal the interrelationships among crypto assets. In the covariance structure, the interconnection between assets significantly strengthens after the event, supporting the hypothesis that "the event triggered a volatility spillover effect." The volatility of the stationary log returns increases, reflecting rising market instability and accelerated adjustment speed. The returns of various crypto assets experienced sharp fluctuations during the event, further emphasizing the systemic impact of this event.

The dynamic conditional covariance results estimated by the BEKK-MGARCH model indicate that this event indeed triggered financial contagion and volatility spillover effects in the Crypto Assets market. The covariance coefficients in the later stages of most events are significant at the 0.001 significance level, especially among assets like ETH, SOL, and LINK, where their covariances significantly increased, showing stronger interconnectivity and a higher degree of market integration. Although SHIB and DOT also reached a significance level of 0.01, their impact is weaker. In contrast, the covariance of LTC and XRP decreased 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

Cumulative abnormal returns ### CARs ( analysis further reveals the information cascade effects triggered by the issuance of new Meme coins. The results indicate that the event has a significant structural impact on market dynamics, manifested as asset-specific reaction paths and increased volatility.

In the pre-event phase, most Crypto Assets experienced positive returns, possibly driven by speculative expectations or market optimism regarding the potential election of a certain candidate. This indicates that even in the absence of concrete information, investors have exhibited clear speculative buying behavior, consistent with the widely documented "fear of missing out" characteristic in the Crypto Assets market.

After the incident, three key dynamics emerged:

1. SOL has performed exceptionally well, surpassing all other assets, which may be related to its direct technological connection as a new Meme coin carrying the blockchain.

2. LINK also performed strongly, possibly related to its connection with a large technology company.

3. Mature Crypto Assets such as Bitcoin, Ethereum, Ripple, and Litecoin have gradually stabilized after a moderate rise, reflecting their market resilience and relative insulation from the impact of cascading speculation.

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

The issuance of the new Meme coin has disrupted the market co-movement pattern prior to the event. Before the event occurred, there was a high degree of co-movement among various assets; however, after the event, the CARs of different assets showed significant differentiation, ranging from +20% for Solana to -20% for Dogecoin and Shiba Inu.

These results reveal that asset-specific narratives, technical correlations, 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, with a focus on analyzing volatility spillover effects and information cascades.

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

At the same time, mainstream crypto assets such as Bitcoin and Ethereum, due to their core position in the market, exhibit stronger stability and play a similar anchoring role 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 behaviors. As digital assets increasingly intertwine with political and economic issues, it becomes particularly important to continuously monitor this interaction to understand its impact on market stability.