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

Recently, a study analyzed the incident of a political figure issuing a Meme coin, revealing the heterogeneity volatility spillover effects driven by market sentiment and fundamentals. This event highlights the increasingly important role of political factors in shaping the Crypto Assets market and investor behavior.

Introduction

Political dynamics are increasingly influencing the financial markets, and the Crypto Assets market has become a significant area of intersection between politics and finance. The 2024 U.S. presidential election further highlights this relationship, as a certain Republican candidate has unprecedentedly turned to support digital assets. He claims he will make the U.S. the "crypto capital of the world" and place Crypto Assets at the core of his economic agenda, leading the market to expect friendlier policy positions during his term.

These are expected to be realized on January 18, 2025, when the candidate issues its 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 USD, surpassing the market value of the largest Meme coin at that time by more than 4 billion USD.

The next day, the issuance of the Meme coin associated with his family further boosted market speculation. These events were not only speculative in nature but also constituted a significant exogenous shock, the impact of which extended beyond financial speculation, sending signals for broader regulatory and political agendas.

This study aims to examine how this event serves as both a political signal and a financial event affecting the Crypto Assets market. It mainly focuses on three key issues:

1. How does the release of this Meme coin affect the returns and volatility of major Crypto Assets?
2. Did this event trigger a financial contagion effect in 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 address these questions, this paper 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 study selected the top ten Crypto Assets by market capitalization for empirical research and found that after the release of this Meme coin, there was 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 certain Crypto Assets recording the largest increases due to their infrastructure and strategic connections. In contrast, mainstream Crypto Assets like Bitcoin and Ethereum showed strong resilience, with their Cumulative Abnormal Returns (CARs) and variance stabilizing in the later stages of the event. Conversely, other Meme coins experienced depreciation, and funds likely shifted towards newly issued Meme coins.

The issuance of this Meme coin occurred in a highly politically polarized environment, and the brand associated with it is closely tied to strong political sentiments, thus increasing investor sensitivity and exacerbating market reactions. For some investors, this represents a unique speculative opportunity, giving rise to a strong "herding effect"; while other investors, aware of the political and regulatory risks due to its controversial image, adopt a more cautious stance. This polarization explains the observed high volatility and differentiated market responses.

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. Moreover, 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 academics, 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

2.1 Data and Sample Selection

This study uses proprietary data of closing midpoints per minute, covering the 10 most representative Crypto Assets among the top 20 by market capitalization. The data is sourced from a centralized trading platform in the United States, with specific data obtained from the LSEG Tick History database.

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

According to the practices in existing literature, this study uses the following formula to calculate Crypto Assets returns:

Yield = ln (P t ∕P t−1)

Among them, P t represents the price of the digital asset at time t.

The event time is defined as January 18, 2025, at 2:44 AM Coordinated Universal Time (UTC), which marks the official release of the new president's Meme coin. Cumulative abnormal returns are calculated to assess the information cascade effect. This article calculates the average benchmark return for each Crypto Asset from January 1, 2025, to January 10, 2025, to represent a relatively stable sample period. Then, the benchmark is subtracted from the actual returns during the sample period to derive the excess returns over the market benchmark, and CARs are obtained through accumulation.

2.2 Method

Use the BEKK-MGARCH model to analyze the impact of the launch of this Meme coin on the Crypto Assets market. Assume that the logarithmic returns follow a normal distribution with a mean of zero and a conditional covariance matrix of Ht, the model is set as follows:

[Model formula omitted]

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, an infectious effect test is conducted. Considering the potential Type I error issue when using high-frequency data, this paper adopts a stricter significance level of α = 0.001.

Result

3.1 Volatility Overflow Effect

The research results show that the interrelationship between assets significantly strengthens in the phase after the event occurs. This finding supports the hypothesis that "the event triggered a volatility spillover effect." At the same time, the volatility of the stable logarithmic returns increases, reflecting the phenomena of rising market instability and accelerating adjustment speed. The returns of various crypto assets experienced sharp fluctuations during this event, further emphasizing the systemic impact of this event.

The dynamic conditional covariance results estimated by the BEKK-MGARCH model indicate that the 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 between certain asset pairs, where the covariance significantly increases, showing stronger interdependence and a higher degree of market integration. In contrast, while some assets also reached a significance level of 0.01, the impact was weaker. Additionally, some assets showed a decrease 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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3.2 Information Cascading Effect

The analysis of 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 increased volatility.

In the pre-event phase, most Crypto Assets experienced positive returns, possibly driven by speculative expectations or the market's optimistic attitude towards a potential presidential candidate. This indicates that even in the absence of concrete information, investors have shown significant speculative buying behavior, a phenomenon that aligns with the widely documented "fear of missing out" characteristic in the Crypto Assets market.

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

1. Some crypto assets have performed exceptionally well, surpassing all other assets, which is likely related to their direct technical relationship as the underlying blockchain of that Meme coin.
2. Some Crypto Assets also performed strongly, possibly related to their association with certain large technology companies.
3. Mature Crypto Assets such as Bitcoin and Ethereum have gradually stabilized after a moderate increase, reflecting their market resilience and relative insulation from the impacts of cascading speculation.

At the same time, other Meme coins appear particularly fragile, showing a clear asset substitution effect, where speculative funds have shifted from old Meme coins to newly issued tokens. Although certain Crypto Assets have a solid technical foundation, they have not been immune to this trend of capital transfer, exhibiting signs of value loss.

The research findings reveal that asset-specific narratives, technological relevance, and investors' subjective perceptions can significantly amplify the differential response of asset returns during major information shocks.

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Conclusion

This study examines the impact of cryptocurrency issuance associated with political figures on the crypto market, focusing on the analysis of volatility spillover effects and information cascade effects.

Research results indicate that there is significant heterogeneity in the market's response to this event. For example, certain Crypto Assets have benefited significantly due to their direct technical association with this Meme coin. Additionally, assets that share the same underlying blockchain infrastructure have also experienced a boost by hitching a ride on the "coattails" of this event.

At the same time, mainstream Crypto Assets like Bitcoin and Ethereum demonstrate stronger stability due to their core position in the market, playing a role similar to that of an anchor in this event, stabilizing the overall market structure. This indicates that investor sentiment is no longer solely dependent on fundamental technical factors, but has also begun to be 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, it becomes particularly important to continuously monitor this interaction to understand its impact on market stability.

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