Research on the Impact of Politically Related Tokens on the Crypto Market

A recent study published in Economics Letters analyzed the event of a political figure issuing Meme coins, revealing the heterogeneous volatility spillover effects driven by sentiment and fundamentals in the crypto market. The research indicates that political signals amplify speculative dynamics, highlighting the increasingly important role of political factors in shaping the cryptocurrency market and investor behavior.

Introduction

The impact of political dynamics on the financial market is becoming increasingly significant, and the crypto market has become an important area where politics and finance intersect. The 2024 United States presidential election further highlights this relationship, as a Republican candidate has shifted to support digital assets, claiming to make the U.S. the "crypto capital" and placing cryptocurrency at the core of his economic agenda. The market thus anticipates more favorable policies to be implemented during his term.

These are expected to be realized on January 18, 2025, when the candidate issued its official Meme coin on the Solana blockchain. Within 24 hours, the price of the coin skyrocketed by 900%, with a trading volume reaching $18 billion and a market capitalization exceeding $4 billion, which was the largest Meme coin at that time. The next day, the issuance of the Meme coin related to its spouse further fueled market speculation. These events are not only speculative in nature but also constitute a significant exogenous shock, whose impact extends beyond the realm of 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 market, focusing on three key issues:

1. How does the release of new Meme coins affect the returns and volatility of major cryptocurrencies?

2. Did this event trigger a financial contagion effect in the crypto market?

3. Does this impact exhibit heterogeneity, manifesting as different responses from various cryptocurrencies based on their technological foundations, uses, or speculative appeal?

To answer these questions, this paper adopts the BEKK-MGARCH model to analyze the dynamic relationship between volatility and correlation. The study finds that after the release of new Meme Tokens, there is a significant volatility spillover effect among crypto assets, indicating the presence of financial contagion in the market. The event has triggered a significant shift in market dynamics, with Solana and Chainlink experiencing the largest gains due to their infrastructure and strategic associations. Mainstream crypto currencies like Bitcoin and Ethereum have shown strong resilience, with their cumulative abnormal returns and variances stabilizing in the later stages of the event. In contrast, other Meme Tokens like Dogecoin and Shiba Inu have depreciated, with funds likely shifting towards the newly issued Meme Tokens.

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Indeed, the issuance of the new Meme coin occurs in an environment of high political polarization in the United States, and the brand associated with it is closely tied to strong political sentiments, which heightens investor sensitivity and exacerbates market reactions. For some investors, this symbolizes a unique speculative opportunity, giving rise to a strong "herd effect"; while others, aware of the political and regulatory risks due to its controversial image, take a more cautious stance. This polarization explains the observed high volatility and differentiated market reactions.

This study is the first to analyze the impact of politically connected tokens on the crypto market. It expands the understanding of how political narratives influence decentralized financial markets. Moreover, unlike previous research that largely focused on negative shocks, this study concentrates on the positive shocks driven by political signals and their effects 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

This study uses minute-by-minute closing mid-price data of the top 10 cryptocurrencies by market capitalization, including Bitcoin, Ethereum, Ripple, Solana, Dogecoin, Chainlink, Avalanche, Shiba Inu, Polkadot, and Litecoin. The data is sourced from a centralized trading platform in the United States, covering the time period from January 11 to January 25, 2025, encompassing one week before and after the release of a new Meme coin.

The study uses the BEKK-MGARCH model to analyze the impact of the launch of new Meme coins on the crypto market. This model is particularly suitable for analyzing the dynamic relationship between volatility and correlation over time.

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Result

Volatility Overflow Effect

Research results indicate that the issuance events of new Meme Tokens have indeed triggered financial contagion and volatility spillover effects in the crypto market. The covariance coefficients in most post-event periods significantly increased, especially among Ethereum, Solana, and Chainlink, showing stronger interdependence and a higher degree of market integration. In contrast, the impact of Shiba Inu coin and Polkadot is relatively weak. The covariance of Litecoin and Ripple decreased after the events, indicating that the spillover effects are not evenly distributed among all assets.

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information cascading effect

Through the analysis of cumulative abnormal returns ( CARs ), the research further reveals the information cascade effect 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 response paths and increased volatility.

After the event occurs, three key dynamics emerge:

1. Solana has performed exceptionally well, surpassing all other assets, which is likely related to its direct technological relationship as a new Meme coin carrying the blockchain.

2. Chainlink also performed strongly, which may be related to its association with a large American technology company.

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

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At the same time, Dogecoin and other Meme coins like Shiba Inu appear particularly weak, exhibiting a clear asset substitution effect, where speculative funds have shifted from older Meme coins to newly issued Tokens. Despite having a solid technical foundation, Avalanche and Polkadot have not been immune to this trend of capital transfer, showing signs of value loss.

The research results reveal that asset-specific narratives, technical 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 politicians on the crypto market, focusing on the volatility spillover effect and information cascade effect.

Research results indicate that the market's reaction to this event shows significant heterogeneity. For example, Solana has benefited significantly due to its direct technical association with the new Meme Token. Additionally, assets that share the same underlying blockchain infrastructure have also gained a boost by riding on the "coattails" of this event.

At the same time, mainstream encryption assets such as Bitcoin and Ethereum have shown stronger stability due to their core position in the market, playing a role similar to anchoring in this event, which stabilized 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 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, continuously monitoring this interaction becomes particularly important for understanding the impact on market stability.

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