A Study on the Impact of Politically-Connected Tokens on the Crypto Assets Market

Recently, Economics Letters published an article titled "From Zero to Hero: The Spillover Effects of Meme Coins in the Crypto Assets Market." This study analyzes the event of a certain political figure launching a Meme coin, revealing the heterogeneous volatility spillover effects driven by market sentiment and fundamentals. Political signals amplify speculative dynamics, highlighting the increasingly important role of political factors in shaping the Crypto Assets market and investor behavior.

Research Background

The impact of political dynamics on financial markets is becoming increasingly significant, and the crypto assets market has become an important area of intersection between politics and finance. The 2024 U.S. presidential election further highlights this relationship, as a certain presidential candidate has rare turned to support digital assets. He has pledged to make the U.S. the "global crypto capital" and place crypto assets at the core of his economic agenda, sparking market expectations for more favorable policies in the future.

These are expected to be confirmed on January 18, 2025, when the candidate issued its official Meme coin on a certain blockchain. Within 24 hours, the price of the coin skyrocketed by 900%, with a trading volume of 18 billion USD, and a market capitalization exceeding 4 billion USD, which was the largest Meme coin at that 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, impacting areas beyond financial speculation and signaling broader regulatory and political agendas.

Research Objectives

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

1. How does the release of this Meme Token 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 responses from various Crypto Assets based on their technological foundations, uses, or speculative appeal?

Research Methodology

The research adopts the Baba-Engle-Kraft-Kroner ( BEKK ) multivariate Generalized Autoregressive Conditional Heteroskedasticity ( MGARCH ) model, which is particularly suitable for analyzing the dynamic relationship of volatility and correlation over time. An empirical study is conducted on the top ten crypto assets ranked by market capitalization.

Main Findings

1. After the release of Meme coin, there is a significant volatility spillover effect among crypto assets, indicating the presence of financial contagion in the market.

2. The event triggered a significant shift in market dynamics. Certain Crypto Assets recorded the largest gains due to their infrastructure and strategic connections.

3. Mainstream crypto assets like Bitcoin and Ethereum exhibit strong resilience, with their cumulative abnormal returns ( CARs ) and variance tending to stabilize in the later stages of the event.

4. Other Meme coins have depreciated, and funds are likely to have shifted to newly issued Meme coins.

5. The event occurred in a politically polarized environment, increasing investor sensitivity and exacerbating market reactions.

6. For some investors, the new Meme Token symbolizes a unique speculative opportunity; while others recognize the political and regulatory risks and take a more cautious stance.

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Significance of the Research

1. This study analyzes for the first time the impact of politically affiliated Tokens on the Crypto Assets market, expanding the understanding of how political narratives influence decentralized financial markets.

2. Focus on the impact of positive shocks driven by political signals on the market, as opposed to previous studies that primarily focused on negative shocks.

3. Provide important references for academia, practitioners, and policymakers, revealing the heterogeneous market responses of politically connected tokens and emphasizing how asset characteristics affect financial contagion dynamics.

Data and Methods

Research using proprietary data of closing mid-prices per minute, covering the 10 most representative Crypto Assets among the top 20 by market capitalization. The data is sourced from a certain exchange, with a time frame from January 11 to January 25, 2025, including 20,160 observations.

Using the BEKK-MGARCH model to analyze the impact of the launch of Meme tokens on the Crypto Assets market. The model assumes that the logarithmic returns follow a normal distribution with a mean of zero and a conditional covariance matrix of Ht.

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Research Findings

1. Volatility spillover effect:
   • The correlation between assets significantly increases after the event.
   • The volatility of stable logarithmic returns has increased, reflecting a rise in market instability.
   • The covariance between most asset pairs has significantly increased, indicating stronger interdependence.
   • Some assets such as LTC and XRP saw a decrease in covariance after the event, indicating that the spillover effect is unevenly distributed.

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2. Information Cascade Effect:
   • Most crypto assets experienced positive returns before the event, possibly driven by speculative expectations.
   • A certain blockchain performs exceptionally well, which may be related to its role as a new Meme Token carrying the blockchain.
   • Some Crypto Assets have performed strongly, possibly related to their association with large technology companies.
   • Mature Crypto Assets such as Bitcoin, Ethereum, etc. are gradually stabilizing after experiencing a moderate rise.
   • Other Meme coins are performing weakly, showing an asset substitution effect.
   • The event broke the previous market co-movement pattern, leading to significant differentiation in the CARs of different assets.

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Conclusion

1. The market's reaction to this event exhibits significant heterogeneity.

2. Crypto Assets that have a direct technical connection with the new Meme Token benefit significantly.

3. Mainstream Crypto Assets exhibit stronger stability, serving as an anchor.

4. Investor sentiment is influenced not only by technical fundamental factors but also by geopolitical and policy narratives.

5. The Crypto Assets market is highly sensitive to external events and is easily driven by speculative behavior.

6. As digital assets increasingly intertwine with political and economic issues, continuously monitoring this interaction is important for understanding the impact on market stability.