jakiro
Author: Luca Galati
recently,Posted by Economics LettersBuilt“FromZerotoHero: Memecoins’SpilloverEFfectsinCryptocurrencyMarkets” article.This articleAnalysis of Trump’s releaseMeme Coin Event Reveals the Spillover Effect of Heterogeneity Volatility Driven by Market Sentiment and Fundamentals,Political signals amplify speculative dynamics, highlighting the increasingly role of political factors in shaping cryptocurrency markets and investor behavior.Institute of Financial Technology, Renmin University of ChinaThe core part of the research was compiled.
introduction
Political dynamics are increasingly affecting the financial market, and the cryptocurrency market has become a significant field of intersection of politics and finance.The relationship is further highlighted by the 2024 U.S. presidential election, with Republican candidate Donald Trump turning to support digital assets like never before.He claimed that it would make the United States “the capital of cryptocurrencies on the planet” and placed cryptocurrencies at the heart of its economic agenda, and the market thus expected a more friendly policy stance during its term.
These expectations were realized on January 18, 2025, with Trump launching its official Meme Coin ($TRUMP) on the Solana blockchain.Within 24 hours, the price of $TRUMP soared by 900%, with a trading volume of up to $18 billion, and its market value exceeded the largest Meme coin at that time, DOGE, as much as $4 billion.
The next day, the issuance of Meme currency $MELANIA, associated with the First Lady, further boosted market speculation.These events are not only speculative, but also constitute a significant exogenous impact, whose impact goes beyond the scope of financial speculation and sends a broader signal to regulatory and political agenda.
The purpose of this study is to examine how this event acts as a political signal and financial events affect the cryptocurrency market.This article focuses on three key issues:
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How does the release of $TRUMP affect the returns and volatility of major cryptocurrencies?
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Has this incident triggered a financial contagious effect in the cryptocurrency market?
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Is this influence heterogeneous, manifested in the different responses of different cryptocurrencies based on their technical basis, purpose, or speculative appeal?
To answer these questions, this paper adopts the Baba-Engle-Kraft-Kroner (BEKK) multivariate generalized autoregressive conditional heteroscedastic (MGARCH) model, which is particularly suitable for analyzing the dynamic relationship between volatility and correlation over time.
This article selects the top ten cryptocurrencies in market value for empirical research, and finds that after the release of Trump Meme, there is a significant volatility spillover effect between crypto assets, indicating that there is financial contagion in the market.The event triggered a major shift in market dynamics, with Solana and Chainlink recording the biggest gains due to their infrastructure and strategic links.Mainstream cryptocurrencies such as Bitcoin and Ethereum have shown strong resilience, and their cumulative abnormal returns (CARs) and variance have stabilized later in the event.Instead, other Meme coins such as Dogecoin and Shiba Inu have depreciated, and funds are likely to turn to $TRUMP.
Indeed, the issuance of $TRUMP occurs in a highly politically differentiated environment in the United States, and the Trump brand itself is closely related to strong political sentiment, thereby increasing investor sensitivity and intensifying market response.For some investors, Trump’s endorsement symbolizes a unique speculative opportunity, giving birth to a strong “follow-up effect”; while others are aware of political and regulatory risks because of their controversial image and take a more cautious stance.This differentiation explains the observed high volatility and differentiated market responses—from enthusiasm for expected political support to doubts about reputation and political uncertainty.
In recent years, the contagious effects in the cryptocurrency market have attracted increasing attention because of their importance to financial stability, risk management and portfolio diversification.Existing research mainly focuses on spillovers between cryptocurrencies, or spillovers between cryptocurrencies and traditional financial assets, revealing the patterns of connectivity, infectious risks and fluctuations transmission.However, most of these studies focus on financial or technical incentives, such as market crashes, liquidity constraints, or blockchain innovation.Political signals, especially the infectious mechanisms related to politically related to tokens, are still research gaps.
This study is the first paper to analyze the impact of politically related tokens on the cryptocurrency market.It expands understanding of how political narratives affect decentralized financial markets.In addition, unlike previous studies that focus on negative shocks (such as Bitcoin price collapse, Terra-Luna collapse, FTX or Silicon Valley bankruptcy, this study focuses on the impact of positive shocks driven by political signals on the market. It is particularly noteworthy that there is evidence that positive shocks have an even higher impact on cryptocurrency fluctuations than negative shocks. Ultimately, this study provides important references to academics, practitioners and policy makers, revealing the heterogeneity of market responses of politically related tokens, and emphasizing how asset characteristics affect financial contagious dynamics.
Data and methods
2.1 Data and sample selection
This study uses proprietary data of the close mid-price per minute, covering the top 20 cryptocurrencies with market caps: Bitcoin (BTC), Ethereum (ETH), Ripple (XRP), Solana (SOL), Dogecoin (DOGE), Chainlink (LINK), Avalanche (AVAX), Shiba Inu (SHIB), Polkadot (DOT) and Litecoin (Litecoin (LTC).The data source is Gemini Exchange, a centralized trading platform widely used in previous research. The specific data is obtained from the LSEG Tick History database.
This data set contains a total of 20,160 observations, with a time interval from January 11, 2025 to January 25, 2025, covering a symmetrical time period before and after the release of Trump’s official Meme currency (January 18, 2025), which facilitates comparative analysis before and after the event.
According to the practice of existing literature, this study uses the following formula to calculate the cryptocurrency yield:
Rate of return =ln(Pt∕Pt−1)
inPtThe digital asset price representing the time t.
The event time is defined as 2:44 am on Coordinated Universal Time (UTC) on January 18, 2025, which is the official release of the new US president for the first time.Calculate cumulative anomaly returns to evaluate the information cascading effect.This article calculates the average benchmark income for each cryptocurrency from January 1, 2025 to January 10, 2025 to represent a relatively stable sample upfront.Next, subtract this benchmark from the actual returns during the sample period to obtain excess returns on the market benchmark, and CARs are derived by accumulation.
2.2 Methods
The BEKK-MGARCH model is used to analyze the impact of the launch of Trump’s Meme coins on the cryptocurrency market.Assuming that the logarithmic returns follow a normal distribution with the mean of zero and the conditional covariance matrix is Ht, the model is set as follows:
in,
H represents the unconditional covariance matrix.The parameter matrix satisfies a,b>0, and a+b<1 to ensure the stationarity and positive qualitativeness of the model.Subsequently, infectious effect testing was performed.Considering the first type of error problem that may occur when using high-frequency data, this paper adopts a strict significance level α=0.001.
result
3.1 Volatility spillover effect
The graphs in this section provide preliminary analysis results to reveal the interrelationships between crypto assets, which are estimated by the BEKK-MGARCH model.In the covariance structure shown in Figure 1(b), the interrelationship between assets is significantly enhanced during the stages after the event.This finding supports the assumption that “events trigger volatility spillover effects”.Similarly, Figure 1(a) shows that the fluctuation amplitude of steady logarithmic returns increases over the same period, reflecting the phenomenon of rising market instability and accelerating adjustment speed.The panel on the right of all images shows that the returns of each crypto assets fluctuated violently during the event, further highlighting the systemic impact of the event.
Table 1 shows the dynamic conditional covariance estimated by the BEKK-MGARCH model, and is accompanied by the corresponding t-test statistics to verify whether there is an infectious effect.The results show that this event did trigger financial contagion and volatility spillover effects in the cryptocurrency market.The covariance coefficients in the later stages of most events are significant at the significance level of 0.001, especially between asset pairs such as ETH, SOL and LINK. The covariance has increased significantly, showing stronger linkage and higher market integration.In contrast, although SHIB and DOT also reached a significant level of 0.01, the impact was weak.Other assets such as LTC and XRP have a decrease in covariance after the event, indicating that the spillover effect is not evenly distributed among all assets.Overall, the results highlight the structural impact of this Meme coin issuance event on the entire cryptocurrency market.
3.2 Information cascading effect
Based on the proven heterogeneous impact between crypto assets, this section further reveals the information cascading effect caused by the issuance of Trump’s Meme coins through the analysis of cumulative anomalies (CARs).The results show that this event has a significant structural impact on market dynamics, manifested as asset-specific reaction paths and intensified volatility.
Figure 2 shows the CARs of the crypto assets analyzed during the sample period.In the pre-event phase, most cryptocurrencies experienced positive returns, which may be driven by speculative expectations, or markets’ optimism about Trump’s possible election as the 47th U.S. president.This shows that even in the absence of conclusive information, investors have shown obvious speculative buying behavior, a phenomenon that is consistent with the widely recorded “miss phobia” feature in the cryptocurrency market.
There are three key dynamics that are particularly prominent in the post-event phase:
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SOL performed well, surpassing all other assets, which is likely related to its direct technical relationship as the Trump Meme currency carrying blockchain.
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LINK also performed strongly, which may be related to its correlation with Oracle, the largest US technology company.
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Mature cryptocurrencies such as Bitcoin, Ethereum, Ripple, and Litecoin have gradually stabilized after experiencing a moderate rise, reflecting the relative insulatingness of their market resilience and the impact on cascading speculation.
Meanwhile, other Meme coins such as DOGE and SHIB appear particularly fragile, showing a clear asset substitution effect, that is, speculative funds have shifted from old Meme coins to newly issued Trump tokens.Despite the solid technical foundation of AVAX and DOT, they have not been spared from such capital transfer trends, showing signs of value loss.
Figure 3 further clearly shows how the exogenous impact of Trump’s Meme coin issuance broke the market co-motivation pattern before the event.Before the event, there was a high degree of synergistic volatility between each asset; after the event, the CARs of different assets showed a drastic differentiation, ranging from +20% of Solana to −20% of Dogecoin and Shiba Inu.
The results of this section reveal that asset-specific narratives, technical relevance, and investor subjective cognition can significantly amplify the differential reactions to returns between assets when major information shocks occur.
in conclusion
This study examines the impact of cryptocurrency issuance related to politicians (such as the US President) on the crypto market, focusing on analyzing the volatility spillover effect and information cascading effect.
The results of the study show that there is significant heterogeneity in the market’s response to this event.For example, SOL benefits significantly due to its direct technical correlation with Trump’s Meme currency.The assets that share the same underlying blockchain infrastructure have also been boosted by the “hitchhiking” of this incident.
At the same time, mainstream crypto assets such as Bitcoin and Ethereum have shown stronger stability in the core position in the market, and have played a similar anchoring role in this incident, stabilizing the overall market structure.This shows that investor sentiment no longer depends solely on basic technical factors, but also begins to be significantly influenced by geopolitical and policy narratives, especially when these narratives are sent by highly symbolic leaders.
In summary, this article reveals the high sensitivity of the cryptocurrency market to external events and its tendency to be easily driven by speculative behavior.As digital assets increasingly intertwined with political and economic issues, it is particularly important to continuously monitor this interaction in understanding the impact of market stability.
