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

Recently, the journal Economics Letters published a research paper titled "From Zero to Hero: The Spillover Effect of Meme Coins in the Crypto Assets Market." The paper provides an in-depth analysis of the impact of Trump's issuance of Meme Coins on the Crypto Assets market, revealing the heterogeneous volatility spillover effects driven by market sentiment and fundamentals. The study shows that political signals amplify speculative dynamics, highlighting the increasing importance of political factors in shaping the Crypto Assets market and investor behavior.

Introduction

The impact of political dynamics on financial markets is becoming increasingly significant, 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 Republican candidate Trump has unprecedentedly turned to support digital assets. He promises to make the U.S. the "global capital of Crypto Assets" and places Crypto Assets at the core of his economic agenda, raising market expectations for a more favorable policy stance in the future.

On January 18, 2025, these expectations were realized. Trump issued his official Meme coin ($TRUMP) on the Solana blockchain. Within 24 hours, the price of $TRUMP skyrocketed by 900%, with a trading volume reaching $18 billion, and a market capitalization exceeding $4 billion more than the largest Meme coin at the time, DOGE. The next day, the issuance of the Meme coin $MELANIA related to the First Lady further fueled market speculation. These events were not only speculative in nature but also constituted a significant exogenous shock, with impacts that extended beyond financial speculation, sending broader signals of regulatory and political agendas to the market.

This study aims to explore how this event serves as both a political signal and a financial event affecting the Crypto Assets market. The research focuses on three key questions:

1. How does the release of $TRUMP 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 foundation, use cases, or speculative appeal?

To answer these questions, the research adopted 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.

The study selected the top ten crypto assets by market capitalization for empirical analysis and found that after the release of Trump's 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 Solana and Chainlink recording the largest gains due to their infrastructure and strategic connections. Mainstream crypto assets like Bitcoin and Ethereum exhibited strong resilience, with their cumulative abnormal returns (CARs) and variance tending to stabilize in the later stages of the event. In contrast, other Meme coins like Dogecoin and Shiba Inu experienced depreciation, and funds likely shifted towards $TRUMP.

The issuance of $TRUMP took place in an environment of high political polarization in the United States, with the Trump brand itself closely tied to strong political emotions, thus increasing investor sensitivity and exacerbating market reactions. For some investors, Trump's endorsement symbolizes a unique speculative opportunity, giving rise to a strong "herding effect"; while other investors, aware of the political and regulatory risks due to his controversial image, adopt a more cautious stance. This polarization explains the observed high volatility and differentiated market reactions — from enthusiasm for expected political support to skepticism about reputation and political uncertainty.

This study is the first to analyze the impact of politically affiliated tokens on the Crypto Assets market. It expands the understanding of how political narratives influence decentralized financial markets. Additionally, unlike previous studies that have largely focused on negative shocks, this research focuses on the effects of positive shocks driven by political signals on the market. The findings provide important references for academia, practitioners, and policymakers, revealing the market response heterogeneity of politically affiliated tokens and emphasizing how asset characteristics influence financial contagion dynamics.

Data and Methods

Data and Sample Selection

The research used proprietary data on closing mid-prices per minute, covering the most representative 10 of 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 source is from an exchange, obtained from the LSEG Tick History database.

The dataset contains a total of 20,160 observations, covering the time period from January 11, 2025, to January 25, 2025. It includes a symmetrical time frame around the official release of Trump's Meme coin on January 18, 2025, which allows for comparative analysis before and after the event.

The formula for calculating Crypto Assets yield is as follows:

Yield = ln(Pt / Pt-1)

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

The event time is defined as January 18, 2025, Coordinated Universal Time ( UTC ) at 2:44 AM. This point marks the official release of the new U.S. President's Meme coin. The study calculated cumulative abnormal returns to assess the information cascade effect. The average benchmark return for each Crypto Asset was calculated from the returns between January 1, 2025, and January 10, 2025, representing a relatively stable sample period. Subsequently, this benchmark was subtracted from the actual returns within the sample period to derive excess returns over the market benchmark, which were then aggregated to obtain CARs.

( method

The study uses the BEKK-MGARCH model to analyze the impact of the launch of Trump Meme coin on the Crypto Assets market. It is assumed that the logarithmic returns follow a normal distribution with a mean of zero and a conditional covariance matrix of Ht, as specified in the model:

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Among them, 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, the study adopts a more stringent significance level of α = 0.001.

Result

) volatility spillover effect

The preliminary analysis results reveal the interrelationships between Crypto Assets. In the post-event phase, the interconnectivity among assets significantly increased, supporting the hypothesis that "the event triggered a volatility spillover effect." At the same time, the volatility of the stable logarithmic returns increased, reflecting a rise in market instability and a faster adjustment speed. All images show that the returns of various Crypto Assets experienced severe fluctuations during the event, further emphasizing the systemic impact of this event.

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The estimation results of dynamic conditional covariance 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 between assets such as ETH, SOL, and LINK, where the covariance significantly increases, demonstrating stronger interactivity and a higher degree of market integration. In contrast, although SHIB and DOT also reached a significant level of 0.01, their impact is weaker. Additionally, some assets like LTC and XRP actually saw a decrease in covariance after the event, indicating that the spillover effects are not uniformly distributed among all assets.

information cascading effects

Through the analysis of accumulated abnormal returns ### CARs ###, the research further reveals the information cascading effects triggered by the issuance of Trump Meme coin. The results indicate that this event has a significant structural impact on market dynamics, manifested as asset-specific response paths and heightened volatility.

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In the pre-event phase, most crypto assets experienced positive returns, possibly driven by speculative expectations or the market's optimistic attitude towards Trump's potential election as the 47th President of the United States. This indicates that even in the absence of concrete information, investors have shown significant speculative buying behavior.

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

1. SOL has performed exceptionally well, surpassing all other assets, which is likely related to its direct technical relationship as the blockchain carrying the Trump Meme coin.

2. LINK has also performed strongly, which may be related to its correlation with large American tech companies.

3. Mature Crypto Assets such as Bitcoin, Ethereum, Ripple, and Litecoin have gradually stabilized after experiencing moderate increases, reflecting their market resilience and relative insulation from cascading speculative impacts.

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

The issuance of the Trump Meme coin has disrupted the market's co-movement pattern prior to the event due to this exogenous shock. Before the event, there was a high level of coordinated volatility among the assets; however, after the event occurred, the CARs of different assets showed significant divergence, ranging from +20% for Solana to -20% for Dogecoin and Shiba Inu.

These results reveal that asset-specific narratives, technological relevance, and investors' subjective perceptions can significantly amplify the differentiated responses of returns between assets during major information shocks.

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

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At the same time, mainstream Crypto Assets such as Bitcoin and Ethereum, due to their core position in the market, have shown stronger stability, playing a similar anchoring role in this event, stabilizing the overall market structure. This indicates that investor sentiment is no longer solely dependent on the 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.

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In summary, this article reveals the high sensitivity of the Crypto Assets market to external events and 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.