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

Recently, a research paper titled "From Zero to Hero: The Spillover Effects of Meme Coins in the Crypto Assets Market" has attracted widespread attention. The study provides an in-depth analysis of the event where a well-known political figure issued a Meme coin, revealing the heterogeneous volatility spillover effects driven by market sentiment and fundamentals. The findings indicate that political signals amplify speculative dynamics, highlighting the increasingly important role of political factors in shaping the crypto assets market and investor behavior.

Introduction

As political dynamics increasingly impact financial markets, 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 one candidate has unprecedentedly turned to support digital assets. He has promised to make the U.S. the "global capital of Crypto Assets" and place Crypto Assets at the core of his economic agenda, thereby raising market expectations for a more favorable policy stance in the future.

These expectations were confirmed on January 18, 2025. The political figure issued their official Meme coin on the Solana blockchain. In just 24 hours, the price of this new coin skyrocketed by 900%, with a trading volume reaching 18 billion USD, and a market capitalization exceeding that of the largest Meme coin at the time, DOGE, by 4 billion USD.

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The next day, the issuance of another Meme coin associated with his family further fueled the market speculation frenzy. 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 of a broader regulatory and political agenda.

This study aims to explore how this event acts 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 new Meme coins 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 reactions from various Crypto Assets based on their technological foundation, use cases, or speculative appeal?

To answer these questions, the study employed 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 analysis and found that significant volatility spillover effects exist among crypto assets after the release of new Meme coins, 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 increases due to their infrastructure and strategic connections. Meanwhile, mainstream crypto assets such as Bitcoin and Ethereum demonstrated 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, as funds likely shifted towards the newly issued Meme coins.

This event occurred in an environment of high political polarization in the United States, and the associated brands are closely linked to strong political sentiments, which heightened investor sensitivity and intensified market reactions. For some investors, this endorsement symbolizes a unique speculative opportunity, giving rise to a strong "herding effect"; while others, aware of the political and regulatory risks due to its controversial image, adopted a more cautious stance. This polarization explains the observed high volatility and differentiated market responses—from enthusiasm for expected political support to skepticism regarding reputation and political uncertainty.

In recent years, the contagion effect in the Crypto Assets market has increasingly attracted attention due to its significant implications for financial stability, risk management, and portfolio diversification. Existing research mainly focuses on the spillovers between Crypto Assets themselves or between Crypto Assets and traditional financial assets, revealing patterns of connectivity, contagion risk, and volatility transmission. However, most of these studies concentrate on financial or technological triggers, such as market crashes, liquidity constraints, or blockchain innovations. Political signals, especially the contagion mechanisms related to politically connected tokens, remain a research gap.

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 finance markets. Additionally, unlike previous research that has mostly focused on negative shocks, this study focuses on the effects of positive shocks driven by political signals on the market. Notably, there is evidence that positive shocks have an even greater impact on the volatility of Crypto Assets than negative shocks. Ultimately, this study provides 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

Data and Sample Selection

This study uses proprietary data of closing mid-prices per minute, covering the 10 most representative Crypto Assets among the top 20 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 comes from a centralized trading platform in the United States, which has been widely used in previous research.

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

The research uses the following formula to calculate the Crypto Assets return rate:

Yield = ln(Pt / Pt-1)

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

The event time is defined as 2:44 AM Coordinated Universal Time (UTC) on January 18, 2025, which marks the first official announcement of the new Meme coin release. Calculate the cumulative abnormal returns to assess the information cascading effect. The average benchmark return for each Crypto Asset is calculated from the returns from January 1, 2025, to January 10, 2025, to represent a relatively stable preliminary sample. 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.

method

The study uses the BEKK-MGARCH model to analyze the impact of the launch of new Meme coins on the Crypto Assets market. It is assumed that the log returns follow a normal distribution with a mean of zero and a conditional covariance matrix of Ht, and the model is set up as follows:

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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, an infection effect test is conducted. Considering the potential first-type error problem when using high-frequency data, the study adopted a stricter significance level of α = 0.001.

Result

volatility spillover effect

The preliminary analysis results reveal the interrelationships between Crypto Assets, which are estimated using the BEKK-MGARCH model. In the covariance structure, the interdependence among the assets significantly increases in the post-event phase. This finding supports the hypothesis that "events trigger volatility spillover effects." Similarly, the volatility of stable logarithmic returns increases, reflecting a phenomenon of rising market instability and accelerated adjustment speeds. The returns of various Crypto Assets experienced significant fluctuations during this event, further emphasizing the systemic impact of this incident.

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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. Most covariance coefficients in the later stages of the events are significant at the 0.001 significance level, especially among assets like ETH, SOL, and LINK, where the covariance significantly increased, demonstrating stronger interconnectedness and a higher degree of market integration. In contrast, while SHIB and DOT also reached a significance level of 0.01, their impact was weaker. Additionally, some assets like LTC and XRP experienced a decline in covariance after the event, indicating that the spillover effects are not uniformly distributed among all assets. Overall, the results highlight the structural impact of this Meme coin issuance event on the entire Crypto Assets market.

information cascading effect

The analysis of Cumulative Abnormal Returns (CARs) further reveals the information cascading effects triggered by the issuance of new Meme coins. The results indicate that the event has a significant structural impact on market dynamics, manifesting 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 an optimistic market attitude towards the future political landscape. This indicates that even in the absence of concrete information, investors have shown a clear tendency for speculative buying behavior, a phenomenon that aligns with the widely documented "fear of missing out" characteristic in the Crypto Assets market.

In the stage following the occurrence of the event, three key dynamics are particularly prominent:

1. SOL performed excellently, surpassing all other assets, which is likely related to its direct technical relationship as a new Meme coin-bearing blockchain.

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

3. Mature crypto assets like Bitcoin, Ethereum, Ripple, and Litecoin have gradually stabilized after experiencing moderate increases, reflecting their market resilience and relative insulation from the effects of cascading speculation.

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

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The issuance of the new Meme coin has broken the pre-event market co-movement pattern due to this exogenous shock. Before the event, there was a high degree of co-movement among different assets; however, after the event, the CARs of different assets exhibited significant divergence, ranging from +20% for Solana to -20% for Dogecoin and Shiba Inu.

These results reveal that asset-specific narratives, technological relevance, and investor subjective perceptions can significantly amplify the differential responses 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 the market's reaction to this event shows significant heterogeneity. For example, SOL benefits significantly due to its direct technical association with the new Meme coin. Additionally, assets sharing the same underlying blockchain infrastructure have also gained a boost by riding on the "coattails" of this event.

At the same time, mainstream crypto assets such as Bitcoin and Ethereum, due to their core position in the market, exhibit stronger stability and play a role similar to that of an anchor during this event, stabilizing 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 expressed by highly symbolic leaders.

In summary, this study reveals the high sensitivity of the Crypto Assets market to external events, as well as its susceptibility to being driven by speculative behavior.