Crypto Assets Market and Political Interaction: Analysis of Trump Meme Coin Incident

Recently, the journal Economics Letters published a research article titled "From Zero to Hero: The Spillover Effects of Meme Coins in the Crypto Assets Market." The article analyzes the event of Trump issuing a Meme coin, revealing the heterogeneous volatility spillover effects driven by market sentiment and fundamentals. The study found that political signals amplified speculative dynamics, highlighting the increasingly important role 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 emerged as an important area where politics and finance intersect. The 2024 U.S. presidential election further highlights this relationship, as Republican candidate Donald Trump has shifted to support digital assets, promising to make the U.S. the "global capital of Crypto Assets" and placing Crypto Assets at the core of his economic agenda.

These expectations were realized on January 18, 2025, when Trump issued his official Meme coin ($TRUMP) on the Solana blockchain. Within 24 hours, the price of $TRUMP surged by 900%, with a trading volume reaching $18 billion, and a market value exceeding the then-largest Meme coin DOGE by $4 billion. The next day, the issuance of the Meme coin $MELANIA related to the First Lady further fueled market speculation. These events not only had speculative characteristics but also constituted a significant exogenous shock, the impact of which extended beyond financial speculation, signaling a broader regulatory and political agenda.

This study aims to examine 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 responses from different Crypto Assets based on their technological foundations, uses, or speculative appeal?

To address these questions, the study employs 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 selects the top ten crypto assets by market capitalization for empirical analysis, finding that after the release of Trump Meme coin, there is 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 displayed strong resilience, with their cumulative abnormal returns (CARs) and variances stabilizing in the later stages of the event. In contrast, other Meme coins such as Dogecoin and Shiba Inu experienced depreciation, and funds likely shifted towards $TRUMP.

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

In recent years, the contagion effects in the crypto assets market have drawn increasing attention due to their significant implications for financial stability, risk management, and portfolio diversification. Existing studies mainly focus on spillovers between crypto assets themselves or between crypto assets and traditional financial assets, revealing patterns of connectivity, contagion risk, and volatility transmission. However, these studies largely concentrate on financial or technical triggers, such as market crashes, liquidity constraints, or blockchain innovations. Political signals, particularly those related to the contagion mechanisms of 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. Furthermore, unlike previous research that has primarily focused on negative shocks, this study emphasizes the effects of positive shocks driven by political signals on the market. Notably, there is evidence suggesting that positive shocks have a greater impact on the volatility of Crypto Assets than negative shocks. Ultimately, this study provides important references for academia, practitioners, and policymakers, revealing the heterogeneity of market responses to politically connected tokens and emphasizing how asset characteristics influence financial contagion dynamics.

Data and Methods

Data and Sample Selection

Research uses proprietary data on the closing mid-price 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 comes from a certain centralized exchange in the United States, obtained from the LSEG Tick History database.

The dataset contains 20,160 observations, covering the time period from January 11 to January 25, 2025, including the official release of Trump's Meme coin ( on January 18, 2025, and the symmetrical time period one week before and after, facilitating comparative analysis before and after the event.

Research uses the following formula to calculate Crypto Assets return:

Yield = ln)Pt / Pt-1(

Among them, Pt represents the price of digital assets 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 official Meme coin announcement. Cumulative abnormal returns are calculated to assess the information cascade effect. The average benchmark return for each crypto asset is calculated from the returns between January 1 and January 10, 2025, to represent a relatively stable sample period. Then, the benchmark is subtracted from the actual returns within the sample period to derive the excess returns over the market benchmark, and CARs are obtained through accumulation.

) method

Research using 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, and the model is set as follows:

rt|Ωt-1 ~ N###0, Ht(

Ht = C'C + A'εt-1ε't-1A + B'Ht-1B

Among them,

C = |c11 0 ... 0 | |c21 c22 ... 0 | |... ... ...| |cn1 cn2 ... cnn|

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 adopted a stricter significance level of α = 0.001.

Result

) Volatility Spillover Effect

The preliminary analysis results reveal the interrelationships among Crypto Assets, which are estimated through the BEKK-MGARCH model. The interdependence among assets in the covariance structure significantly strengthens in the post-event phase. This finding supports the hypothesis that "events trigger volatility spillover effects." Likewise, the volatility of stationary log returns increases during the same period, reflecting the phenomenon of rising market instability and accelerating adjustment speed. All right-side panels of the images show that the returns of each Crypto Asset experienced significant fluctuations during the event, further emphasizing the systemic impact of this event.

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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. The covariance coefficients in the later stages of most events are significant at the 0.001 significance level, especially among assets such as ETH, SOL, and LINK, where the covariance significantly increases, indicating stronger interdependence and a higher degree of market integration. In contrast, although SHIB and DOT also reached a significance level of 0.01, their impact was weaker. Additionally, some assets like LTC and XRP saw a decline in covariance after the event, suggesting 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

Based on the confirmed heterogeneity effects between Crypto Assets, the analysis through the accumulation of abnormal returns ###CARs( further reveals the information cascading effect triggered by Trump Meme coin issuance. The results indicate that this event has a significant structural impact on market dynamics, manifested as asset-specific reaction paths and increased 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 potentially being elected as the 47th President of the United States. This indicates that even in the absence of definitive information, investors have shown significant speculative buying behavior, a phenomenon that aligns with the widely documented "fear of missing out" characteristic in the Crypto Assets market.

In the phase following 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 Trump Meme coin hosting blockchain.

2. LINK also performed strongly, which may be related to its association with the large American technology company Oracle.

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 the effects of cascading speculation.

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Meanwhile, other Meme coins like DOGE and SHIB appear particularly weak, exhibiting a clear asset substitution effect, where speculative funds have shifted from old Meme coins to the newly issued Trump token. Despite AVAX and DOT having a solid technical foundation, they have also not escaped this trend of capital shift, showing signs of value loss.

The issuance of the Trump Meme coin has broken the market co-movement pattern prior to the event due to this exogenous shock. Before the event, there was a high level of co-movement among various assets; however, after the event, the CARs of different assets showed severe differentiation, 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 differential responses of asset returns during major information shocks.

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Conclusion

This study examines the impact of cryptocurrency issuance related to political figures on the crypto market, focusing on the volatility spillover effect and the information cascade effect.

Research results indicate that the market's reaction to this event exhibits significant heterogeneity. For example, due to the direct technical association with Trump Meme coin, SOL has benefited significantly. Additionally, assets sharing the same underlying blockchain infrastructure have also gained a boost from riding the "coattails" of this event.

At the same time, mainstream Crypto Assets such as Bitcoin and Ethereum demonstrate stronger stability due to their core position in the market, playing a similar anchoring role in this event, stabilizing the overall market.