The Impact of Political Factors on the Crypto Assets Market: Taking Trump Meme Coin as an Example

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 a prominent political figure issuing 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.

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Research Background

The influence of political trends on financial markets is 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 a major presidential candidate has unprecedentedly turned to support digital assets, declaring the intention to make the U.S. the "global capital of Crypto Assets" and placing Crypto Assets at the core of their economic agenda. As a result, the market anticipates a more friendly policy stance during their potential term.

These expectations were confirmed on January 18, 2025. The candidate issued its official Meme coin on the Solana blockchain. Within 24 hours, the price of this token soared by 900%, with a trading volume reaching $18 billion, and a market capitalization exceeding $4 billion, surpassing the largest Meme coin at that time. The next day, the issuance of another Meme coin related to its family members further fueled market speculation. These events not only have a speculative nature but also constitute a significant exogenous shock, with impacts that go beyond the realm of financial speculation, releasing signals of a broader regulatory and political agenda.

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Research Methodology

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. An empirical study was conducted on the top ten ranked crypto assets by market capitalization, including Bitcoin, Ethereum, Ripple, Solana, Dogecoin, Chainlink, Avalanche, Shiba Inu, Polkadot, and Litecoin.

The dataset contains 20,160 observations, covering the time period from January 11, 2025, to January 25, 2025, encompassing a symmetrical time interval one week before and after the release of the Meme coin. The event time is defined as 2:44 AM Coordinated Universal Time (UTC) on January 18, 2025, which is the moment the new Meme coin was officially announced.

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Research Results

1. Volatility Spillover Effect:
   • After the event, the interconnection between crypto assets significantly increased.
   • The volatility of stable logarithmic returns has increased, reflecting a rise in market instability and a faster pace of adjustment.
   • The covariance between most asset pairs has significantly increased, especially for ETH, SOL, and LINK, indicating stronger interconnectivity and a higher level of market integration.
   • Some assets like LTC and XRP saw a decrease in covariance after the event, indicating that the spillover effect is not uniformly distributed.

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2. Information Cascading Effect:
   • SOL has performed the most outstandingly, which may be related to its direct technical relationship as the new Meme coin carrier blockchain.
   • LINK has also performed strongly, possibly due to its association with certain large tech companies.
   • Mature Crypto Assets such as Bitcoin and Ethereum have gradually stabilized after experiencing moderate increases, demonstrating market resilience.
   • DOGE and other Meme coins like SHIB are performing weakly, showing a clear asset substitution effect.
   • The event broke the previous market co-movement pattern, leading to a sharp divergence in the cumulative abnormal returns of different assets.

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Conclusion

Research shows that the issuance of crypto assets related to political figures has a significant impact on the crypto market, with market reactions exhibiting clear heterogeneity. Assets that are directly technically linked to new Meme coins benefit the most, while mainstream crypto assets demonstrate stronger stability. This reflects that investor sentiment is influenced not only by fundamental technical factors but also increasingly by geopolitical and policy narratives.

Research has revealed the high sensitivity of the Crypto Assets market to external events, as well as its characteristics driven by speculative behavior. As digital assets increasingly intertwine with political and economic issues, continued attention to this interaction is of significant importance for understanding market stability.

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