How do politically connected tokens affect the crypto assets market?

A recent study analyzed the impact of Trump issuing Meme coins on the Crypto Assets market. The study found that this event triggered a heterogeneous volatility spillover effect driven by market sentiment and fundamentals, with political signals amplifying speculative dynamics, highlighting the important role of political factors in shaping the Crypto Assets market and investor behavior.

Research Background and Purpose

On January 18, 2025, Trump issued the 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 dollars, and a market capitalization exceeding 4 billion dollars, surpassing the then-largest Meme coin DOGE. The next day, the issuance of the Meme coin $MELANIA related to the First Lady further fueled market speculation.

These events are not only speculative but also constitute a significant exogenous shock, with impacts that extend beyond the realm of financial speculation, signaling broader regulatory and political agendas. This study aims to examine how this event serves as both a political signal and a financial event affecting the Crypto Assets market, focusing on the following three 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 reactions from various crypto assets based on their technological foundations, use cases, or speculative appeal?

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Research Methods

The study employs the Baba-Engle-Kraft-Kroner ( BEKK ) multivariate Generalized Autoregressive Conditional Heteroskedasticity ( MGARCH ) model to analyze the top ten Crypto Assets by market capitalization. It uses minute-by-minute closing midpoint price data from January 11 to January 25, 2025, covering a symmetric time period one week before and after the event.

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Major Findings

1. Volatility spillover effect:
   • The interconnection among Crypto Assets significantly increased after the event.
   • The covariance between most asset pairs significantly increases after the event, especially for ETH, SOL, and LINK.
   • The covariance of some assets such as LTC and XRP has decreased, indicating an uneven distribution of spillover effects.

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2. Information Cascading Effect:
   • SOL performed the best, possibly due to its direct technical relationship as the blockchain supporting $TRUMP.
   • LINK has shown strong performance, possibly related to its association with Oracle Corporation.
   • Mature Crypto Assets such as BTC and ETH demonstrate market resilience.
   • Meme coins like DOGE and SHIB are performing weakly, reflecting the asset substitution effect.
   • The event broke the previous market co-movement pattern, and the cumulative abnormal returns of different assets showed significant divergence.

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Conclusion

Research shows that the issuance of Crypto Assets related to political figures has had a significant heterogeneous impact on the market:

• Assets directly related to the event ( such as SOL ) benefit significantly.
• Mainstream Crypto Assets ( such as BTC, ETH ) show stronger stability.
• Investor sentiment is influenced not only by technical factors but also significantly by geopolitical issues and policy narratives.

This reveals the high sensitivity of the Crypto Assets market to external events, as well as its characteristics of being driven by speculative behavior. As digital assets increasingly intertwine with political and economic issues, continuous monitoring of this interaction is essential for understanding market stability.

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