Politics and Crypto Assets: The Impact of Trump's Token on the Market

Recently, Economics Letters published a research paper titled "From Zero to Hero: The Spillover Effects of Meme Coins in the Crypto Assets Market." The paper analyzes the event of a well-known political figure issuing a Meme coin, revealing the heterogeneous volatility spillover effects driven by market sentiment and fundamentals, with political signals amplifying 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 cryptocurrency market has become an important arena where politics and finance intersect. The 2024 U.S. election further highlights this relationship, as Republican candidate Trump has unprecedentedly turned to support digital assets. He claims he will make the U.S. the "global cryptocurrency capital" and place cryptocurrency at the core of his economic agenda, leading the market to anticipate more friendly policies during his term.

These are expected to be realized on January 18, 2025, 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 USD, and a market capitalization exceeding that of the largest Meme coin DOGE by 4 billion USD.

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 in nature but also constitute a significant exogenous shock, with impacts that extend beyond financial speculation, releasing signals of a broader regulatory and political agenda.

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

• How does the release of $TRUMP affect the returns and volatility of major Crypto Assets?
• Did this event trigger a financial contagion effect in the Crypto Assets market?
• Does this impact exhibit heterogeneity, manifesting as different Crypto Assets responding differently based on their technological foundations, uses, or speculative appeal?

To answer these questions, this article uses 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 cryptocurrencies by market capitalization for empirical analysis and found that after the release of Trump 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. Meanwhile, mainstream cryptocurrencies like Bitcoin and Ethereum showed 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 such as Dogecoin and Shiba Inu experienced depreciation, and funds likely shifted towards $TRUMP.

The issuance of $TRUMP occurred against the backdrop of highly polarized American politics, with the Trump brand itself being closely linked to strong political sentiments, thereby heightening 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 responses—from enthusiasm for anticipated political support to skepticism regarding reputation and political uncertainty.

In recent years, the contagion effects in the crypto assets market have increasingly attracted attention, as they hold significant implications for financial stability, risk management, and portfolio diversification. Existing research mainly focuses on spillovers among cryptocurrencies or between cryptocurrencies and traditional financial assets, revealing patterns of connectivity, contagion risks, and volatility transmission. However, most of these studies emphasize financial or technical triggers, such as market crashes, liquidity constraints, or blockchain innovations. Political signals, especially those related to the contagion mechanisms of politically affiliated 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 financial markets. Moreover, unlike previous research that has often focused on negative shocks, this study concentrates 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 heterogeneity of market responses to politically connected tokens and emphasizing how asset characteristics influence financial contagion dynamics.

Data and Methods

2.1 Data and Sample Selection

This study uses proprietary data on the close mid-price (close mid-price) per minute, covering the most representative 10 out of the top 20 cryptocurrency 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 is sourced from a centralized trading platform in the United States and retrieved from the database.

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

According to the practices in existing literature, this study 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 January 18, 2025, Coordinated Universal Time ( UTC ) at 2:44 AM, which marks the official release of the new U.S. President's Meme coin. Cumulative abnormal returns are calculated to assess the information cascade effect. This article calculates the average benchmark return for each Crypto Asset 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 excess returns over the market benchmark, and CARs are obtained by accumulation.

( 2.2 Method

Using the BEKK-MGARCH model to analyze the impact of the launch of Trump Meme Token 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, the model is set as follows:

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Among them,

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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, this paper adopts a stricter significance level of α = 0.001.

Result

) 3.1 Volatility Spillover Effect

The charts in this section provide preliminary analysis results to reveal the interrelationships between crypto assets, which are estimated through the BEKK-MGARCH model. In the covariance structure shown in Figure 1###b###, the interconnection between assets significantly strengthens in the post-event phase. This finding supports the hypothesis that "the event triggered a volatility spillover effect." Similarly, Figure 1(a) shows an increase in the volatility of stable logarithmic returns over the same period, reflecting a phenomenon of rising market instability and accelerated adjustment speed. All right-hand panels of the images indicate that the returns of each crypto asset experienced severe fluctuations during this event, further emphasizing the systemic impact of this event.

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Table 1 presents the dynamic conditional covariance estimated through the BEKK-MGARCH model, along with the corresponding t-test statistics to verify the existence of contagion effects. The results 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 level, especially among assets like ETH, SOL, and LINK, whose covariances significantly increase, demonstrating stronger interconnections and a higher degree of market integration. In contrast, although SHIB and DOT also reached a significance level of 0.01, their impact is weaker. Additionally, some assets like LTC and XRP show a decline in covariance after the event, indicating that the spillover effects are not uniformly distributed across all assets. Overall, the results highlight the structural impact of this Meme coin issuance event on the entire crypto assets market.

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( 3.2 information cascading effect

Based on the confirmed heterogeneity effects among crypto assets, this section further reveals the information cascading effect triggered by the issuance of Trump Meme coin through the analysis of cumulative abnormal returns ) CARs ###. The results indicate that this event has a significant structural impact on market dynamics, manifested as asset-specific response paths and increased volatility.

Figure 2 shows the CARs of the analyzed crypto assets during the sample period. In the pre-event phase, most cryptocurrencies experienced positive returns, possibly driven by speculative expectations or the market's optimism regarding Trump's potential election as the 47th President of the United States. This indicates that even in the absence of concrete information, investors exhibited significant speculative buying behavior, a phenomenon that aligns with the widely documented "fear of missing out" characteristic in the cryptocurrency market.

In the stage after the event occurs, three key dynamics stand out particularly:

• SOL has performed exceptionally well, surpassing all other assets, which is likely related to its direct technical relationship as the blockchain that supports Trump's Meme coin.

• LINK has also performed strongly, possibly related to its association with the large American tech company Oracle.

• Mature crypto assets like Bitcoin, Ethereum, Ripple, and Litecoin have gradually stabilized after experiencing moderate increases, reflecting their market resilience and relative insulation from cascading speculative impacts.

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

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Figure 3 further clarifies how the external shock of the Trump Meme coin issuance broke the market co-movement pattern prior to the event. Before the event, there was a high level of synchronized volatility among the various assets; however, after the event, the CARs of different assets showed dramatic divergence, ranging from +20% for Solana to -20% for Dogecoin and Shiba Inu.

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The results of this section reveal that asset-specific narratives, technical correlations, and investor subjective perceptions can significantly amplify the differential responses of asset returns during major information shocks.

Conclusion

This study examines the impact of cryptocurrency issuance associated with political figures ( such as President Trump ) on the crypto market, focusing on the volatility spillover effect and information cascade effect.

Research results indicate that the market's reaction to this event exhibits significant heterogeneity. For example, due to the direct technical relevance to Trump Meme coin, SOL has benefited significantly.