Memecoin contagion: Irrationality, illicit behaviour, and Cryptocurrency risk

Abstract

We investigate the contagion effects of rapid memecoin growth, a phenomenon often characterised by irrational exuberance and illicit behaviour. Using an EGARCH methodology, the results indicate that while memecoin growth generates revenue for host platforms like Ethereum and Solana, it broadly increases market-wide risk and is detrimental to established cryptocurrencies, such as Bitcoin. Furthermore, we find that PolitiFi memecoins are uniquely susceptible, characterised by positive responses to broad memecoin growth, exhibiting statistical properties deeming them attractive due to the cloaking provided by wider memecoin market growth, without evidence for tangible purposes. • We investigate memecoin contagion effects on the cryptocurrency market using EGARCH and on-chain data. • Memecoin growth adds systemic risk towards major cryptocurrencies such as Bitcoin. • We find strong evidence of sentiment contagion from launchpads to the entire memecoin sub-class. • PolitiFi memecoins are highly susceptible to contagion, suggesting use for opaque financing. • We demonstrate that the memecoin sector is a source of systemic risk from irrationality and illicit activity.