Cryptocurrency Airdrop: What Is It and How Does It Work

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Cryptocurrency Airdrop: What Is It and How Does It Work

What Is a Cryptocurrency Airdrop?

A bitcoin airdrop is a marketing approach in which coins or tokens are sent to wallet addresses. Small quantities of the new virtual currency are transferred to the wallets of active blockchain community members for free or in exchange for a minor service, such as retweeting a message issued by the firm creating the currency. A crypto airdrop’s ultimate purpose is to raise awareness and circulation of a new token or currency.

Key Takeaways

  • A crypto airdrop is a marketing strategy used by cryptocurrency entrepreneurs.
  • It entails providing tokens to existing cryptocurrency traders’ wallets for free or in return for a minor promotional service.
  • The airdrop is intended to raise awareness and ownership of the cryptocurrency startup.
  • While some airdrops are real, some have been identified as fake while trying to steal a wallet or personal information.
  • Airdrops may be based on people who indicate interest, possess current tokens, are deliberately chosen, or win lotteries.

Understanding Cryptocurrency Airdrops

A crypto airdrop is a promotional activity often carried out by blockchain-based firms to assist in the development of a virtual currency initiative. Its goal is to raise awareness about the cryptocurrency project and get more people trading in it when it launches as an initial coin offering on an exchange (ICO).

Generally, airdrops are marketed on the company’s website, social media, and cryptocurrency forums. Only coins or tokens kept in current wallets or unique wallets based on the blockchain network are given coins or tokens.

To be eligible for the free gift, a receiver may need to have a certain number of crypto currencies in their wallet. Alternatively, users may be required to do a specific activity, such as discussing the currency on a social media platform, interacting with a certain member of the blockchain project, or publishing a blog post.

Cryptocurrency airdrops are named after real airdrops utilizing airplanes. Airdrops include the delivery of supplies (such as weaponry, food, or medicine) that literally fall from the sky.

Types of Crypto Airdrops

Standard Airdrop

Participants interested in getting an airdrop just register their interest in order to receive the airdrop in a typical crypto airdrop. Individuals must supply a valid wallet address, and certain airdrops do not need any extra information.

Standard airdrops often include a predetermined number of tokens to distribute, with a cap on how many tokens each participant may get. As a result, certain routine airdrops are time-critical. Though these sorts of airdrops are popular owing to their ease of use, there is nothing preventing a single user from generating many wallets in order to fast deplete the airdrop amount, therefore they may be more difficult to achieve.

Bounty Airdrop

Bounty crypto airdrops occur when users complete certain objectives. These jobs sometimes include increasing project awareness by posting on social media and tagging the firm or retweeting a recent tweet about the project. Referral incentives or finder’s fees may also be offered to those who recruit new users, sign up for the project’s newsletter, or join the company’s Discord channel.

Users often obtain points in return for completing activities that correlate to the size of the reward airdrop they receive. Users may also be forced to acquire a particular number of points before being eligible for an airdrop. For example, a user may be eligible for an airdrop after accumulating 300 points, with each of the items listed above worth 100 points.

Holder Airdrop

Holder crypto airdrops happen automatically depending on who owns existing tokens and how many tokens they own. Because wallets and blockchain information are part of a publicly distributed ledger, all blockchain users have complete transparency into wallets and token distribution.

The disadvantage of holder airdrops is that those who have tokens may not desire an airdrop. Holder airdrops, on the other hand, guarantee that only the biggest, most invested people gain. Some holder airdrops may only grant an airdrop if members own a specified number of tokens; otherwise, the reward amount may be pro-rated.

Exclusive Airdrop

An exclusive crypto airdrop is a more particular sort of holder airdrop that happens when specified persons are personally picked for the airdrop. The distinction is that they may be chosen not only on the quantity of tokens they have, but on other factors such as time spent on a project, most money spent on non-token activities, or number of forum posts. An exclusive airdrop is a more centralized method of rewarding people closest to the project and may provide airdrops to wallets that do not own any tokens at all.

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Raffle Airdrop

Some of the above-mentioned forms of airdrops may be paired with a raffle airdrop. A project will often declare the amount of airdrops it intends to provide and urge people to acquire lottery tickets. This ticket may be obtained by holding tokens, accumulating points, or just showing interest.

Finally, the number of people interested in the airdrop often surpasses the quantity of airdrops that the firm desires to give. As a result, a lottery is held, and a restricted number of wallets are chosen at random to receive the airdrop.

Never give out your private keys to anyone you don’t know or trust.

Crypto Airdrop Process

The crypto airdrop process starts when a project or corporation determines that an airdrop is required. This might be in reaction to market tactics, a network hard fork, or to entice current investors. The first stage is to decide how the airdrop will be carried out and who will be eligible.

The public push for wide, universal airdrops is the next phase. This involves gathering information for interested parties; often, this is confined to wallet addresses, however businesses may also obtain e-mail addresses to expand their contact list.

Other sorts of airdrops may depend on a snapshot, which is a capture of an instance that determines who meets certain requirements. For example, the project may take a snapshot to identify all addresses that have at least 1,000 tokens as of December 31st at midnight. Any transactions that occur after the snapshot will have no effect on the outcomes of the airdrop; hence, coin or token values often fluctuate in reaction to when snapshots are taken.

Once the list of airdrop receivers has been determined, the airdrop is often facilitated by the use of smart contracts. The corporation may decide to utilize its Treasury wallet to effectuate the airdrop, and the transaction block is often publicized to show the equitability of the airdrop. The airdrop will be seen leaving the company’s wallet and being distributed to the recipients in the transaction.

Airdrop receivers sometimes get cash or tokens straight without having to accept the tokens. Some people may need to add the token or currency, as well as its address, to their wallet in order to see the token’s balance.

Crypto Airdrop Scams

A genuine crypto airdrop will never solicit financial investment in the currency. Its only purpose is promotional. Some crypto scams, on the other hand, involve transferring little quantities of bitcoin or other cryptocurrencies to unwary receivers in what is known as a dusting scam.

Many airdrop scams focus on convincing an investor to connect their wallet to a phishing website in order to get their airdrop. The web3 URL will often urge a user to link their wallet utilizing well-known and popular wallet services like as MetaMask, Trust Wallet, or Oasis. The fraud is complete after a person links their wallet by supplying their secret password or keys.

Airdrop scams may also occur by luring market participants to invest in a certain security in the hopes of receiving a different item through airdrop. For example, a project may promise that storing certain NFTs in a wallet would result in owners receiving a rare airdrop. Though the airdrop may be real, the project owners may have attracted NFT market activity in order to sell theirs at a greater price.

How to Avoid Airdrop Scams

Users should always be wary of unsolicited deposits into their cryptocurrency wallets. Furthermore, consumers should be informed of the projects in which they are investing or seeking to claim assets. “Do your own research,” as the term goes among bitcoin explorers.

It is recommended that crypto enthusiasts avoid connecting to websites they are unfamiliar with. This includes ensuring that any external links users click on are from the project. Consider bookmarking commonly visited sites to guarantee you’re constantly connected to the correct site.

Companies often publicize airdrops and other promotions. Follow the project on social media, forums, or Discord to stay up to date on planned activities, but keep in mind that intricate frauds may copy or imitate project social media identities.

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If you don’t want airdrops to be connected with your principal investments, try opening a separate wallet for airdrops. After getting the tokens, you may move them to multiple wallets. Though not a typical type of diversification, holding cryptocurrency in various wallets spreads and reduces total risk.

Cryptocurrency transactions, including airdrops, have developed, resulting in complicated tax rules that must be carefully considered. Consult a tax specialist if you are unclear if a bitcoin transaction is taxable.

Crypto Airdrops and Taxes

The country in which the token holder resides determines whether or not an airdrop is taxed. Crypto airdrops are considered income in the United States and must be reported on one’s Federal income tax return.1

The difficulty in reporting taxes on an airdrop stems from the token’s lack of liquidity or clearly assessable fair market value. When an airdrop is received, it should be recorded as revenue at its fair value. Furthermore, airdrops are not taxable revenue until a person has custody of the token. If the airdrop is locked or subject to a vesting schedule, it is not taxable income until it is received and tradeable.

If the price of the airdrop falls after receipt and is subsequently sold, this produces a second, unrelated transaction that results in a capital loss.1 The taxpayer would report income for the amount of the airdrop, then a loss equal to the difference between the airdrop price and the selling price. If the price rises, a short-term or long-term gain may be taxed depending on the holding duration.

Advantages and Disadvantages of Cryptocurrency Airdrops

Advantages

Given the fierce rivalry among bitcoin firms, an airdrop is an effort to distinguish oneself. Some crypto airdrop firms include user notifications, startup listing services, and a variety of marketing services to help them fine-tune their airdrops. As with every industry, there are excellent and terrible enterprises.

In an article on the CoinDesk blog, Michael J. Casey, Chair of CoinDesk’s advisory board and an adviser at MIT’s blockchain research effort, stated that some form of marketing is required for a cryptocurrency to flourish. “A currency is worthless if it is not extensively utilized, and that cannot be done unless individuals make some costly effort to promote its use,” he wrote.2

Certain crypto airdrops also benefit committed supporters of certain blockchain networks. Furthermore, delivering airdrops to all wallets or current token holders extensively distributes tokens in a way that would not occur spontaneously in a free market.

Disadvantages

However, there are various factors to consider when it comes to cryptocurrency airdrops. The apparent source of worry is network security, particularly given the nature of “redeeming” airdrops. Some airdrops, for example, may suggest that users must link their wallet to dubious websites; once connected to web3, the thief may now have access to the user’s keys or password.

Crypto airdrops may sometimes be fraudulent enterprises. Despite the allure of getting free money, some projects entice stakeholders to increase their ownership in an airdrop by purchasing additional tokens. Ultimately, the long-term objective may be to “rug pull” investors by dumping massive numbers of tokens into the market at once, plummeting the price and rendering past airdrops useless.

Some may see airdrops as low-quality ventures. Some may want to concentrate on compensating miners or other network participants rather than distributing free tokens to non-heavy contributors to a project.

Finally, since airdrops may lack liquidity, they may be worthless if they cannot be sold on an open market. Airdrops, which are often the consequence of a project’s infancy, may claim to be worth thousands of dollars. However, without the capacity to freely trade the airdropped tokens, the free gift to wallet holders may be rendered ineffective.

Crypto Airdrops

Pros

  • Early adopters or persons involved in a project are rewarded with a share in the initiative.

  • Because of the marketing component of an airdrop, it raises awareness of a project.

  • Encourages the use and adoption of a newly issued token

  • Tokens may be distributed among holders in ways that would not have occurred spontaneously in an open market.

Cons

  • If wallet holders must link their wallets to dubious sites in order to claim the airdrop, this may constitute a security risk.

  • May prove to be “pump-and-dump” schemes

  • Some investors may be discouraged from joining if they prefer alternate methods of token distribution.

  • If the coin does not have liquidity on an exchange, it may be worthless.

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Crypto Airdrops vs. Initial Coin Offerings (ICO)

Initial coin offers and crypto airdrops may look to be quite similar. Both are likely to occur in the beginning of a project and are designed to distribute currency or tokens.

Crypto airdrops may not need an investment, but initial coin offerings often do. Though the transaction may reward investors by providing coins or tokens at a discount, it is anticipated that investors would purchase the coins or tokens rather than receiving free airdrops. ICOs are often first sold to venture capitalists.

Furthermore, the demographics for these two events are vastly different. ICOs seek to attract bigger investors prepared to put money into a business. These users are more inclined to make an investment in the project. Airdrops, on the other hand, are often used to create awareness among smaller consumers. Though a modest airdrop may not be of much benefit to consumers, the idea is to persuade smaller users to deal with the digital currency.

Real-World Examples

Gas DAO was established around the end of 2021 to give tokens to those who had paid a particular amount of Ethereum gas costs. The idea was that ownership of the DAO would be linked to the most active Ethereum users. 55% of Gas DAO tokens were distributed through airdrop to 634,429 qualified wallets.3

In addition, the OpenDao awarded tokens to NFT holders depending on OpenSea trading activity at the end of 2021. Ownership of OpenDao tokens would be airdropped depending on NFT-ownership, producing an entity structure driven by the most ambitious collectors.4 OpenDao had a market value of more than $250 million at its height. Its market capitalization has plummeted to less than $11 million by September 2022.5

What Was the First Crypto Airdrop?

AuroraCoin (AUR) received the first cryptocurrency airdrop on March 25, 2014. Every citizen or permanent resident who presented their national ID earned 31.8 AUR.6 as the country of Iceland’s cryptocurrency.

What Is an NFT Airdrop?

An NFT airdrop, like other forms of crypto airdrops, rewards NFT holders with more tokens. This is done to strengthen the community around certain NFTs, generate publicity, and reward NFT holders.

Did the Country of El Salvador Do a Bitcoin Airdrop?

Yes. El Salvador awarded everyone who installed the government-built wallet with $30 worth of BTC to boost Bitcoin adoption when the nation extended its legal cash to Bitcoins.7

How Do I Find Crypto Airdrops?

Crypto airdrops are often publicized and advertised to the general public in order to generate enthusiasm and knowledge about a coin. Subscribing to airdrop emails or following blockchains on social media will help you find many of these airdrops.

Can You Make Money From Crypto Airdrops?

Individuals may profit from crypto airdrops, but they are meant to boost the adoption of a cryptocurrency across a wide variety of users. As a result, airdrops are often small (less than $10), and the tokens may not be liquid. Furthermore, there is a greater likelihood that consumers will attempt to sell their holdings when they are able to (thus quickly dropping the value of the coins or tokens).

The Bottom Line

Crypto airdrops are a technique for businesses and initiatives to spread the word about their token or currency. It is also a method of increasing the liquidity of their security by distributing it to hundreds of different wallets. Though airdrops have value and may be considered free money, there are major hazards if consumers are not informed of possible crypto airdrop frauds.

Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is very dangerous and speculative, and this article is not a suggestion by Investopedia or the author to do so. Because every person’s circumstance is different, a knowledgeable specialist should always be contacted before making any financial choices. Investopedia makes no guarantees or warranties about the accuracy or timeliness of the information provided on this site.

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